<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Glossary of Terms................................ 5
Performance Results.............................. 7
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Financial Highlights............................. 17
Notes to Financial Statements.................... 18
Dividend Reinvestment Plan....................... 23
</TABLE>
VOT SAR 6/98
<PAGE> 2
LETTER TO SHAREHOLDERS
May 22, 1998
Dear Shareholder,
The Taxpayer Relief Act of 1997,
signed into law by President Clinton
last year, was created to fill the need
for a broad variety of tax-advantaged
investments to promote asset growth. We
are pleased that you selected our Trust [PHOTO]
as a vehicle to provide the potential
for tax-free income within your
investment portfolio. As you are aware,
dividends distributed by the Trust are DENNIS J. MCDONNELL AND DON G. POWELL
generally free from federal income
taxes, and often from state and local
taxes as well. At Van Kampen American Capital, we strive not only for a high
current income, but total return performance as well.
ECONOMIC OVERVIEW
After nearly seven years of continuous growth, the economy remained buoyant
with few signs of accelerating inflation. Wholesale prices in the first quarter
plummeted at an annual rate of 4.2 percent, while consumer prices inched up 0.2
percent and employment costs rose just 0.7 percent. However, inflationary
pressures were eased by factors such as lower oil prices, increasing
productivity, and a pending budget surplus. The Asian financial crisis led to a
stronger dollar and a decline in the prices of Asian imports, which in turn has
discouraged price increases on competing U.S. goods.
To date, Asia's slowdown has had a modest impact on U.S. economic growth. In
the first quarter, the U.S. economy grew at a 4.2 percent annual rate, its
fastest pace in the past year. Strong consumer spending and inventory buildup by
manufacturers offset a decrease in exports to Asia. Despite the economy's
strength, the Federal Reserve Board refrained from raising interest rates, given
the lack of domestic inflationary pressure and concerns about Asia's economic
future.
MARKET OVERVIEW
Against the backdrop of benign inflation and no action by the Fed, U.S. bond
prices rose during the past six months, although they ended the reporting period
below the highs reached in early January.
The yield of the 30-year Treasury bond, which moves in the opposite
direction of its price, fell from 6.15 percent on October 31 to 5.95 percent on
April 30. Bond prices hit a record high as yields reached 5.69 percent in early
January amidst expectations that the Fed would cut interest rates, but the yield
went back to 6.00 percent in early March after the Fed chose not to act. Yields
were volatile for the rest of the reporting period, as
Continued on page two
1
<PAGE> 3
foreign investors sold U.S. Treasury holdings and investors began to fear that
the Fed was leaning toward a rate hike.
Municipal bond yields generally moved in unison with Treasuries but did not
gain nearly as much in price. By the end of the reporting period, the average
yield of AAA-rated, 30-year generic general obligation bonds was 5.14 percent,
two basis points above the yield posted on October 31 of last year. The
underperformance of municipal bonds can be attributed in part to heavy supply
that outpaced demand. Supply increased as state and local governments took
advantage of low interest rates by issuing bonds to refinance outstanding issues
with higher interest rates, as well as to fund new projects. In the first
quarter, long-term municipal issuance totaled $71 billion, up from $40 billion a
year earlier.
More than half of the new issue volume was AAA-rated and insured, which
significantly diminished the amount of uninsured, higher-yielding securities
available in the marketplace. The dominance of insured volume and the high
demand for uninsured paper created an imbalance that compressed the yields
between higher-quality and lower-quality bonds.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of April 30, 1998*
<TABLE>
<S> <C>
AAA................... 58.0%
AA.................... 11.9%
A..................... 16.0%
BBB................... 13.2%
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
We used the following strategies to manage the Trust during the period:
We maintained a portfolio consisting primarily of high-quality bonds with a
heavy emphasis on AAA-rated securities. Under current market conditions, we
believe the yield spread between higher-rated and lower-rated securities does
not adequately compensate the investor for the additional credit risk of the
lower-rated security. Also, high-quality bonds generally have performed better
than lower-quality holdings when interest rates are falling, which was the case
for most of the reporting period.
