<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
TWELVE-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 12
FINANCIAL STATEMENTS 21
NOTES TO FINANCIAL STATEMENTS 26
REPORT OF INDEPENDENT AUDITORS 29
DIVIDEND REINVESTMENT PLAN 30
TRUST OFFICERS AND IMPORTANT ADDRESSES 32
RESULTS OF SHAREHOLDER VOTES 33
</TABLE>
Our generations of money-management experience may help you pursue life's true
wealth.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
November 20, 2000
Dear Shareholder,
The first three quarters of 2000 proved to be especially volatile, with all of
the major markets declining in the spring and spending the following months
trying to recover. To manage one's portfolio during such unpredictable times
requires investment-management experience, and the following pages should give
you some insight into how we have performed in this difficult environment.
In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your trust during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the trust's largest
investments, and you can examine the complete portfolio to see all of your
trust's holdings as of the end of your trust's reporting period.
At Van Kampen, we place a high priority on providing you and
your financial advisor with the information you need to help
you monitor your investments during all types of markets. With
nearly four generations of investment-management experience,
we've been around long enough to understand that by investing
with Van Kampen you're entrusting us with much more than your
money. Your investments may help make it possible to afford your next house,
keep up with rising college costs, or enjoy a comfortable retirement.
No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH REMAINED RELATIVELY STRONG DURING THE REPORTING PERIOD,
UNDERPINNED BY LOW UNEMPLOYMENT AND RISING PRODUCTIVITY, YET THERE WERE SIGNS
THAT A HEALTHY SLOWDOWN WAS UNDERWAY. GROSS DOMESTIC PRODUCT, THE PRIMARY
MEASURE OF ECONOMIC GROWTH, INCREASED AT A 2.4 PERCENT ANNUALIZED RATE FOR THE
THIRD QUARTER OF 2000. FOLLOWING RELATIVELY MILD FIRST- AND SECOND-QUARTER DATA,
THIS THIRD-QUARTER FIGURE OFFERS FURTHER EVIDENCE THAT GROWTH MIGHT BE SETTLING
BACK TO A MORE MODERATE AND SUSTAINABLE PACE THAN ITS RAPID RATE IN LATE 1999.
CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT INFLATION REMAINED AT BAY DUE IN PART TO A GRADUAL SLOWDOWN IN
CONSUMER SPENDING. RISING INTEREST RATES, HIGHER ENERGY COSTS, AND A
DISAPPOINTING STOCK MARKET BEGAN TO TEMPER RETAIL SALES, WHICH LEVELED OFF FROM
THE BLISTERING PACE OF LATE 1999 AND EARLY 2000. AND WHILE CONSUMER SPENDING WAS
BRISK, THE OVERALL TREND HAS BEEN DOWNWARD THIS YEAR.
THE JOBLESS RATE CONTINUED TO BE EXTREMELY LOW BY HISTORICAL STANDARDS, BUT A
RECENT DECLINE IN NEW JOB CREATION SUPPORTS THE POPULAR BELIEF THAT THE ECONOMY
IS MODERATING. ALTHOUGH EMPLOYER COSTS SUCH AS WAGES AND BENEFITS WERE RISING AT
THE END OF 1999 AND THE BEGINNING OF 2000, OVER THE PAST SIX MONTHS THE
EMPLOYMENT COST INDEX HAS SHOWN MARKED DECELERATION, WHICH SHOULD HELP EASE
INFLATION CONCERNS.
INTEREST RATES AND INFLATION
THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES FOUR TIMES DURING THE
LAST 12 MONTHS IN AN EFFORT TO WARD OFF INFLATION BY CURBING ECONOMIC GROWTH.
OVER THE SAME PERIOD, THE CONSUMER PRICE INDEX ROSE 3.5 PERCENT, WHICH INDICATED
THAT INFLATION GENERALLY REMAINS UNDER CONTROL.
THE FED HAS ACKNOWLEDGED THE RISK OF RISING INFLATION AND WILL STAY ON GUARD, AS
RISING ENERGY COSTS AND LOW UNEMPLOYMENT THREATEN TO PROPEL THIS FIGURE UPWARD
IN THE COMING MONTHS. AS LONG AS INFLATION IS CONTAINED AND THE PACE OF ECONOMIC
GROWTH REMAINS FAVORABLE, THE FED IS LIKELY TO HOLD INTEREST RATES STEADY IN THE
SHORT TERM, WHICH COULD HELP STABILIZE THE STOCK AND BOND MARKETS.
2
<PAGE> 4
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. GROSS DOMESTIC PRODUCT
---------------------------
<S> <C>
Sep 98 3.80
Dec 98 5.90
Mar 99 3.50
Jun 99 2.50
Sep 99 5.70
Dec 99 8.30
Mar 00 4.80
Jun 00 5.60
Sep 00 2.40
</TABLE>
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(October 31, 1998--October 31, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
6.50 3.10
6.50 3.70
Jul 00 6.50 3.70
6.50 3.30
6.50 3.50
Oct 00 6.50 3.50
</TABLE>
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
<PAGE> 5
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of October 31, 2000)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C>
AMEX Ticker Symbol VKI
-----------------------------------------------------------------------
One-year total return based on market price(1) 11.15%
-----------------------------------------------------------------------
One-year total return based on NAV(2) 10.62%
-----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 6.71%
-----------------------------------------------------------------------
Taxable-equivalent distribution rate as a % of closing
common stock price(4) 10.48%
-----------------------------------------------------------------------
Net asset value $13.46
-----------------------------------------------------------------------
Closing common stock price $11.6250
-----------------------------------------------------------------------
One-year high common stock price (8/10/00) $12.2500
-----------------------------------------------------------------------
One-year low common stock price (5/11/00) $10.4375
-----------------------------------------------------------------------
Preferred share (Series A) rate(5) 4.150%
-----------------------------------------------------------------------
Preferred share (Series B) rate(5) 4.130%
-----------------------------------------------------------------------
</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 #4, 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 is no guarantee of 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.
