<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 5
Portfolio of Investments......................... 6
Statement of Assets and Liabilities.............. 12
Statement of Operations.......................... 13
Statement of Changes in Net Assets............... 14
Financial Highlights............................. 15
Notes to Financial Statements.................... 16
Report of Independent Accountants................ 21
Dividend Reinvestment Plan....................... 22
</TABLE>
VOT ANR 12/97
<PAGE> 2
LETTER TO SHAREHOLDERS
December 4, 1997
Dear Shareholder,
In the past year, we have been
participants in and witnesses to two
mergers that we believe have positioned
our company at the forefront of the [PHOTO]
financial industry's evolution. Our
latest announcement continues our
forward progress. I am pleased to
announce that Philip N. Duff, formerly
the chief financial officer of DENNIS J. MCDONNELL AND DON G. POWELL
Morgan Stanley, has joined Van
Kampen American Capital as president
and chief executive officer. I will continue as chairman of the firm. Together,
we will continue to work to the benefit of our fund shareholders as Van Kampen
American Capital advances toward the next century.
ECONOMIC REVIEW
The last quarter of 1996 brought renewed strength and rumblings of
inflation, which continued to feed investors' uncertainties about the direction
of interest rates. This was reflected in the volatility of taxable yields, with
the 30-year Treasury ranging from a high of 6.70 percent to a low of 6.35
percent, and ending the period at 6.64 percent.
The economy grew at a brisk 3.9 percent annual rate during the first three
quarters of 1997. At the same time, the federal budget deficit fell to its
lowest level in 23 years, while consumer prices rose less than 2.0 percent on an
annual basis and producer prices declined 1.4 percent.
The bond market advanced in price during the first 10 months of 1997, but
its ascension was not a smooth ride. Bond prices fell early in the period as
economic growth soared, fueling concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed did raise interest
rates by a modest 0.25 percent in late March, bond prices fell further, sending
the yield of the 30-year U.S. Treasury bond above 7.0 percent for the first time
in six months. By mid-April, however, the market's mood had changed, reflecting
few signs of price pressures despite the economy's strength. Bonds also
benefited from continued heavy purchases by foreign investors and concerns that
the stock market rally was nearing an end. The 7.0 percent slump in the Dow
Jones Industrial Average on October 27 reinforced the benefit of owning bonds
for diversification. By the end of October, the yield on the 30-year Treasury
bond was near its lowest level in 20 months, at 6.15 percent.
Throughout 1997, municipal bond prices moved in the same direction as the
Treasury bond market, but gained less when Treasury prices rallied and lost less
when Treasuries fell. Between December 31, 1996 and October 31, 1997, the yield
on the long-term municipal revenue bond index fell 36 basis points as the yield
on the 30-year Treasury
Continued on page two
1
<PAGE> 3
bond fell 48 basis points. Because yields move in the opposite direction of
prices, the smaller yield decline of municipal bonds indicates that their prices
did not rise as much as Treasuries.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
As Of October 31, 1997
<TABLE>
<S> <C>
AAA............ 59.1%
AA............. 10.2%
A.............. 13.3%
BBB............ 16.5%
BB............. 0.9%
</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
In managing the Trust, we used the following strategies:
We continued to maintain a portfolio heavily weighted toward high-quality
bonds. The emphasis on AAA-rated securities in the portfolio reflects the
proliferation of insured bonds, which currently comprise well over half of new
issues in the municipal bond market. AAA-rated bonds are extremely liquid and
carry minimal credit risk. When interest rates fall, as they did for most of the
second half of the fiscal year, AAA-rated bonds tend to outperform lower-rated
securities. Bonds rated BBB, the lowest investment-grade credit rating assigned
by Standard & Poor's, and below BBB tend to perform better when rates are
rising, and have the potential to provide additional income.
Portfolio turnover during the fiscal year was light due to market conditions
that afforded few opportunities to add value to existing holdings. The average
yield of bonds in the Trust's portfolio was higher than average market yields.
As a result, there was little incentive to replace bonds in the portfolio,
because such trades would have reduced the Trust's dividend-paying ability.
Trading was also restrained by tight spreads between yields of AAA-rated
bonds and lower-rated securities. These spreads compressed to historically
narrow levels due to the increasing number of insured bonds in the municipal
market. For example, when a new long-term California transportation issue was
sold in September, its BBB-rated portion yielded only 20 basis points more than
the AAA-rated insured component in the same maturity. As a result of the narrow
yield spreads, there was often not enough incentive for the Trust to purchase
lower-rated securities and assume the additional credit risk.
Acquisitions focused on enhancing the Trust's call protection as well as its
potential price appreciation. Because we hope to limit the number of bonds that
could be "called" at any one time, we purchased long-term discount bonds that
will not be callable for many years. A discount bond sells for a price below its
face value, which is also known as its par value. High-quality bonds were
purchased representing a variety of sectors. Sales were
Continued on page three
2
<PAGE> 4
dominated by health-care securities with revised credit outlooks. These included
one issue with a deteriorated credit quality, as well as several issues that
posted price gains following improved credit outlooks.