Overall, we limited the number of new acquisitions because current market
yields were below the average yield of bonds in the Trust. We purchased a number
of long-term bonds with relatively high yields, which allowed us to extend the
call protection of the Trust. These bonds included AA-rated long-term housing
securities, as well as long-term
Continued on page three
2
<PAGE> 4
hospital issues rated A or BBB. In addition, we sold bonds which had
outperformed the market in order to capture the price appreciation, and replace
them with securities we felt were undervalued and had strong potential for an
increase in price. These trades involved swaps between different states and
different coupons. We had little trouble finding replacement bonds because there
was a substantial supply of new securities to choose from.
Most of our purchases were discount securities. In a falling interest rate
environment, these securities have the potential to appreciate in value faster
than premium securities as they move closer to maturity. They also have a longer
duration, making them more sensitive to changing interest rates. Discount bonds
helped offset the declining duration of the portfolio that occurred as the low
interest rate environment caused bonds previously priced to maturity to be
priced to call dates. As of April 30, the duration of the Trust was 7.11 years
compared with 7.76 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 SECTORS AS OF APRIL 30, 1998*
Health Care ............................ 19.3%
Single-Family Housing .................. 11.3%
Retail Electric/Gas/Telephone .......... 10.9%
General Purpose ........................ 10.4%
Industrial Revenue ..................... 10.1%
*As a Percentage of Long-Term Investments
PERFORMANCE SUMMARY
For the six-month period ended April 30, 1998, the Trust generated a total
return of 11.47 percent(1). This reflects a gain in market price per common
share from $12.6875 on October 31, 1997, to $13.7500 on April 30, 1998, plus
reinvestment of all dividends. The Trust had a tax-exempt distribution rate of
5.67 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 8.86 percent(4) on a taxable investment for investors
in the 36 percent federal income tax bracket.
As a result of an increase in Trust earnings, the Board of Trustees approved
an increase in its monthly dividend from $0.0625 to $0.0650 per common share,
first payable December 31, 1997. Please refer to the chart on page seven for
additional performance numbers.
Continued on page four
3
<PAGE> 5
[DIVIDEND HISTORY GRAPH]
Six-month Dividend History
For the Period Ended April 30, 1998
<TABLE>
<CAPTION>
Distribution per Common Share
<S> <C>
Nov 1997........................... $.0625
Dec 1997........................... $.0650
Jan 1998........................... $.0650
Feb 1998........................... $.0650
Mar 1998........................... $.0650
Apr 1998........................... $.0650
</TABLE>
The dividend history represents past performance of the Trust and does
not predict the Trust's future distributions.
ECONOMIC OUTLOOK
We expect the economy to slow from its brisk first-quarter pace, although
the extent of the slowdown depends on the continued effects of Asia's crisis and
on Fed policy. We believe the Fed is biased toward raising rates, given concerns
about the economy's increasing strength. If economic strength ignites
inflationary pressures, then we believe the Fed will raise interest rates later
this year. As a result, the yield of the 30-year Treasury bond could top 6.25
percent.
We will continue to track market developments and their effects on the
Trust. When appropriate, we will make adjustments to the portfolio. As we
mentioned earlier, our goal remains a high level of current income for
investors, plus gains in total return. Thank you for your continued support and
confidence in Van Kampen American Capital and the management of your Trust.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
Please see footnotes on page seven
4
<PAGE> 6
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting bond yields. One hundred basis points is
equal to one 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 call dates
before maturity. Call dates and prices are set when the bond is issued. To
compensate the bond holder for loss of income and ownership, the 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.
A callable bond is "priced to call" when it is selling at a premium, because it
is assumed that the issuer will redeem the bond at its call date, rather than at
maturity.
COUPON RATE: The stated rate of interest a bond pays until maturity, expressed
as a percentage of its face value.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investor Services are two
companies that assign bond ratings. Standard & Poor's ratings range from a high
of AAA to a low of D; Moody's ratings range from a high of Aaa to a low of D.
CREDIT SPREAD: The difference in yield between higher-quality issues and
lower-quality issues. Normally, lower-quality issues provide higher yields than
higher-quality issues in order to compensate investors for the additional credit
risk.
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.
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
one-percent change in the price of the bond for every one-percent change in
interest rates. The longer a fund's duration, the greater the effect of interest
rate movements on net asset value. Typically, funds with shorter durations have
performed better in rising rate environments, while funds with longer durations
have performed better when rates decline.
FEDERAL RESERVE BOARD (THE FED): A group that meets eight times a year to
establish monetary policy and monitor the economic pulse of the United States.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. These
bonds are issued to finance essential government projects, such as highways and
schools.