4
<PAGE> 6
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
<TABLE>
<CAPTION>
As of October 31, 2000
<S> <C> <C>
- AAA/Aaa............ 68.0%
- AA/Aa.............. 10.1%
- A/A................ 10.5%
- BBB/Baa............ 11.0%
- BB/Ba.............. 0.4%
[PIE CHART]
<CAPTION>
As of October 31, 1999
<S> <C> <C>
- AAA/Aaa............ 66.7%
- AA/Aa.............. 11.7%
- A/A................ 9.8%
- BBB/Baa............ 11.5%
- B/B................ 0.5%
[PIE CHART]
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
TWELVE-MONTH DIVIDEND HISTORY
(for the period ended October 31, 2000, for common shares)
[BAR GRAPH]
<TABLE>
<CAPTION>
DIVIDENDS
---------
<S> <C>
11/99 0.065
12/99 0.065
1/00 0.065
2/00 0.065
3/00 0.065
4/00 0.065
5/00 0.065
6/00 0.065
7/00 0.065
8/00 0.065
9/00 0.065
10/00 0.065
</TABLE>
The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.
5
<PAGE> 7
TOP FIVE SECTORS
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
Health Care 23.30 27.50
Public Building 10.30 2.30
General Purpose 10.00 10.50
Transportation 9.60 9.30
Single-Family Housing 9.30 11.80
</TABLE>
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--August 1993 through October 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICE
--------------- ------------
<S> <C> <C>
8/93 14.9800 14.9800
15.6100 15.6100
15.0800 13.5000
12.9800 11.8750
12.8100 11.7500
12.5600 10.6250
12/94 11.8700 10.0000
13.1300 11.5000
12.8300 11.5000
13.0600 11.5000
12/95 13.9100 11.3750
13.1400 11.1250
13.0300 11.0000
13.3600 11.2500
12/96 13.6000 11.2500
13.2900 11.3750
13.7200 12.1250
14.1100 12.5000
12./97 14.4000 12.7500
14.4000 12.7500
14.4400 13.1250
14.8400 13.4375
12/98 14.6500 13.6250
14.4900 13.1250
13.7900 12.4375
13.2600 11.3750
12/99 12.7300 10.8750
13.0700 11.1250
13.0200 11.4375
13.2800 12.0000
10/00 13.4600 11.6250
</TABLE>
The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
6
<PAGE> 8
[PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE PORTFOLIO MANAGER OF THE VAN KAMPEN ADVANTAGE
MUNICIPAL INCOME TRUST II ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED
THE MARKETS AND INFLUENCED THE TRUST'S RETURN DURING THE 12 MONTHS ENDED OCTOBER
31, 2000. TIMOTHY D. HANEY, PORTFOLIO MANAGER, HAS MANAGED THE TRUST SINCE 1995
AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE FOLLOWING DISCUSSION
REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q WHAT WERE THE MOST IMPORTANT
DEVELOPMENTS IN THE FIXED-INCOME MARKETS AND HOW DID THE TRUST PERFORM
DURING THE REPORTING PERIOD?
A The key factor in the market's
behavior during the past fiscal year has been generally rising interest rates,
especially at the short end of the maturity spectrum. This rate environment
stemmed from the Federal Reserve Board's commitment to keeping inflation in
check by ratcheting up short-term interest rates whenever the economy threatened
to overheat and push the prices of goods and services higher. In fact, the Fed
increased short-term rates four times during the reporting period, with the last
hike occurring in May 2000.
The strength of the economy, and the accompanying Federal Reserve activity,
caused interest rates to rise across the board for the first half of the
reporting period. In the spring of 2000, the bond market rallied as investors
began to anticipate an end to the Fed's rate-tightening cycle. By the end of
October, short-term rates remained high, but rates in the intermediate to long
maturity segments of the market had actually declined from the levels we had
seen at the start of the reporting period.
Because the trust is leveraged, higher short-term rates placed pressure on
the trust's dividend, as the increased cost of borrowing cut into the fund's
earnings. However, the relatively high long-term rates that prevailed for part
of the reporting period allowed the trust to add new holdings at attractive
yields, partially offsetting the decline in income that occurred as short-term
rates climbed.
After the steady increase in short-term interest rates over the past year,
we have seen a more stable environment in recent months, as the Fed has reacted
to slower economic growth, more efficient workforce output, and moderate price
gains by keeping target lending rates unchanged. The inflation rate, as measured
by the consumer price index, peaked in March 2000 at 3.8 percent and has since
dropped back below the 3 percent level.
7
<PAGE> 9
Supply in the municipal bond market was sharply lower from the levels of a
year ago, as higher interest rates have made it unattractive for municipalities
to retire existing debt. At the same time, strong economic activity has allowed
many municipalities to generate a budget surplus, enabling them to cover
spending that would normally require municipal bond financing.