When searching for new securities for the Trust's portfolio, we try to
identify bonds that we believe will outperform within a particular sector and
that can be purchased at an attractive price. We believe this "bottom-up"
approach, supported by our research, provides significant added value to the
portfolio.
Throughout the fiscal year, we maintained a relatively short duration for
the Trust in order to attempt to limit its price volatility in response to
changing interest rates. We believe the leveraged structure of the portfolio,
which involves borrowing short-term funds in order to purchase long-term
municipal securities, exposes the portfolio to a sufficient amount of price
volatility. Duration, which is expressed in years, is a measure of a portfolio's
sensitivity to interest rate movements. Portfolios with long durations tend to
perform better when interest rates are falling; portfolios with short durations
tend to do better when rates are rising. During the second half of the fiscal
year, when rates were declining, the Trust's relatively short duration slightly
hindered its performance, but its leveraged structure enhanced gains. As of
October 31, the duration of the Trust's bond portfolio stood at 7.21 years,
compared to 7.34 years for the Lehman Brothers Municipal Bond Index. Because of
the longer-term nature of the Trust, the calculation of this index's duration
has been adjusted to eliminate bonds with maturities of five years or less.
Top Five Portfolio Industry Holdings by Sector as of October 31, 1997*
Health Care............................ 18.5%
Single-Family Housing.................. 11.7%
Retail Electric/Gas/Telephone.......... 11.0%
General Purpose........................ 10.6%
Industrial Revenue..................... 10.3%
*As a Percentage of Long-Term Investments
PERFORMANCE SUMMARY
For the one-year period ended October 31, 1997, the Van Kampen American
Capital Municipal Opportunity Trust II generated a total return at market price
of 16.02 percent(1). The Trust offered a tax-exempt distribution rate of 5.91
percent(3), based on the closing common stock price on October 31, 1997. At the
end of the reporting period, the closing share price of the Trust traded at
$12.6875, a 12.6 percent discount to its net asset value of $14.51. Because
income from the Trust is exempt from federal income taxes, this distribution
rate represents a yield equivalent to a taxable investment earning 9.23
percent(4) (for investors in the federal income tax bracket of 36 percent).
Continued on page four
3
<PAGE> 5
[DIVIDEND HISTORY GRAPH]
Twelve-month Dividend History
For the Period Ended October 31, 1997
Distribution per Common Share
<TABLE>
<CAPTION>
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
1996 1996 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
OUTLOOK
We expect the economy to remain strong in the coming months, although the
growth rate might slow to a more moderate pace. The weakness in the Far East,
which was the impetus for the recent volatility in world stock markets, will
most likely reduce U.S. exports to the region. In turn, this could trim U.S.
economic growth as well as the earnings of many U.S. companies. As a result, we
believe there is little chance that the Fed will raise interest rates in the
coming months. A rate hike reemerges as a possibility if inflation picks up, or
if growth continues at its current brisk pace.
As a result of this outlook, we expect that the yield on the 30-year
Treasury bond will trade within a range of 5.75 percent and 6.50 percent for the
next six months, possibly falling further in mid-1998. A decline in rates would
not only boost the prices of long-term investments in the portfolio, but could
also positively affect the Trust as a result of its leveraged structure. That
structure, which involves borrowing short-term funds to purchase long-term
municipal bonds, provides common shareholders with above-market levels of
dividend income. It should be noted, however, that if short-term rates rise,
borrowing costs would increase; this would negatively impact the income and
performance of common shares.
We will continue to seek a balance between the Trust's total return and its
dividend income, and to add value through our investment strategies and bond
selection. Thank you for your continued confidence in Van Kampen American
Capital and your Trust's portfolio manager.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
Please see footnotes on page five
4
<PAGE> 6
PERFORMANCE RESULTS FOR THE PERIOD ENDED OCTOBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
(NYSE TICKER SYMBOL--VOT)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
One-year total return based on market price(1)............ 16.02%
One-year total return based on NAV(2)..................... 10.24%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 5.91%
Taxable-equivalent distribution rate as a % of closing
common stock price(4)...................................... 9.23%
SHARE VALUATIONS
Net asset value........................................... $14.51
Closing common stock price................................ $12.6875
One-year high common stock price (10/07/97)............... $13.125
One-year low common stock price (04/22/97)................ $11.375
Preferred share (Series A) rate(5)........................ 3.600%
Preferred share (Series B) rate(5)........................ 3.400%
Preferred share (Series C) rate(5)........................ 3.400%
</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.