5
<PAGE> 7
INFLATION: An economic situation in which money supply and business activity
dramatically increase, accompanied by sharply rising 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 municipal bond
insurer. If the issuer defaults, the insurance company will step in and take
over payments of interest and principal. As a result of this protection against
credit risk, most municipal bonds are AAA-rated. Insurance on the bonds does not
relate to mutual fund shares, which will fluctuate in price.
INVESTMENT GRADE BONDS: Securities rated BBB and above by Standard & Poor's or
Baa and above by Moody's Investor Services. Bonds rated below BBB or Baa are
noninvestment grade.
MARKET PRICE: The price of a share of a closed-end fund trading on a stock
exchange. When the price is less than a fund's NAV, the fund is trading at a
discount. When the price is more than the NAV, the fund is trading at a premium.
MUNICIPAL BOND: A debt security issued by a state, municipality, or other
governmental entity to finance capital expenditures such as the construction of
highways or public works.
NET ASSET VALUE (NAV): The value of a fund share, calculated by deducting a
fund's liabilities from its total assets and dividing this amount by the number
of shares outstanding.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This 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.
YIELD SPREAD: The difference between the yields of distinct bonds, due to
variant credit ratings or maturities. When yield spreads between bonds of
different credit quality are narrow, there is less incentive to own the
lower-quality bond. When yield spreads between bonds of different maturities are
narrow, there is less incentive to own the bond with the longer maturity. In
both cases, the investor is not being compensated for the additional risk.
ZERO COUPON BONDS: A corporate or municipal debt security that trades at a deep
discount to face value and pays no interest. It may be redeemed at maturity for
full face value.
6
<PAGE> 8
PERFORMANCE RESULTS FOR THE PERIOD ENDED APRIL 30, 1998
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
(NYSE TICKER SYMBOL--VOT)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
Six-month total return based on market price(1)........... 11.47%
Six-month total return based on NAV(2).................... 3.01%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................ 5.67%
Taxable-equivalent distribution rate as a % of closing
common stock price(4)................................... 8.86%
SHARE VALUATIONS
Net asset value........................................... $ 14.56
Closing common stock price................................ $13.7500
Six-month high common stock price (02/24/98).............. $14.5000
Six-month low common stock price (11/03/97)............... $12.5625
Preferred share (Series A) rate(5)........................ 4.15%
Preferred share (Series B) rate(5)........................ 4.10%
Preferred share (Series C) rate(5)........................ 3.79%
</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.
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 99.2%
ALABAMA 0.3%
$ 1,000 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem
Hosp Ser A...................................... 5.600% 11/01/16 $ 1,005,900
------------
ALASKA 1.1%
3,000 North Slope Borough, AK Ser B (FSA Insd)........ 6.100 06/30/99 3,076,830
------------
ARIZONA 1.2%
3,100 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 3,440,194
------------
CALIFORNIA 13.9%
1,300 Anaheim, CA Pub Fin Auth Lease Rev Pub Impt Proj
Ser C (FSA Insd)................................ 6.000 09/01/16 1,444,794
4,600 California St Pub Wks Brd Lease Rev Var Univ CA
Proj A Rfdg..................................... 5.500 06/01/10 4,868,640
5,905 California St Pub Wks Brd Lease Rev Var Univ CA
Proj A Rfdg..................................... 5.500 06/01/14 6,194,994
2,000 Foothill/Eastern Tran Corridor Agy CA Toll Rd
Rev Ser A....................................... 6.500 01/01/32 2,166,100
2,000 Imperial Irrig Dist CA Ctfs Partn Elec Sys Proj
(MBIA Insd)..................................... 6.750 11/01/11 2,242,640
3,500 Los Angeles Cnty, CA Pub Wks Fin Auth Rev Reg
Park & Open Space Dist.......................... 5.000 10/01/16 3,385,305
2,860 Los Angeles Cnty, CA Metro Tran Auth Sales Tax
Rev Ppty Ser A Rfdg (FGIC Insd)................. 5.000 07/01/21 2,742,397
11,500 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev
Crossover Rfdg (FGIC Insd) (b).................. 5.375 09/01/23 11,516,330
2,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA
Insd)........................................... 6.000 07/01/08 2,215,800
3,000 Southern CA Pub Pwr Auth Pwr Proj Rev San Juan
Unit 3 Ser A (MBIA Insd)........................ 5.000 01/01/20 2,888,370
------------
39,665,370
------------
COLORADO 4.7%
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 1,177,980
7,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser C (Prerefunded @ 08/31/05)....... * 08/31/26 1,115,775
1,600 Denver, CO City & Cnty Arpt Rev Ser A........... 6.900 11/15/98 1,625,792
1,250 Denver, CO City & Cnty Arpt Rev Ser A........... 7.000 11/15/99 1,303,213
2,650 Denver, CO City & Cnty Arpt Rev Ser B........... 7.250 11/15/05 2,963,998
895 Denver, CO City & Cnty Arpt Rev Ser B........... 7.250 11/15/07 995,213
105 Denver, CO City & Cnty Arpt Rev Ser B
(Prerefunded @ 11/15/02)........................ 7.250 11/15/07 119,095
1,500 Denver, CO City & Cnty Arpt Rev Ser D........... 7.750 11/15/13 1,862,115
2,500 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
(MBIA Insd)..................................... * 09/01/11 1,268,925
4,000 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
(MBIA Insd)..................................... * 09/01/22 1,073,920
------------
13,506,026
------------
CONNECTICUT 1.5%
4,235 Connecticut St Dev Auth Pkg Fac Hartford Hosp
Rev (MBIA Insd)................................. 6.875 10/01/06 4,412,616
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<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 $ 2,162,040
1,050 Florida Hsg Fin Agy Single Family Mtg Ser A Rfdg
(GNMA Collateralized)........................... 6.550 07/01/14 1,118,407
2,000 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl
Rev Tampa Elec Co Proj Ser 92 Rfdg.............. 8.000 05/01/22 2,299,220
1,000 Jacksonville, FL Hosp Rev Univ Med Cent Inc Proj
(Connie Lee Insd)............................... 6.500 02/01/11 1,077,980
3,590 Pinellas Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Multi Cnty Ser A (GNMA Collateralized)...... 6.650 08/01/21 3,816,996
------------
10,474,643
------------
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 2,078,220
3,000 Muni Elec Auth GA Proj One Sub Ser A (AMBAC
Insd)........................................... 6.000 01/01/04 3,227,430
------------
5,305,650
------------
ILLINOIS 7.0%
3,365 Chicago, IL Cap Apprec (Prerefunded @ 07/01/05)
(AMBAC Insd).................................... * 01/01/17 1,157,055
4,860 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)................................. 7.000 09/01/27 5,391,295
1,415 Chicago, IL Single Family Mtg Rev Ser B (GNMA
Collateralized)................................. 7.625 09/01/27 1,610,242
3,000 Illinois Dev Fin Auth Solid Waste Disposal
Rev............................................. 5.950 12/01/24 3,231,270
4,305 Illinois Hlth Fac Auth Rev OSF Hlthcare Sys
Rfdg............................................ 6.000 11/15/10 4,558,737
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent A Rfdg..................................... 8.800 06/01/06 1,017,990
2,615 Peoria, Moline & Freeport, IL Coll Mtg Ser A
(GNMA Collateralized)........................... 7.600 04/01/27 2,964,286
------------
19,930,875
------------
INDIANA 3.3%
1,165 Concord, IN Cmnty Schs Bldg Corp First Mtg
(Prerefunded @ 7/01/05) (FSA Insd).............. 7.000 07/01/11 1,354,790
4,000 East Chicago, IN Elementary Sch Bldg Corp First
Mtg Ser A....................................... 6.250 07/05/08 4,413,280
3,000 Indiana Hlth Fac Fin Auth Hosp Rev Columbus Regl
Hosp Rfdg (FSA Insd)............................ 7.000 08/15/15 3,653,370
------------
9,421,440
------------
IOWA 0.4%
1,200 Ottumwa, IA Hosp Fac Rev Rfdg................... 6.000 10/01/18 1,252,032
------------
KENTUCKY 0.7%
2,000 Jefferson Cnty, KY Hlth Fac Rev (MBIA Insd)..... 5.125 10/01/27 1,919,300
------------
LOUISIANA 1.1%
2,800 Saint Charles Parish, LA Solid Waste Disp Rev LA
Pwr & Lt Co Proj (FSA Insd)..................... 7.050 04/01/22 3,019,912
------------
MAINE 0.8%
2,215 Maine St Hsg Auth Mtg Purp Ser C2............... 6.875 11/15/23 2,362,718
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MARYLAND 0.3%
$ 1,000 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Ser C........................................... 5.550% 07/01/27 $ 1,003,220
------------
MASSACHUSETTS 2.7%