Because demand has remained strong, the lack of new issuance in the primary
market helped support bond prices, although the somewhat limited selection of
available securities required us to be very selective in choosing new bonds for
the trust's portfolio. In many cases, we found attractive values in the
secondary market, buying and selling bonds that have been in the market for a
while.
The trust continued to provide shareholders with an attractive level of
income. Its monthly dividend of $0.065 per share, which was increased from
$0.062 per share in November 1999, translates to a distribution rate of 6.71
percent based on the trust's closing market price on October 31, 2000. Because
income from the trust is exempt from federal income taxes, this distribution
rate is equivalent to a yield of 10.48 percent for an investor in the 36 percent
federal income tax bracket.
For the 12 months through October 31, 2000, the trust produced a total
return of 11.15 percent based on market price. This reflects an increase in
market price from $11.1875 per share on October 31, 1999, to $11.6250 per share
on October 31, 2000. Of course, past performance is no guarantee of future
results. As a result of recent market activity, current performance may vary
from the figures shown. By comparison, the Lehman Brothers Municipal Bond Index
posted a total return of 8.51 percent for the same period. This broad-based,
unmanaged index, which reflects the general performance of municipal securities,
does not reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents. Such costs would lower the performance
of the index. It is not possible to invest directly in an index. For additional
performance results, please refer to the chart and footnotes on page 4.
Q HOW DID YOU REACT TO THE
MARKET CONDITIONS YOU ENCOUNTERED IN MANAGING THE TRUST?
A Much of the activity in the trust's
portfolio during the reporting period was guided by a strategic direction we
adopted in February of 2000 and had largely implemented by the end of March. It
was our goal to lengthen the duration of the portfolio (a measure of its
sensitivity to changes in interest rates) so that it more closely mirrored the
benchmark indicators we use to gauge the trust's performance. At the time, we
felt the market had solid upside potential, and a longer duration would allow
the trust to more fully participate in the gains of the market if it rallied
over time.
As we began implementing this strategy, we caught the market at a good time.
Early in the year, the market presented us with attractive yields on
long-duration securities, particularly those priced at deep discounts. We
purchased some of these
8
<PAGE> 10
bonds and sold prerefunded securities and bonds with short calls--many of which
were scheduled to be called or refunded within the next year or two. In effect,
this strategy helped capture additional par value and the potential for capital
appreciation, all while achieving the desired effect of extending the
portfolio's duration. This strategy was a positive in terms of the trust's
performance, especially during the market rally that occurred in the second and
third quarters of 2000.
Q HOW DID THIS STRATEGY AFFECT THE
COMPOSITION OF THE PORTFOLIO?
A A by-product of this market
activity--and the trust's positioning within the market--was an increase in the
overall credit quality of the portfolio. The rally was strongest at the high end
of the quality spectrum, so these securities saw solid price gains while the
valuations of nonrated and lower-rated securities, such as those rated BBB or
lower, remained fairly flat or decreased.
Over the course of the reporting period, the portfolio composition came to
reflect this trend, as the trust's AAA allocation increased slightly to 68.0
percent of long-term investments (up from 66.7 percent at the start of the
period), and its BBB allocation declined to 11.0 percent (down from 11.5
percent). In general, our bias toward high-quality securities was a boost to
portfolio performance.
Among industry sectors, the trust's allocations to health-care bonds and
industrial revenue bonds were reduced by roughly 3 and 4 percent, respectively.
We moved those assets into the public building sector, where the trust's
allocation rose by nearly 8 percent, most of which was in high-quality
securities. We also did some buying and selling within the BBB rating category,
taking advantage of the wide yield spreads on selected health-care bonds.
Q WHAT DO YOU SEE AHEAD FOR
THE ECONOMY AND THE MUNICIPAL MARKET?
A The outlook for the municipal
bond market will be closely tied to the prospects of the U.S. economy and the
Fed's reaction to key economic indicators. While interest rates have been fairly
steady of late, the Fed's next move will be based on whether inflation shows
signs of heating up. We believe inflation appears to be under control at this
time, but the Fed will be watching economic growth statistics, the labor market,
and the prices of key commodities, such as crude oil, for signs of inflationary
pressures.
Clearly, the direction of interest rates will be determined by the Fed's
reaction to inflationary signals, so we feel it would be imprudent to make a bet
on the direction of interest rates in terms of how we position the trust.
Consequently, we will seek to maintain a neutral stance with respect to the
portfolio's duration in the near term.
We believe the demand for municipal securities should remain healthy. This
will hopefully bode well for the trust, although it will be competing with a
range of investment options, such as individual bonds, mutual funds, and managed
accounts,
9
<PAGE> 11
for investor assets. Also, the stock market may continue to attract assets away
from bonds, depending on its return prospects and price volatility. We believe
bond supply should remain tight, helping to support prices, as municipalities
continue to operate with budget surpluses that can be used for construction
projects, education funding, road improvements, and other expenditures typically
financed by new bond issuance.
We will continue to search for securities that have the potential to enhance
the trust's long-term performance. If our analysis indicates that it would be
advantageous to sell certain bonds--or as bonds are prerefunded, mature
according to schedule, or are called from the portfolio--we will strive to
replace them with bonds that offer the best relative value available at the
time.