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.9%
ALASKA 1.1%
$ 3,000 North Slope Borough, AK Ser B (FSA Insd)........ 6.100% 06/30/99 $ 3,103,830
------------
ARIZONA 1.3%
3,325 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 3,720,077
------------
CALIFORNIA 12.6%
1,300 Anaheim, CA Pub Fin Auth Lease Rev Pub Impt Proj
Ser C (FSA Insd)................................ 6.000 09/01/16 1,436,266
4,600 California St Pub Wks Brd Lease Rev Var Univ CA
Proj A Rfdg..................................... 5.500 06/01/10 4,843,478
5,905 California St Pub Wks Brd Lease Rev Var Univ CA
Proj A Rfdg..................................... 5.500 06/01/14 6,109,962
2,000 Foothill/Eastern Tran Corridor Agy CA Toll Rd
Rev Ser A....................................... 6.500 01/01/32 2,156,420
2,000 Imperial Irrig Dist CA Ctfs Partn Elec Sys Proj
(MBIA Insd)..................................... 6.750 11/01/11 2,260,820
2,860 Los Angeles Cnty, CA Metro Tran Auth Sales Tax
Rev Ppty Ser A Rfdg (FGIC Insd)................. 5.000 07/01/21 2,718,945
11,500 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev
Crossover Rfdg (FGIC Insd)(b)................... 5.375 09/01/23 11,317,610
2,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA
Insd)........................................... 6.000 07/01/08 2,230,240
3,000 Southern CA Pub Pwr Auth Pwr Proj Rev San Juan
Unit 3 Ser A (MBIA Insd)........................ 5.000 01/01/20 2,860,680
------------
35,934,421
------------
COLORADO 5.8%
1,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser B (Prerefunded @ 08/31/05)....... 7.000 08/31/26 1,185,700
7,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser C (Prerefunded @ 08/31/05)....... * 08/31/26 1,101,225
1,600 Denver, CO City & Cnty Arpt Rev Ser A........... 6.900 11/15/98 1,645,136
1,250 Denver, CO City & Cnty Arpt Rev Ser A........... 7.000 11/15/99 1,315,175
2,650 Denver, CO City & Cnty Arpt Rev Ser B........... 7.250 11/15/05 2,985,570
895 Denver, CO City & Cnty Arpt Rev Ser B........... 7.250 11/15/07 1,003,793
105 Denver, CO City & Cnty Arpt Rev Ser B
(Prerefunded @ 11/15/02)........................ 7.250 11/15/07 120,437
1,500 Denver, CO City & Cnty Arpt Rev Ser D........... 7.750 11/15/13 1,878,720
2,500 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
(MBIA Insd)..................................... * 09/01/11 1,242,275
4,000 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
Rfdg (MBIA Insd)................................ * 09/01/22 1,057,400
3,000 E-470 Pub Hwy Auth CO Rev Sr Ser A Rfdg (MBIA
Insd)........................................... 5.000 09/01/26 2,867,550
------------
16,402,981
------------
CONNECTICUT 1.5%
4,235 Connecticut St Dev Auth Pkg Fac Hartford Hosp
Rev (MBIA Insd)................................. 6.875 10/01/06 4,379,329
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA 3.7%
$ 2,000 Dade Cnty, FL Genl Oblig Seaport Bonds
(Prerefunded @ 10/01/01) (AMBAC Insd)........... 6.500% 10/01/26 $ 2,187,900
1,050 Florida Hsg Fin Agy Single Family Mtg Ser A Rfdg
(GNMA Collateralized)........................... 6.550 07/01/14 1,118,334
2,000 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl
Rev Tampa Elec Co Proj Ser 92 Rfdg.............. 8.000 05/01/22 2,319,800
1,000 Jacksonville, FL Hosp Rev Univ Med Cent Inc Proj
(Connie Lee Insd)............................... 6.500 02/01/11 1,088,990
3,590 Pinellas Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Multi Cnty Ser A (GNMA Collateralized)...... 6.650 08/01/21 3,816,242
------------
10,531,266
------------
GEORGIA 1.9%
2,000 Burke Cnty, GA Dev Auth Pollutn Ctl Rev GA Pwr
Co Plant Vogtle Proj (MBIA Insd)................ 6.350 05/01/19 2,092,920
3,000 Muni Elec Auth GA Proj One Sub Ser A (AMBAC
Insd)........................................... 6.000 01/01/04 3,246,480
------------
5,339,400
------------
ILLINOIS 6.9%
3,365 Chicago, IL Cap Apprec (AMBAC Insd)............. * 01/01/17 1,067,546
4,860 Chicago, IL Single Family Mtg Rev Ser A
(GNMA Collateralized)........................... 7.000 09/01/27 5,395,280
1,415 Chicago, IL Single Family Mtg Rev Ser B
(GNMA Collateralized)........................... 7.625 09/01/27 1,600,959
3,000 Illinois Dev Fin Auth Solid Waste Disposal
Rev............................................. 5.950 12/01/24 3,159,150
4,305 Illinois Hlth Fac Auth Rev OSF Hlthcare Sys
Rfdg............................................ 6.000 11/15/10 4,482,926
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent A Rfdg..................................... 8.800 06/01/06 1,022,890
2,615 Peoria, Moline & Freeport, IL Coll Mtg Ser A
(GNMA Collateralized)........................... 7.600 04/01/27 2,952,649
------------
19,681,400
------------
INDIANA 3.3%
1,165 Concord, IN Cmnty Schs Bldg Corp First Mtg
(Prerefunded @ 7/01/05) (FSA Insd).............. 7.000 07/01/11 1,368,153
4,000 East Chicago, IN Elementary Sch Bldg Corp First
Mtg Ser A....................................... 6.250 07/05/08 4,411,200
3,000 Indiana Hlth Fac Fin Auth Hosp Rev Columbus Regl