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Cape
Cod Hlth Ser A-3 (Connie Lee Insd).............. 5.000 11/15/11 1,695,002
2,500 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000 10/01/23 2,502,800
3,335 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental
Ser A Rfdg (AMBAC Insd)......................... 6.600 07/01/14 3,583,024
------------
7,780,826
------------
MICHIGAN 2.9%
1,000 Battle Creek, MI Downtown Dev Auth Tax Increment
Rev (Prerefunded @ 05/01/04).................... 7.600 05/01/16 1,173,050
3,300 Michigan St Bldg Auth Rev (MBIA Insd)........... 6.250 10/01/20 3,523,575
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................. 5.500 10/01/18 1,002,470
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................. 5.500 10/01/27 997,060
1,500 Michigan St Hsg Dev Auth Multi-Family Rev Ltd
Oblig Ser A Rfdg (GNMA Collateralized).......... 6.600 04/01/30 1,601,925
------------
8,298,080
------------
MISSISSIPPI 0.6%
1,500 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy
Res Inc Rfdg.................................... 7.300 05/01/25 1,583,835
------------
MISSOURI 2.5%
1,200 Branson, MO Tourism Tax Rev (a)................. 5.000 01/01/18 1,164,816
4,500 Kansas City, MO Muni Assistance Corp Rev Rfdg
(MBIA Insd)..................................... 5.000 04/15/20 4,342,905
1,500 Saint Louis Cnty, MO Mtg Rev Ctfs Receipt Ser H
(GNMA Collateralized)........................... 5.400 07/01/18 1,545,630
------------
7,053,351
------------
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 3,301,333
------------
NEW JERSEY 4.0%
1,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/06 1,099,730
1,750 New Jersey Hlthcare Fac Fin Auth Rev Hackensack
Med Cent (FGIC Insd)............................ 6.625 07/01/17 1,881,950
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 5,629,493
2,500 Secaucus, NJ Muni Util Auth Swr Rev Ser A
Rfdg............................................ 6.000 12/01/08 2,739,875
------------
11,351,048
------------
NEW YORK 11.4%
1,485 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A....................................... 7.000 06/15/09 1,614,433
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 1,515 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A (Prerefunded @ 06/15/01).............. 7.000% 06/15/09 $ 1,647,472
2,500 New York City Ser A............................. 7.000 08/01/04 2,802,425
5,000 New York City Ser A-1........................... 6.375 08/01/10 5,506,100
2,000 New York City Ser B1 (Prerefunded @ 08/15/04)
(MBIA Insd)..................................... 6.950 08/15/12 2,291,360
1,800 New York City Ser E Rfdg........................ 6.600 08/01/03 1,965,258
1,000 New York St Dorm Auth Rev City Univ Third Genl
Res Ser 2 (MBIA Insd)........................... 6.250 07/01/19 1,080,990
3,000 New York St Dorm Auth Rev Cons City Univ Sys Ser
A Rfdg.......................................... 6.000 07/01/06 3,209,310
1,520 New York St Dorm Auth Rev Insd John T Mather Mem
Hosp (Connie Lee Insd).......................... 6.500 07/01/09 1,733,499
2,545 New York St Dorm Auth Rev Secd Hosp New York
Downtown Rfdg................................... 5.200 02/15/14 2,486,923
970 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.750 04/01/03 1,015,095
835 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.400 04/01/04 860,952
500 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.500 04/01/05 517,700
500 New York St Energy Research & Dev Auth St
Service Contract Rev............................ 5.500 04/01/06 517,815
1,500 New York St Loc Govt Assistance Corp Ser A
(Prerefunded @ 4/01/02)......................... 6.875 04/01/19 1,664,715
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 1,485,797
2,000 New York St Urban Dev Corp Rev Correctional Fac
Ser A Rfdg...................................... 5.500 01/01/16 2,004,800
------------
32,404,644
------------
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 3,015,450
------------
OHIO 4.1%
2,000 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys
Ser B Rfdg (MBIA Insd).......................... 5.250 06/01/08 2,071,840
1,040 Lorain Cnty, OH Hosp Rev EMH Regl Med Cent Rfdg
(AMBAC Insd).................................... 7.750 11/01/13 1,232,910
1,400 Lucas Cnty, OH Hosp Rev......................... 7.625 06/01/15 1,424,136
2,395 Lucas Cnty, OH Hosp Rev Impt Saint Vincent Med
Cent (MBIA Insd)................................ 6.625 08/15/22 2,628,033