10
<PAGE> 12
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CALL FEATURE: Allows a bond issuer to buy back a bond on specific dates at set
prices before the bond's maturity date. These dates and prices are set when the
bond is issued. To compensate the bondholder for the potential loss of income
and ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly that
the issuer can save money by issuing new bonds at lower rates.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising-rate environments, while funds with longer durations perform better
when rates decline.
MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1999
and maturing in 2009 is a 10-year bond. Typically, short-term bonds mature in
five years or less, intermediate-term bonds mature in five to ten years, and
long-term bonds mature after ten years.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding bond
issue prior to its maturity or call date. The proceeds from the new bonds are
generally invested in U.S. government securities. Prerefunding typically occurs
when interest rates decline and an issuer replaces its higher-yielding bonds
with current lower-yielding issues.
SECONDARY MARKET: A market where securities are traded after they are initially
offered.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
11
<PAGE> 13
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
October 31, 2000
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 97.0%
ALASKA 1.5%
$3,000 Alaska St Hsg Fin Corp Ser A Rfdg.......... 5.000% 12/01/18 $ 2,780,730
------------
ARIZONA 0.7%
1,330 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease
Oblig Irvington Proj Tucson Ser A Rfdg (FSA
Insd)...................................... 7.250 07/15/10 1,399,705
------------
CALIFORNIA 5.3%
5,000 Anaheim, CA Pub Fing Auth Lease Rev Cap
Apprec Pub Impt Proj Ser C (FSA Insd)...... * 09/01/32 817,650
6,000 Anaheim, CA Pub Fing Auth Lease Rev Cap
Apprec Pub Impts Proj Ser C (FSA Insd)..... * 09/01/19 2,122,320
2,000 California St Pub Wks Brd Lease Rev Dept of
Corrctns St Prisons Ser A Rfdg (AMBAC
Insd)...................................... 5.000 12/01/19 1,955,420
3,000 Los Angeles Cnty, CA Tran Comm Sales Tax
Rev Prop C Second Sr Ser A (Prerefunded @
07/01/02) (MBIA Insd)...................... 6.250 07/01/13 3,166,020
3,680 Midpeninsula Regl Open Space Dist CA Fin
Auth Rev Cap Apprec (AMBAC Insd)........... * 09/01/26 802,093
1,250 San Diego, CA Convention Cent Expansion Fin
Auth Lease Rev Ser A (AMBAC Insd).......... 4.750 04/01/28 1,110,737
------------
9,974,240
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
COLORADO 4.8%
$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 $ 1,129,520
5,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy
Rev E-470 Proj Ser C (Prerefunded @
08/31/05).................................. * 08/31/26 829,050
174 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser E...................................... 8.125 12/01/24 182,408
1,860 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser A...................................... 8.000 06/01/25 1,978,240
1,180 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser A2..................................... 7.250 05/01/27 1,286,813
1,020 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser B1..................................... 7.650 11/01/26 1,105,609
1,655 Lakewood, CO Ctfs Partn (AMBAC Insd)....... 5.400 12/01/18 1,649,803
1,000 University CO Hosp Auth Rev Ser A (AMBAC
Insd)...................................... 5.000 11/15/29 890,440
------------
9,051,883
------------
CONNECTICUT 1.1%
1,010 Mashantucket Western Pequot Tribe CT Spl
Rev Ser A, 144A--Private Placement (a)..... 6.400 09/01/11 1,061,884
990 Mashantucket Western Pequot Tribe CT Spl
Rev Ser A, 144A--Private Placement
(Prerefunded @ 09/01/07) (a)............... 6.400 09/01/11 1,101,820
------------
2,163,704
------------
FLORIDA 1.5%
3,000 Miami-Dade Cnty, FL Professional Sports
Franchise Fac Tax Rfdg (MBIA Insd)......... 4.750 10/01/30 2,614,950
1,000 Winter Springs, FL Impt Rev Cap Apprec Rfdg
(AMBAC Insd)............................... * 10/01/20 320,530
------------
2,935,480
------------
GEORGIA 3.0%
2,250 Atlanta, GA Arpt Rev Ser B (FGIC Insd)..... 5.625 01/01/30 2,214,945
3,310 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg
Rev North Hill Apts Proj Rfdg (FNMA
Collateralized)............................ 6.625 01/01/25 3,462,922
------------
5,677,867
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
ILLINOIS 9.6%
$2,090 Alton, IL Hosp Fac Rev Saint Anthony's Hlth
Cent Rfdg.................................. 5.500% 09/01/06 $ 2,008,741
1,710 Bolingbrook, IL Cap Apprec Ser C Rfdg (MBIA
Insd)...................................... * 01/01/29 333,159
15,000 Chicago, IL Brd of Ed Cap Apprec Sch Reform
Ser A Rfdg (FGIC Insd)..................... * 12/01/31 2,423,700
5,670 Chicago, IL Cap Apprec City Colleges (FGIC
Insd)...................................... * 01/01/29 1,114,439