Hosp Rfdg (FSA Insd)............................ 7.000 08/15/15 3,611,670
------------
9,391,023
------------
IOWA 0.4%
1,200 Ottumwa, IA Hosp Fac Rev Rfdg................... 6.000 10/01/18 1,228,752
------------
KENTUCKY 1.0%
3,000 Jefferson Cnty, KY Hlth Fac Rev (MBIA Insd)..... 5.125 10/01/27 2,873,820
------------
LOUISIANA 1.1%
2,800 Saint Charles Parish, LA Solid Waste Disp Rev LA
Pwr & Lt Co Proj (FSA Insd)(b).................. 7.050 04/01/22 3,046,596
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MAINE 0.9%
$ 2,500 Maine St Hsg Auth Mtg Purp Ser C2............... 6.875% 11/15/23 $ 2,668,900
------------
MASSACHUSETTS 2.7%
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Cape
Cod Hlth Ser A-3 (Embedded Swap) (Connie Lee
Insd)........................................... 5.000 11/15/11 1,654,848
2,500 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000 10/01/23 2,413,925
3,500 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental
Ser A Rfdg (AMBAC Insd)......................... 6.600 07/01/14 3,744,825
------------
7,813,598
------------
MICHIGAN 2.2%
1,000 Battle Creek, MI Downtown Dev Auth Tax Increment
Rev............................................. 7.600 05/01/16 1,188,320
3,300 Michigan St Bldg Auth Rev (MBIA Insd)........... 6.250 10/01/20 3,559,314
1,500 Michigan St Hsg Dev Auth Multi-Family Rev Ltd
Oblig Ser A Rfdg (GNMA Collateralized).......... 6.600 04/01/30 1,600,605
------------
6,348,239
------------
MISSISSIPPI 0.6%
1,500 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy
Res Inc Rfdg.................................... 7.300 05/01/25 1,588,755
------------
MISSOURI 2.1%
4,500 Kansas City, MO Muni Assistance Corp Rev Rfdg
(MBIA Insd)..................................... 5.000 04/15/20 4,346,775
1,500 Saint Louis Cnty, MO Mtg Rev Ctfs Receipt Ser H
(GNMA Collateralized)........................... 5.400 07/01/18 1,529,385
------------
5,876,160
------------
NEVADA 1.2%
2,970 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser C
Rfdg (AMBAC Insd)............................... 7.200 10/01/22 3,332,726
------------
NEW JERSEY 4.3%
1,000 New Jersey Econ Dev Auth Rev Clara Maas Hlth Sys
Proj (FSA Insd)................................. 5.000 07/01/25 960,840
1,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/06 1,106,970
1,750 New Jersey Hlthcare Fac Fin Auth Rev Hackensack
Med Cent (FGIC Insd)............................ 6.625 07/01/17 1,896,562
5,630 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pollutn Ctl Pub Svc Elec & Gas Ser A (MBIA
Insd)........................................... 5.450 02/01/32 5,501,411
2,500 Secaucus, NJ Muni Util Auth Swr Rev Ser A
Rfdg............................................ 6.000 12/01/08 2,745,650
------------
12,211,433
------------
NEW YORK 11.5%
3,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev............................................. 5.250 06/15/29 2,918,640
1,485 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A....................................... 7.000 06/15/09 1,633,426
1,515 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A (Prerefunded @ 06/15/01).............. 7.000 06/15/09 1,669,909
2,500 New York City Ser A Rfdg........................ 7.000 08/01/04 2,816,750
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 5,000 New York City Ser A-1........................... 6.375% 08/01/10 $ 5,377,400
1,800 New York City Ser E Rfdg........................ 6.600 08/01/03 1,974,204
1,975 New York, NY Ser B1 (MBIA Insd)................. 6.950 08/15/02 2,253,154
25 New York, NY Ser B1 (MBIA Insd) (Prerefunded @
8/15/04)........................................ 6.950 08/15/12 28,986
1,000 New York St Dorm Auth Rev City Univ Third Genl
Res Ser 2 (MBIA Insd)........................... 6.250 07/01/19 1,072,970
3,000 New York St Dorm Auth Rev Cons City Univ Sys Ser
A Rfdg.......................................... 6.000 07/01/06 3,232,710
1,520 New York St Dorm Auth Rev Insd John T Mather Mem
Hosp (Connie Lee Insd).......................... 6.500 07/01/09 1,744,990
970 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.750 04/01/03 1,021,478
835 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.400 04/01/04 865,619
500 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.500 04/01/05 520,655
500 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.500 04/01/06 519,420
1,500 New York St Loc Govt Assistance Corp Ser A
(Prerefunded @ 4/01/02)......................... 6.875 04/01/19 1,685,445
1,375 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser D (MBIA Insd)................. 5.900 02/15/10 1,473,546
2,000 New York St Urban Dev Corp Rev Correctional Fac
Ser A Rfdg...................................... 5.500 01/01/16 2,001,140
------------
32,810,442
------------
NORTH CAROLINA 1.1%
3,000 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth
Rev Solid Waste Weyerhaeuser Co................. 5.650 12/01/23 3,015,090
------------
OHIO 4.2%
1,000 Cleveland Rock Glen Hsg Assistance Corp OH Mtg