2,000 Ohio St Wtr Dev Auth Solid Waste Disp Rev....... 6.300 09/01/20 2,133,480
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO (CONTINUED)
$ 1,000 Rocky River, OH City Sch Dist................... 5.375% 12/01/17 $ 1,032,510
1,065 Strongsville, OH................................ 6.700 12/01/11 1,228,307
------------
11,751,216
------------
OKLAHOMA 2.7%
2,250 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 6.125 10/01/14 2,340,855
2,960 Tulsa, OK Indl Auth Hosp Rev Hillcrest Med Cent
Proj Rfdg (Connie Lee Insd)..................... 6.250 06/01/07 3,264,880
1,975 Tulsa, OK Muni Arpt Tran Rev American Airls
Inc............................................. 7.375 12/01/20 2,128,872
------------
7,734,607
------------
OREGON 0.9%
2,500 Oregon St Vets Welfare Ser 76A.................. 6.050 10/01/28 2,629,650
------------
PENNSYLVANIA 9.4%
2,000 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,176,140
5,780 Erie, PA Sch Dist Cap Apprec Rfdg (FSA Insd)
(a)............................................. * 09/01/20 1,746,716
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 1,660,200
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
43.............................................. 7.500 10/01/25 1,086,980
4,000 Pennsylvania Hsg Fin Agy Single Family Ser
56A............................................. 6.150 10/01/27 4,181,000
1,975 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Alleghany, DE Vly Oblig Ser C (MBIA Insd)... 5.300 11/15/06 2,050,504
1,600 Pennsylvania St Higher Edl Fac Auth Rev Med
College PA Ser A (Prerefunded @ 03/01/01)....... 7.250 03/01/11 1,755,472
2,635 Philadelphia, PA (MBIA Insd).................... 5.000 05/15/25 2,511,129
7,500 Philadelphia, PA Gas Wks Rev 14th Ser Rfdg (FSA
Insd) (b)....................................... 6.250 07/01/08 8,203,425
1,315 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (MBIA Insd)...................... 6.450 02/01/10 1,441,148
------------
26,812,714
------------
TENNESSEE 0.8%
2,095 Tennessee Hsg Dev Agy Mtg Fin Ser A............. 7.125 07/01/26 2,237,691
------------
TEXAS 1.9%
2,000 Harris Cnty, TX Hlth Fac Dev Corp Hosp Rev
Hermann Hosp Proj (Prerefunded @ 10/01/04) (MBIA
Insd)........................................... 6.375 10/01/24 2,224,960
2,840 Harris Cnty, TX Toll Rd Sub Lien Rev Rfdg....... 6.750 08/01/14 3,082,053
------------
5,307,013
------------
UTAH 1.0%
1,050 Intermountain Pwr Agy UT Pwr Supply Rev Ser B... 7.000 07/01/21 1,103,256
1,680 Utah St Hsg Fin Agy Single Family Mtg Sr Issue
Ser B-2 (FHA Insd).............................. 6.500 07/01/15 1,786,126
------------
2,889,382
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<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 $ 1,359,063
1,500 Henrico Cnty, VA Indl Dev Auth Pub Fac Lease Rev
Henrico Cnty Regl Jail Proj..................... 6.500 08/01/10 1,694,520
2,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd).......... 6.900 03/01/19 2,233,060
3,680 Virginia St Hsg Dev Auth Comwlth Mtg Ser C...... 6.250 07/01/11 3,861,792
1,000 Virginia St Hsg Dev Auth Multi-Family Ser E
Rfdg............................................ 5.900 11/01/17 1,031,750
------------
10,180,185
------------
WEST VIRGINIA 2.3%
735 Harrison Cnty, WV Cnty Cmnty Solid Waste Disp
Rev West PA Pwr Co Ser C (AMBAC Insd)........... 6.750 08/01/24 814,902
3,000 Marshall Cnty, WV Pollutn Ctl Rev OH Pwr Co Proj
Ser C Rfdg (MBIA Insd).......................... 6.850 06/01/22 3,277,350
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 2,536,596
------------
6,628,848
------------
WISCONSIN 1.0%
2,490 Wisconsin St Hlth & Edl Fac Auth Rev (AMBAC
Insd)........................................... 6.625 02/15/08 2,843,580
------------
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 9,161,520
------------
TOTAL LONG-TERM INVESTMENTS 99.2%
(Cost $263,187,778)......................................................... 282,761,699
SHORT-TERM INVESTMENTS 0.3%
(Cost $1,000,000)........................................................... 1,000,000
------------
TOTAL INVESTMENTS 99.5%
(Cost $264,187,778)......................................................... 283,761,699
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%................................... 1,298,731
------------
NET ASSETS 100.0%............................................................ $285,060,430
============
</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 and open option transactions.