5,000 Chicago, IL O'Hare Intl Arpt Rev Sr Lien
Ser A Rfdg................................. 5.000 01/01/12 4,880,600
7,375 Illinois Hlth Fac Auth Rev Swedish American
Hosp Rfdg (AMBAC Insd)..................... 5.375 11/15/13 7,407,081
------------
18,167,720
------------
IOWA 0.6%
1,300 Ottumwa, IA Hosp Fac Rev Ottumwa Regl Hlth
Rfdg & Impt................................ 6.000 10/01/18 1,191,996
------------
KENTUCKY 2.2%
3,000 Louisville & Jefferson Cnty, KY Met Swr
Dist Drainage Rev Rfdg (MBIA Insd)......... 5.300 05/15/19 2,925,630
1,300 Pike Cnty, KY Sch Dist Fin Corp Sch Bldg
Rev Ser B.................................. 5.100 09/01/20 1,238,341
------------
4,163,971
------------
LOUISIANA 3.6%
2,000 Louisiana Pub Fac Auth Rev Dillard Univ
Proj Rfdg (AMBAC Insd)..................... 5.000 02/01/28 1,821,180
1,400 Louisiana Pub Fac Auth Rev Hlth Fac Glen
Retirement Ser A........................... 6.700 12/01/25 1,336,286
2,000 New Orleans, LA Rfdg (FGIC Insd)........... 5.500 12/01/21 2,001,140
2,000 New Orleans, LA Rfdg (FGIC Insd)........... 4.750 12/01/26 1,724,860
------------
6,883,466
------------
MARYLAND 4.1%
2,855 Maryland St Cmnty Dev Admin Dept Hsg &
Cmnty Dev Single Family Pgm................ 6.800 04/01/24 2,935,597
1,000 Maryland St Econ Dev Corp Student Hsg Rev
Collegiate Hsg Towson Ser A................ 5.750 06/01/29 920,660
4,000 Maryland St Hlth & Higher Edl Fac Auth Rev
Subn Hosp Rfdg (AMBAC Insd)................ 5.000 07/01/13 3,968,240
------------
7,824,497
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MASSACHUSETTS 4.0%
$1,200 Massachusetts Bay Tran Auth MA Genl Tran
Sys Ser A Rfdg............................. 6.250% 03/01/12 $ 1,337,844
2,665 Massachusetts Muni Whsl Elec Co Pwr Supply
Sys Rev Ser B Rfdg (MBIA Insd)............. 5.000 07/01/12 2,658,977
1,000 Massachusetts St Dev Fin Agy Rev Boston
Univ Ser P................................. 5.450 05/15/59 922,430
1,000 Massachusetts St Hlth & Edl Fac Auth Rev
Saint Mem Med Cent Ser A................... 6.000 10/01/23 778,830
1,886 Massachusetts St Hsg Fin Agy Hsg Rev Insd
Rental Ser A (AMBAC Insd) (c).............. 6.650 07/01/19 1,956,830
------------
7,654,911
------------
MICHIGAN 4.2%
2,000 Detroit, MI Downtown Dev Auth Tax Increment
Rev Dev Area No 1 Proj Ser C1 (Prerefunded
@ 07/01/06)................................ 6.250 07/01/25 2,192,160
2,500 Detroit, MI Wtr Supply Sys Rev Rfdg (FGIC
Insd)...................................... 6.250 07/01/12 2,621,575
1,000 Michigan St Hosp Fin Auth Rev Detroit Med
Cent Oblig Ser A........................... 5.250 08/15/28 710,220
2,285 Taylor, MI Bldg Auth (AMBAC Insd).......... 6.000 03/01/13 2,476,826
------------
8,000,781
------------
MISSISSIPPI 6.0%
3,000 Mississippi Bus Fin Corp Miss Pollutn Ctl
Rev Sys Energy Res Inc Pj Rfdg............. 5.900 05/01/22 2,789,790
3,335 Mississippi Dev Bnk Spl Oblig Cap Proj &
Equip Acquisition Ser A2 (AMBAC Insd)
(b)........................................ 5.000 07/01/24 3,099,282
2,985 Mississippi Home Corp Single Family Rev Mtg
Ser C (GNMA Collateralized)................ 7.600 06/01/29 3,348,872
2,050 Mississippi Home Corp Single Family Rev Mtg
Ser F (GNMA Collateralized)................ 6.250 12/01/16 2,073,165
------------
11,311,109
------------
MISSOURI 1.4%
2,000 Kansas City, MO Muni Assistance Corp Rev
Rfdg (MBIA Insd)........................... 5.000 04/15/20 1,875,720
1,000 Missouri St Hlth & Edl Fac Auth Rev BJC
Hlth Sys................................... 5.000 05/15/28 873,050
------------
2,748,770
------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
NEW HAMPSHIRE 1.1%
$1,000 New Hampshire Hlth & Ed Facs Auth Rev
Derryfield Sch............................. 7.000% 07/01/30 $ 1,011,390
1,000 New Hampshire St Bus Fin Auth Wtr Fac Rev
Pennichuck Wtrwks Inc (AMBAC Insd)......... 6.300 05/01/22 1,046,080
------------
2,057,470
------------
NEW JERSEY 1.6%
2,210 New Jersey Econ Dev Wtr Facs Rev NJ
American Wtr Co Inc Ser B (FGIC Insd)...... 5.375 05/01/32 2,111,036
1,000 New Jersey Hlthcare Facs Fin Auth Rev Saint
Barnabas Hlth Ser C Rfdg (MBIA Insd)....... 5.000 07/01/12 996,870
------------
3,107,906
------------
NEW MEXICO 0.8%
610 New Mexico St Hosp Equip Ln Council Hosp
Rev Mem Med Cent Inc Proj.................. 5.500 06/01/28 479,765
1,060 Rio Rancho, NM Wtr & Wastewtr Sys Rev Rfdg
(AMBAC Insd)............................... 4.400 05/15/11 986,860
------------
1,466,625
------------
NEW YORK 14.4%
3,000 New York City Ser G........................ 6.000 02/01/11 3,167,910
400 New York City Ser H........................ 7.200 02/01/13 419,596
4,000 New York City Ser H (Prerefunded @
02/01/02).................................. 7.200 02/01/13 4,195,960
2,000 New York St Dorm Auth Rev NY Univ Ser A
(AMBAC Insd) (b)........................... 5.250 07/01/07 2,061,900
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000 New York St Dorm Auth Rev St Univ Edl Fac