Rev Ser A Rfdg (FHA Insd)....................... 6.625 01/15/18 1,063,520
2,000 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys
Ser B Rfdg (MBIA Insd).......................... 5.250 06/01/08 2,072,580
1,040 Lorain Cnty, OH Hosp Rev EMH Regl Med Cent Rfdg
(AMBAC Insd).................................... 7.750 11/01/13 1,247,584
1,400 Lucas Cnty, OH Hosp Rev......................... 7.625 06/01/15 1,424,024
2,395 Lucas Cnty, OH Hosp Rev Impt Saint Vincent Med
Cent (MBIA Insd)................................ 6.625 08/15/22 2,637,470
2,000 Ohio St Wtr Dev Auth Solid Waste Disp Rev....... 6.300 09/01/20 2,149,980
1,065 Strongsville, OH................................ 6.700 12/01/11 1,219,542
------------
11,814,700
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OKLAHOMA 2.7%
$ 2,250 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 6.125% 10/01/14 $ 2,310,120
2,960 Tulsa, OK Indl Auth Hosp Rev Hillcrest Med Cent
Proj Rfdg (Connie Lee Insd)..................... 6.250 06/01/07 3,273,286
1,975 Tulsa, OK Muni Arpt Tran Rev American Airls
Inc............................................. 7.375 12/01/20 2,146,035
------------
7,729,441
------------
OREGON 0.9%
2,500 Oregon St Vets Welfare Ser 76A.................. 6.050 10/01/28 2,623,075
------------
PENNSYLVANIA 9.9%
3,000 Beaver Cnty, PA (MBIA Insd) (a)................. 5.300 10/01/26 2,982,270
2,000 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,155,380
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 1,648,710
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
43.............................................. 7.500 10/01/25 1,089,390
4,000 Pennsylvania Hsg Fin Agy Single Family Ser
56A............................................. 6.150 10/01/27 4,162,960
1,975 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Alleghany, DE Vly Oblig Ser C (MBIA Insd)... 5.300 11/15/06 2,062,888
1,600 Pennsylvania St Higher Edl Fac Auth Rev Med
College PA Ser A (Prerefunded @ 03/01/01)....... 7.250 03/01/11 1,778,320
2,635 Philadelphia, PA (MBIA Insd).................... 5.000 05/15/25 2,510,127
7,500 Philadelphia, PA Gas Wks Rev 14th Ser Rfdg (FSA
Insd)........................................... 6.250 07/01/08 8,234,400
1,315 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (MBIA Insd)...................... 6.450 02/01/10 1,448,946
------------
28,073,391
------------
TENNESSEE 0.9%
2,345 Tennessee Hsg Dev Agy Mtg Fin Ser A............. 7.125 07/01/26 2,506,500
------------
TEXAS 1.9%
2,000 Harris Cnty, TX Hlth Fac Dev Corp Hosp Rev
Hermann Hosp Proj (MBIA Insd)................... 6.375 10/01/24 2,156,220
2,840 Harris Cnty, TX Toll Rd Sub Lien Rev Rfdg....... 6.750 08/01/14 3,110,198
------------
5,266,418
------------
UTAH 1.1%
1,050 Intermountain Pwr Agy UT Pwr Supply Rev Ser B... 7.000 07/01/21 1,110,932
1,815 Utah St Hsg Fin Agy Single Family Mtg Sr Issue
Ser B-2 (FHA Insd).............................. 6.500 07/01/15 1,916,059
------------
3,026,991
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA 3.6%
$ 1,250 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev
(Prerefunded @ 08/15/01) (FGIC Insd)............ 6.600% 08/15/23 $ 1,378,825
1,500 Henrico Cnty, VA Indl Dev Auth Pub Fac Lease Rev
Henrico Cnty Regl Jail Proj..................... 6.500 08/01/10 1,687,170
2,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd).......... 6.900 03/01/19 2,249,460
3,680 Virginia St Hsg Dev Auth Comwlth Mtg Ser C...... 6.250 07/01/11 3,859,584
1,000 Virginia St Hsg Dev Auth Multi-Family Ser E
Rfdg............................................ 5.900 11/01/17 1,025,610
------------
10,200,649
------------
WEST VIRGINIA 2.3%
735 Harrison Cnty, WV Cnty Cmnty Solid Waste Disp
Rev West PA Pwr Co Ser C (AMBAC Insd)........... 6.750 08/01/24 817,930
3,000 Marshall Cnty, WV Pollutn Ctl Rev OH Pwr Co Proj
Ser C Rfdg (MBIA Insd).......................... 6.850 06/01/22 3,308,760
2,215 West Virginia St Wtr Dev Auth Wtr Dev Rev Ln Pgm
II Ser A (Prerefunded @ 11/01/04) (FSA Insd).... 6.750 11/01/33 2,557,638
------------
6,684,328
------------
WISCONSIN 1.0%
2,490 Wisconsin St Hlth & Edl Fac Auth Rev (AMBAC
Insd)........................................... 6.625 02/15/08 2,859,715
------------
PUERTO RICO 3.2%
8,000 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser
Y Rfdg (Embedded Cap) (FSA Insd)................ 5.730 07/01/21 9,189,600
------------
TOTAL LONG-TERM INVESTMENTS 98.9%
(Cost $261,954,760).......................................................... 281,273,046
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.7%................................. 4,900,000
------------
TOTAL INVESTMENTS 100.6%
(Cost $266,854,760).......................................................... 286,173,046
------------
LIABILITIES IN EXCESS OF OTHER ASSETS (0.6%).................................. (1,677,160)
------------
NET ASSETS 100.0%............................................................. $284,495,886
-----------
</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
purchases and open futures transactions.