See Notes to Financial Statements
13
<PAGE> 15
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $264,187,778)....................... $283,761,699
Receivables:
Interest.................................................. 4,555,436
Investments Sold.......................................... 569,318
Unamortized Organizational Costs............................ 1,180
Other....................................................... 3,895
------------
Total Assets.......................................... 288,891,528
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,953,653
Custodian Bank............................................ 366,302
Investment Advisory Fee................................... 153,301
Income Distributions--Common and Preferred Shares......... 73,679
Administrative Fee........................................ 47,169
Options at Market Value (Net premiums received of
$18,143)................................................ 9,375
Affiliates................................................ 5,522
Accrued Expenses............................................ 140,511
Trustees' Deferred Compensation and Retirement Plans........ 81,586
------------
Total Liabilities..................................... 3,831,098
------------
NET ASSETS.................................................. $285,060,430
============
NET ASSETS CONSIST OF:
Preferred Shares ($.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................................. 19,582,689
Accumulated Undistributed Net Investment Income............. 1,162,121
Accumulated Net Realized Loss............................... (23,188,330)
------------
Net Assets Applicable to Common Shares................ 170,060,430
------------
NET ASSETS.................................................. $285,060,430
============
NET ASSET VALUE PER COMMON SHARE ($170,060,430 divided
by 11,681,272 shares outstanding)......................... $ 14.56
============
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 8,043,743
-----------
EXPENSES:
Investment Advisory Fee..................................... 925,815
Administrative Fee.......................................... 284,866
Preferred Share Maintenance................................. 178,907
Trustees' Fees and Expenses................................. 13,011
Custody..................................................... 9,618
Legal....................................................... 4,028
Amortization of Organizational Costs........................ 3,968
Other....................................................... 99,153
-----------
Total Expenses.......................................... 1,519,366
-----------
NET INVESTMENT INCOME....................................... $ 6,524,377
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................. $ 334,253
Options................................................. 31,199
Futures................................................. (189,221)
-----------
Net Realized Gain....................................... 176,231
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 19,172,681
-----------
End of the Period:
Investments............................................. 19,573,921
Options................................................. 8,768
-----------
19,582,689
-----------
Net Unrealized Appreciation During the Period............... 410,008
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 586,239
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 7,110,616
===========
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1998 and
the Year Ended October 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1998 October 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................. $ 6,524,377 $ 13,200,083
Net Realized Gain/Loss................................. 176,231 (474,170)
Net Unrealized Appreciation During the Period.......... 410,008 7,491,605
------------ ------------
Change in Net Assets from Operations................... 7,110,616 20,217,518
------------ ------------
Distributions from Net Investment Income:
Common Shares........................................ (4,526,342) (8,760,706)
Preferred Shares..................................... (2,019,730) (4,067,268)
------------ ------------
Total Distributions.................................... (6,546,072) (12,827,974)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.... 564,544 7,389,544
NET ASSETS:
Beginning of the Period................................ 284,495,886 277,106,342
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $1,162,121 and $1,183,816,
respectively)........................................ $285,060,430 $284,495,886
============ ============
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 25, 1993
(Commencement
Year Ended October 31, of Investment
Six Months Ended ----------------------------------------- Operations) to
April 30, 1998 1997 1996 1995 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period (a)......... $ 14.510 $ 13.877 $13.717 $12.201 $ 15.584 $14.766
-------- -------- ------- ------- --------- -------
Net Investment Income..... .559 1.130 1.140 1.149 1.108 .312
Net Realized and
Unrealized Gain/Loss.... .050 .601 .119 1.548 (3.276) .710
-------- -------- ------- ------- --------- -------
Total from Investment
Operations................ .609 1.731 1.259 2.697 (2.168) 1.022