Ser B (FSA Insd)........................... 4.750% 05/15/28 $ 2,606,670
2,175 New York St Med Care Fac Fin Agy Rev NY
Downtown Hosp Ser A (Prerefunded @
02/15/05).................................. 6.800 02/15/20 2,409,117
3,000 New York St Med Care Fac Fin Agy Rev NY
Hosp Mtg Ser A (Prerefunded @ 02/15/05)
(AMBAC Insd)............................... 6.200 08/15/05 3,253,590
3,000 New York St Med Care Fac Fin Agy Rev NY
Hosp Mtg Ser A (Prerefunded @ 02/15/05)
(AMBAC Insd)............................... 6.800 08/15/24 3,322,920
1,450 New York St Pwr Auth Rev & Genl Purp Ser CC
(Prerefunded @ 01/01/03) (AMBAC Insd)...... 5.125 01/01/10 1,500,707
1,000 New York St Twy Auth Svc Contract Rev Loc
Hwy & Brdg (MBIA Insd)..................... 5.125 04/01/07 1,021,330
3,505 Port Auth NY & NJ Cons 92nd Ser............ 5.000 07/15/15 3,421,686
------------
27,381,386
------------
NORTH CAROLINA 0.9%
1,500 North Carolina Eastn Muni Pwr Agy Pwr Sys
Rev Ser D.................................. 6.700 01/01/19 1,563,810
190 Sampson Area Dev Corp NC (MBIA Insd)....... 4.300 06/01/10 178,131
------------
1,741,941
------------
OHIO 1.2%
1,000 Cuyahoga Cnty, OH Hosp Fac Rev Canton Inc
Proj....................................... 7.500 01/01/30 1,037,260
1,165 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp
Rfdg....................................... 6.100 05/15/06 1,181,706
------------
2,218,966
------------
OKLAHOMA 2.5%
1,755 Tulsa Cnty, OK Pub Facs Auth Cap Impt Rev.. 6.250 11/01/22 1,776,042
2,785 Tulsa, OK Indl Auth Hosp Rev Hillcrest Med
Cent Proj Rfdg (Connie Lee Insd)........... 6.250 06/01/06 3,006,742
------------
4,782,784
------------
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
OREGON 1.3%
$2,010 Emerald Peoples Util Dist OR Elec Sys Rev
(FGIC Insd)................................ 7.350% 11/01/09 $ 2,386,694
------------
PENNSYLVANIA 2.7%
2,000 Pennsylvania Econ Dev Fin Auth Res Recovery
Rev Colver Proj Ser D...................... 7.150 12/01/18 2,041,200
3,200 Philadelphia, PA Wtr & Wastewtr Rev Rfdg
(FSA Insd)................................. 5.000 06/15/16 3,083,872
------------
5,125,072
------------
RHODE ISLAND 0.8%
1,445 Rhode Island Hsg & Mtg Fin Corp Home
Ownership Oppty Ser E1 (FHA Gtd)........... 7.500 10/01/11 1,489,492
------------
SOUTH DAKOTA 0.5%
1,000 South Dakota St Hlth & Edl Facs Auth Rev
Childrens Care Hosp Rfdg................... 6.125 11/01/29 977,470
------------
TENNESSEE 1.5%
1,000 Johnson City, TN Hlth & Edl Facs Brd Hosp
Rev First Mtg MTN States Hlth Ser A Rfdg... 7.500 07/01/25 970,930
2,000 Metropolitan Govt Nashville & Davidson TN
Ser A (FGIC Insd).......................... 5.125 11/15/27 1,876,080
------------
2,847,010
------------
TEXAS 7.4%
3,065 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev
Baptist Mem Hosp Sys Proj (Prerefunded @
08/15/04) (MBIA Insd)...................... 6.625 02/15/13 3,332,697
1,470 Brownsville, TX Util Sys Rev............... 7.375 01/01/10 1,631,230
1,515 Cameron Cnty, TX Ctfs Oblig (AMBAC Insd)... 5.750 02/15/16 1,567,177
3,480 Houston, TX Arpt Sys Rev (c)............... 9.500 07/01/10 4,430,179
1,000 Mesquite, TX Hlth Facs Dev Christian Care
Retirement Fac Ser A....................... 7.625 02/15/28 999,830
1,990 Stafford, TX Econ Dev Corp (FGIC Insd)..... 6.000 09/01/19 2,113,758
------------
14,074,871
------------
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
WASHINGTON 0.9%
$2,000 Washington St Hlth Care Facs Auth Rev
Childrens Hosp & Regl Med Cent............. 5.000% 10/01/28 $ 1,761,920
------------
WISCONSIN 1.4%
1,000 Wisconsin St Hlth & Edl Facs Auth Rev
Marquette Univ (MBIA Insd)................. 4.750 06/01/28 859,380
2,000 Wisconsin St Hlth & Edl Facs Auth Rev
Kenosha Hosp & Med Cent Proj............... 5.625 05/15/29 1,742,740
------------
2,602,120
------------
WYOMING 0.8%
1,500 Laramie Cnty, WY Hosp Rev Mem Hosp Proj
(AMBAC Insd)............................... 6.700 05/01/12 1,576,995
------------
PUERTO RICO 3.6%
6,000 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev
Ser Y (FSA Insd)........................... 6.250 07/01/21 6,746,640
------------
TOTAL LONG-TERM INVESTMENTS 97.0%
(Cost $174,032,511).................................................. 184,276,192
SHORT-TERM INVESTMENTS 1.8%
(Cost $3,400,000).................................................... 3,400,000
------------
TOTAL INVESTMENTS 98.8%
(Cost $177,432,511).................................................. 187,676,192
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%............................ 2,228,177
------------
NET ASSETS 100.0%..................................................... $189,904,369
============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
YOUR TRUST'S INVESTMENTS
October 31, 2000
* Zero coupon bond
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may be resold
only in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(b) Securities purchased on a when-issued or delayed delivery basis.