See Notes to Financial Statements
11
<PAGE> 13
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $266,854,760)....................... $286,173,046
Cash........................................................ 72,639
Interest Receivable......................................... 4,604,946
Unamortized Organizational Costs............................ 5,147
Other....................................................... 963
------------
Total Assets.......................................... 290,856,741
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 5,828,602
Investment Advisory Fee................................... 156,388
Income Distributions--Common and Preferred Shares......... 81,354
Administrative Fee........................................ 48,119
Affiliates................................................ 15,948
Variation Margin on Futures............................... 7,188
Accrued Expenses............................................ 153,110
Trustees' Deferred Compensation and Retirement Plans........ 70,146
------------
Total Liabilities..................................... 6,360,855
------------
NET ASSETS.................................................. $284,495,886
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000
shares, 2,300 issued with liquidation preference of
$50,000 per share)........................................ $115,000,000
------------
Common Shares ($.01 par value with an unlimited number of
shares authorized, 11,681,272 shares issued and
outstanding).............................................. 116,813
Paid in Surplus............................................. 172,387,137
Net Unrealized Appreciation................................. 19,172,681
Accumulated Undistributed Net Investment Income............. 1,183,816
Accumulated Net Realized Loss............................... (23,364,561)
------------
Net Assets Applicable to Common Shares................ 169,495,886
------------
NET ASSETS.................................................. $284,495,886
============
NET ASSET VALUE PER COMMON SHARE ($169,495,886 divided
by 11,681,272 shares outstanding)......................... $ 14.51
============
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $16,208,902
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,814,495
Administrative Fee.......................................... 558,306
Preferred Share Maintenance................................. 345,503
Trustees' Fees and Expenses................................. 28,769
Custody..................................................... 23,644
Legal....................................................... 12,791
Amortization of Organizational Costs........................ 8,001
Other....................................................... 217,310
-----------
Total Expenses.......................................... 3,008,819
-----------
NET INVESTMENT INCOME....................................... $13,200,083
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................. $ 924,512
Options................................................. (211,323)
Futures................................................. (1,187,359)
-----------
Net Realized Loss....................................... (474,170)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 11,681,076
-----------
End of the Period:
Investments............................................. 19,318,286
Futures................................................. (145,605)
-----------
19,172,681
-----------
Net Unrealized Appreciation During the Period............... 7,491,605
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 7,017,435
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $20,217,518
===========
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended October 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................. $ 13,200,083 $ 13,322,526
Net Realized Gain/Loss................................. (474,170) 78,272
Net Unrealized Appreciation During the Period.......... 7,491,605 1,309,991
------------ ------------
Change in Net Assets from Operations................... 20,217,518 14,710,789
------------ ------------
Distributions from Net Investment Income:
Common Shares........................................ (8,760,706) (8,760,817)
Preferred Shares..................................... (4,067,268) (4,075,814)
------------ ------------
Total Distributions.................................... (12,827,974) (12,836,631)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.... 7,389,544 1,874,158
NET ASSETS:
Beginning of the Period................................ 277,106,342 275,232,184
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $1,183,816 and $811,707,
respectively)........................................ $284,495,886 $277,106,342
============ ============
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 25, 1993
(Commencement
Year Ended October 31, of Investment
-------------------------------------- Operations) to
1997 1996 1995 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period (a)......................... $13.877 $13.717 $12.201 $15.584 $14.766
------- ------- ------- ------- -------
Net Investment Income.............. 1.130 1.140 1.149 1.108 .312
Net Realized and Unrealized
Gain/Loss........................ .601 .119 1.548 (3.276) .710
------- ------- ------- ------- -------
Total from Investment Operations..... 1.731 1.259 2.697 (2.168) 1.022
======= ======= ======= ======= =======
Less:
Distributions from Net Investment
Income:
Paid to Common Shareholders...... .750 .750 .795 .900 .150
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders................... .348 .349 .386 .256 .054
Distributions from Net Realized
Gain:
Paid to Common Shareholders...... -0- -0- -0- .049 -0-
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders................... -0- -0- -0- .010 -0-
------- ------- ------- ------- -------
Total Distributions.................. 1.098 1.099 1.181 1.215 .204
------- ------- ------- ------- -------
Net Asset Value, End of the Period... $14.510 $13.877 $13.717 $12.201 $15.584
======= ======= ======= ======= =======
Market Price Per Share at End of the
Period............................. $12.6875 $11.625 $11.375 $10.500 $15.000
Total Investment Return at Market
Price (b).......................... 16.02% 8.98% 16.07% (24.59%) 1.01%*