======== ======== ======= ======= ========= =======
Less:
Distributions from Net
Investment Income:
Paid to Common
Shareholders.......... .388 .750 .750 .795 .900 .150
Common Share Equivalent
of Distributions Paid
to Preferred
Shareholders.......... .173 .348 .349 .386 .256 .054
Distributions from Net
Realized Gain:
Paid to Common
Shareholders.......... -0- -0- -0- -0- .049 -0-
Common Share Equivalent
of Distributions Paid
to Preferred
Shareholders.......... -0- -0- -0- -0- .010 -0-
-------- -------- ------- ------- --------- -------
Total Distributions......... .561 1.098 1.099 1.181 1.215 .204
-------- -------- ------- ------- --------- -------
Net Asset Value, End of the
Period.................... $ 14.558 $ 14.510 $13.877 $13.717 $ 12.201 $15.584
======== ======== ======= ======= ========= =======
Market Price Per Share at
End of the Period......... $13.7500 $12.6875 $11.625 $11.375 $ 10.500 $15.000
Total Investment Return at
Market Price (b).......... 11.47%* 16.02% 8.98% 16.07% (24.59%) 1.01%*
Total Return at Net Asset
Value (c)................. 3.01%* 10.24% 6.82% 19.54% (16.14%) 4.87%*
Net Assets at End of the
Period (In millions)...... $ 285.1 $ 284.5 $ 277.1 $275.2 $ 257.5 $ 297.0
Ratio of Expenses to Average
Net Assets Applicable to
Common Shares**........... 1.78% 1.83% 1.90% 1.94% 1.82% 1.59%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares (d)......... 5.27% 5.56% 5.77% 5.88% 6.11% 4.76%
Portfolio Turnover.......... 8%* 23% 37% 58% 115% 55%*
* Non-Annualized
** Ratio of Expenses to
Average Net Assets
Including Preferred
Shares................... 1.07% 1.08% 1.10% 1.10% 1.06% 1.11%
</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.
See Notes to Financial Statements
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
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
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
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 April 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $264,187,778; the aggregate gross unrealized
appreciation is $19,685,019 and the aggregate gross unrealized depreciation is
$102,330, resulting in net unrealized appreciation including open option
transactions of $19,582,689.
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.
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 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
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
record keeping and reporting responsibilities with respect to the Trust's
portfolio and preferred shares and providing certain services to shareholders.
For the six months ended April 30, 1998, the Trust recognized expenses of
approximately $1,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
For the six months ended April 30, 1998, the Trust recognized expenses of
approximately $30,400 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust 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 per trustee under the plan is $2,500.
At April 30, 1998, 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 $24,718,548 and $23,825,797,
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 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.
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
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 six months ended April 30, 1998, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1997................... 0 $ 0
Options Written and Purchased (Net)............... 275 49,341
Options Expired (Net)............................. (200) (31,198)
---- --------
Outstanding at April 30, 1998..................... 75 $ 18,143
==== ========
</TABLE>
The related futures contracts of the outstanding option transactions as of April
30, 1998, and the description and market value is as follows:
<TABLE>
<CAPTION>
EXP. MARKET
MONTH/ VALUE
EXERCISE OF
CONTRACTS PRICE OPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bond Index Futures
June 1998--Written Puts (Current
Notional Value of $121,063 per
contract)....................... 75 Jun/116 $(9,375)
== =======
</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).
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Transactions in futures contracts for the six months ended April 30, 1998,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1997............................ 75
Futures Opened............................................. 80
Futures Closed............................................. (155)
----
Outstanding at April 30, 1998.............................. 0
====
</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 the 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 April
30, 1998 was 4.023%. During the six months ended April 30, 1998, the rates
ranged from 3.000% to 5.000%.
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.
22
<PAGE> 24
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
23
<PAGE> 25
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest or
send money.
To view a current Van Kampen American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
24
<PAGE> 26
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
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
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., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
25
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