(c) Assets segregated as collateral for when-issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Administration
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
20
<PAGE> 22
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $177,432,511)....................... $187,676,192
Cash:....................................................... 70,844
Receivables
Interest.................................................. 3,380,168
Investments Sold.......................................... 3,100,508
Other....................................................... 4,612
------------
Total Assets............................................ 194,232,324
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 3,940,871
Investment Advisory Fee................................... 103,981
Income Distributions--Preferred Shares.................... 36,229
Administrative Fee........................................ 30,994
Affiliates................................................ 7,170
Trustees' Deferred Compensation and Retirement Plans........ 116,504
Accrued Expenses............................................ 92,206
------------
Total Liabilities....................................... 4,327,955
------------
NET ASSETS.................................................. $189,904,369
============
NET ASSETS CONSIST OF:
Preferred Shares (Par Value of $.01 per share, 100,000,000
shares authorized, 3,200 issued with liquidation
preference of $25,000 per share).......................... $ 80,000,000
------------
Common Shares (Par Value of $.01 per share with an unlimited
number of shares authorized, 8,168,211 shares issued and
outstanding).............................................. 81,682
Paid in Surplus............................................. 120,809,877
Net Unrealized Appreciation................................. 10,243,681
Accumulated Undistributed Net Investment Income............. 280,530
Accumulated Net Realized Loss............................... (21,511,401)
------------
Net Assets Applicable to Common Shares.................. 109,904,369
------------
NET ASSETS.................................................. $189,904,369
============
NET ASSET VALUE PER COMMON SHARE ($109,904,369 divided by
8,168,211 shares outstanding)............................. $ 13.46
============
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
Statement of Operations
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $10,829,854
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,209,161
Administrative Fee.......................................... 372,050
Preferred Share Maintenance................................. 224,279
Trustees' Fees and Related Expenses......................... 21,364
Legal....................................................... 14,196
Custody..................................................... 12,005
Other....................................................... 142,504
-----------
Total Expenses.......................................... 1,995,559
-----------
NET INVESTMENT INCOME....................................... $ 8,834,295
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (127,314)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 4,971,186
End of the Period......................................... 10,243,681
-----------
Net Unrealized Appreciation During the Period............... 5,272,495
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 5,145,181
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $13,979,476
===========
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
Statement of Changes in Net Assets
For the Years Ended October 31, 2000 and 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 8,834,295 $ 9,055,228
Net Realized Loss................................... (127,314) (481,062)
Net Unrealized Appreciation/Depreciation During the
Period............................................ 5,272,495 (14,564,889)
------------ ------------
Change in Net Assets from Operations................ 13,979,476 (5,990,723)
------------ ------------
Distributions from Net Investment Income:
Common Shares..................................... (6,370,796) (6,076,891)
Preferred Shares.................................. (3,258,278) (2,600,615)
------------ ------------
Total Distributions................................. (9,629,074) (8,677,506)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES........................................ 4,350,402 (14,668,229)
NET ASSETS:
Beginning of the Period............................. 185,553,967 200,222,196
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $280,530
and $1,075,309, respectively)..................... $189,904,369 $185,553,967
============ ============
</TABLE>
See Notes to Financial Statements
23
<PAGE> 25
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
--------------------
2000 1999
--------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD (A)................ $ 12.92 $ 14.72
-------- --------
Net Investment Income..................................... 1.08 1.10
Net Realized and Unrealized Gain/Loss..................... 0.64 (1.84)
-------- --------
Total from Investment Operations............................ 1.72 (.74)
-------- --------
Less Distributions from Net Investment Income:
Paid to Common Shareholders............................. .78 .74
Common Share Equivalent of Distributions Paid to
Preferred Shareholders................................ .40 .32
-------- --------
Total Distributions......................................... 1.18 1.06
-------- --------
NET ASSET VALUE, END OF THE PERIOD.......................... $ 13.46 $ 12.92
======== ========
Market Price Per Share at End of the Period................. $11.6250 $11.1875
Total Investment Return at Market Price (b)................. 11.15% -13.37%
Total Return at Net Asset Value (c)......................... 10.62% -7.47%
Net Assets at End of the Period (In millions)............... $ 189.9 $ 185.6
Ratio of Expenses to Average Net Assets Applicable to Common
Shares**.................................................. 1.88% 1.79%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (d)........................... 5.27% 5.60%
Portfolio Turnover.......................................... 24% 36%
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including
Preferred Shares......................................... 1.07% 1.06%
</TABLE>
(a) Net Asset Value at August 27, 1993, of $15.000 is adjusted for common share
offering costs of $.079 per common share. Net asset value at October 31,
1993 of $15.131 is adjusted for preferred share offering costs of $.159 per
common share.