Total Return at Net Asset Value
(c)................................ 10.24% 6.82% 19.54% (16.14%) 4.87%*
Net Assets at End of the Period (In
millions).......................... $284.5 $277.1 $275.2 $257.5 $ 297.0
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares............................. 1.83% 1.90% 1.94% 1.82% 1.59%
Ratio of Expenses to Average Net
Assets............................. 1.08% 1.10% 1.10% 1.06% 1.11%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d).................. 5.56% 5.77% 5.88% 6.11% 4.76%
Portfolio Turnover................... 23% 37% 58% 115% 55%*
</TABLE>
(a) Net Asset Value at June 25, 1993, is adjusted for common and preferred share
offering costs of $.234 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.
* Non-Annualized
See Notes to Financial Statements
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Municipal Opportunity Trust II (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 intends to invest
substantially all of its assets in municipal securities rated investment grade
at the time of investment. The Trust commenced investment operations on June 25,
1993.
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. ORGANIZATIONAL COSTS--The Trust has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
the Trust's organization in the amount of $40,000. These costs are being
amortized on a straight line basis over the 60 month period ending June 24,
1998. Van Kampen American Capital Investment Advisory Corp. (the "Adviser") has
agreed that in the event any of the initial shares of the Trust originally
purchased by VKAC are redeemed during the amortization period, the Trust will be
reimbursed for any unamortized organizational costs in the same proportion as
the number of shares redeemed bears to the number of initial shares held at the
time of redemption.
E. FEDERAL INCOME TAXES--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At October 31, 1997, the Trust had an accumulated capital loss
carryforward for tax purposes of $23,510,166 which will expire between October
31, 2002 and October 31, 2005. Net realized gains or losses differ for financial
reporting and tax purposes as a result of gains and losses recognized for tax
purposes on open futures positions at October 31, 1997.
At October 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $266,854,760; the aggregate gross unrealized
appreciation is $19,375,270 and the aggregate gross unrealized depreciation is
$56,984, resulting in net unrealized appreciation of $19,318,286.
F. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays dividends from
net investment income to common shareholders monthly. Net realized gains, if
any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
For the year ended October 31, 1997, 99.56% of the income distributions made
by the Trust were exempt from federal income taxes. In January, 1998, the Trust
will provide tax information to shareholders for the 1997 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .65% of
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
the average net assets of the Trust. In addition, the Trust will pay a monthly
administrative fee to VKAC, the Trust's Administrator, at an annual rate of .20%
of the average net assets of the Trust. 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, 1997, the Trust recognized expenses of
approximately $3,700 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.
For the year ended October 31, 1997, the Trust recognized expenses of
approximately $85,300 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit under the plan is equal to the trustee's annual retainer fee, which is
currently $2,500.
At October 31, 1997, VKAC owned 6,700 common shares of the Trust.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $63,034,156 and $62,899,991,
respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Trust's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on securities. Upon disposition, a realized gain or
loss is recognized accordingly, except when exercising an
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
option contract or taking delivery of a security underlying a futures contract.
In these instances the recognition of gain or loss is postponed until the
disposal of the security underlying the option or futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Trust.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Trust
to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1996.................. 64 $(117,517)
Options Written and Purchased (Net).............. 1,225 (90,879)
Options Terminated in Closing Transactions
(Net).......................................... (224) (47,194)
Options Expired (Net)............................ (1,065) 255,590
----- ---------
Outstanding at October 31, 1997.................. 0 $ 0
===== =========
</TABLE>
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Trust generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the year ended October 31, 1997, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1996............................ 60
Futures Opened............................................. 380
Futures Closed............................................. (365)
----
Outstanding at October 31, 1997............................ 75
====
</TABLE>
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
The futures contracts outstanding as of October 31, 1997, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Short Contracts:
10 Year U.S. Treasury Note
December 1997 (Current Notional Value of
$111,750 per contract)....................... 35 $44,032
Muni Bond Future
December 1997 (Current Notional Value of
$121,844 per contract)....................... 40 101,573
--- --------
75 $145,605
=== ========
</TABLE>
C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short-term interest rates which it
pays on its preferred shares.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the 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 2,300 Auction Preferred Shares ("APS") in three
series. Series A and B each contain 800 shares while Series C contains 700
shares. Dividends are cumulative and the dividend rates are currently reset
every seven days through an auction process. The average rate in effect on
October 31, 1997 was 3.433%. During the year ended October 31, 1997, the rates
ranged from 2.500% to 5.255%.
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.
20
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen American Capital Municipal Opportunity Trust II:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Municipal Opportunity Trust II (the "Trust"), including
the portfolio of investments, as of October 31, 1997, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Municipal Opportunity Trust II as of October 31, 1997,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 11, 1997
21
<PAGE> 23
DIVIDEND REINVESTMENT PLAN
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, State Street Bank and Trust
Company, as your Plan Agent, will automatically invest your dividends and
capital gains distributions in Common Shares of the Trust for your account.
HOW TO PARTICIPATE
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact your
nominee to see if it would participate in the Plan on your behalf. If you wish
to participate in the Plan, but your brokerage firm, bank or nominee is unable
to participate on your behalf, you should request that your shares be re-
registered in your own name which will enable your participation in the Plan.
HOW THE PLAN WORKS
Participants in the Plan will receive the equivalent in Common Shares valued on
the valuation date, generally at the lower of market price or net asset value,
except as specified below. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the national
securities exchange or market system on which the Common Shares are listed for
trading, the next preceding trading day. If the market price per Common Share on
the valuation date equals or exceeds net asset value per Common Share on that
date, the Trust will issue new Common Shares to participants valued at the
higher of net asset value or 95% of the market price on the valuation date. In
the foregoing situation, the Trust will not issue Common Shares under the Plan
below net asset value. If net asset value per Common Share on the valuation date
exceeds the market price per Common Share on that date, or if the Board of
Trustees should declare a dividend or capital gains distribution payable to the
Common Shareholders only in cash, participants in the Plan will be deemed to
have elected to receive Common Shares from the Trust valued at the market price
on that date. Accordingly, in this circumstance, the Plan Agent will, as agent
for the participants, buy the Trust's Common Shares in the open market for the
participants' accounts on or shortly after the payment date. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
per share of the Common Shares, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in the acquisition of fewer Common Shares than if the dividend or
distribution had been paid in Common Shares issued by the Trust. All
reinvestments are in full and fractional Common Shares and are carried to three
decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
changes sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan and a cash payment will be made for any fractional Common
Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
Van Kampen American Capital
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
22
<PAGE> 24
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY
FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Value Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds or
Morgan Stanley funds.
23
<PAGE> 25
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
Vice President
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
CUSTODIAN AND
TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in
the Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1997
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
24
<PAGE> 26
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on May 28, 1997,
where shareholders voted on a new investment advisory agreement, the election of
Trustees whose terms expired in 1997 and independent public accountants.
1) With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Trust,
8,249,726 shares voted for the proposal, 131,939 shares voted against, 154,376
shares abstained and 0 shares represented broker non-votes.
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>
David C. Arch 8,408,011 126,151
Howard J Kerr 8,408,871 125,291
Dennis J. McDonnell 8,410,046 124,116
</TABLE>
3) With regard to the ratification of KPMG Peat Marwick LLP as independent
public accountants for its current fiscal year, 8,399,419 shares voted for the
proposal, 30,832 shares voted against, 105,797 shares abstained and 0 shares
represented broker non-votes.
25
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 266,854,760
<INVESTMENTS-AT-VALUE> 286,173,046
<RECEIVABLES> 4,604,946
<ASSETS-OTHER> 5,147
<OTHER-ITEMS-ASSETS> 73,602
<TOTAL-ASSETS> 290,856,741
<PAYABLE-FOR-SECURITIES> 5,828,602
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 532,253
<TOTAL-LIABILITIES> 6,360,855
<SENIOR-EQUITY> 115,000,000
<PAID-IN-CAPITAL-COMMON> 172,503,950
<SHARES-COMMON-STOCK> 11,681,272
<SHARES-COMMON-PRIOR> 11,681,272
<ACCUMULATED-NII-CURRENT> 1,183,816
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23,364,561)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,172,681
<NET-ASSETS> 284,495,886
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,208,902
<OTHER-INCOME> 0
<EXPENSES-NET> (3,008,819)
<NET-INVESTMENT-INCOME> 13,200,083
<REALIZED-GAINS-CURRENT> (474,170)
<APPREC-INCREASE-CURRENT> 7,491,605
<NET-CHANGE-FROM-OPS> 20,217,518
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,827,974)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,389,544
<ACCUMULATED-NII-PRIOR> 811,707
<ACCUMULATED-GAINS-PRIOR> (22,890,391)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,814,495
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,008,819
<AVERAGE-NET-ASSETS> 164,163,865
<PER-SHARE-NAV-BEGIN> 13.877
<PER-SHARE-NII> 1.130
<PER-SHARE-GAIN-APPREC> 0.601
<PER-SHARE-DIVIDEND> (1.098)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.510
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