(b) 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.
(c) 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.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
24
<PAGE> 26
<TABLE>
<CAPTION>
AUGUST 27, 1993
(COMMENCEMENT
YEAR ENDED OCTOBER 31, OF INVESTMENT
----------------------------------------------------- OPERATIONS) TO
1998 1997 1996 1995 1994 OCTOBER 31, 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 14.17 $ 13.51 $ 13.31 $ 11.93 $ 14.97 $ 14.92
-------- ------- ------- ------- ------- -------
1.10 1.12 1.12 1.15 1.12 .09
.54 .63 .19 1.45 (3.07) .12
-------- ------- ------- ------- ------- -------
1.64 1.75 1.31 2.60 (1.95) .21
-------- ------- ------- ------- ------- -------
.74 .74 .76 .83 .83 -0-
.35 .35 .35 .39 .26 -0-
-------- ------- ------- ------- ------- -------
1.09 1.09 1.11 1.22 1.09 -0-
-------- ------- ------- ------- ------- -------
$ 14.72 $ 14.17 $ 13.51 $ 13.31 $ 11.93 $ 15.13
======== ======= ======= ======= ======= =======
$13.6875 $12.500 $11.500 $11.500 $ 9.875 $14.625
15.87% 15.58% 6.82% 25.22% -27.65% -2.50%*
9.35% 10.71% 7.44% 19.09% -16.10% .87%*
$ 200.2 $ 195.7 $ 190.3 $ 188.7 $ 177.4 $ 123.6
1.83% 1.88% 1.94% 1.98% 1.82% 1.30%
5.24% 5.61% 5.77% 6.01% 6.34% 3.40%
15% 16% 37% 79% 214% 24%*
1.09% 1.09% 1.12% 1.12% 1.09% 1.30%
</TABLE>
See Notes to Financial Statements
25
<PAGE> 27
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Advantage Municipal Income 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 will invest substantially all of its assets
in municipal securities rated investment grade at the time of investment. The
Trust commenced investment operations on August 27, 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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services are valued at fair value
using 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, which approximates market value.
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 is amortized and original issue discount is accreted over the expected
life of each applicable security.
26
<PAGE> 28
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
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, 2000, the Trust had an accumulated capital loss
carryforward for tax purposes of $21,511,401 which will expire between October
31, 2002 and October 31, 2008.
At October 31, 2000, for federal income tax purposes, cost of long- and
short-term investments is $177,432,511; the aggregate gross unrealized
appreciation is $11,746,064 and the aggregate gross unrealized depreciation is
$1,502,383, resulting in net unrealized appreciation on long- and short-term
investments of $10,243,681.
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .65% of the average
net assets of the Trust. In addition, the Trust will pay a monthly
administrative fee to Van Kampen Funds Inc. or its affiliates (collectively "Van
Kampen"), the Trust's Administrator, at an annual rate of .20% of the average
net assets of the Trust. The administrative services provided by the
Administrator include record keeping and reporting responsibilities with respect
to the Trust's portfolio and preferred shares and providing certain services to
shareholders.
For the year ended October 31, 2000, the Trust recognized expenses of
approximately $4,100 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.
27
<PAGE> 29
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each Trust. For the year ended October
31, 2000, the Trust recognized expenses of approximately $26,200 representing
Van Kampen's cost of providing accounting and legal services to the Trust, which
are reported as part of other and legal expenses, respectively, in the statement
of operations.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
At October 31, 2000, Van Kampen 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 $45,090,480 and $49,066,926,
respectively.
4. PREFERRED SHARES
The Trust has outstanding 3,200 Auction Preferred Shares ("APS") in two series
of 1,600 shares each. Dividends are cumulative and the dividend rate is
generally reset every 7 days for both series through an auction process. The
dividend rate for Series B is currently reset every 7 days. However, effective
with the auction on August 9, 1999, the dividend period for Series A was
extended through April 10, 2000. Following this extended dividend period, Series
A reverted to its normal 7 day reset period. The average rate in effect on
October 31, 2000, was 4.14%. During the year ended October 31, 2000, the rates
ranged from 3.35% to 5.90%.
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 $25,000 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.
28
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of Van Kampen Advantage Municipal
Income Trust II
We have audited the accompanying statement of assets and liabilities of Van
Kampen Advantage Municipal Income Trust II (the "Trust"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations, changes in net assets and the financial highlights for the year then
ended. 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
audit. The Trust's financial statements and financial highlights for the periods
ended prior to October 31, 2000 were audited by other auditors whose report,
dated December 9, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the Trust's
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
audit provides 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 Advantage Municipal Income Trust II as of October 31, 2000, the results
of its operations, the changes in its net assets and the financial highlights
for the year ended, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 6, 2000
29
<PAGE> 31
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
30
<PAGE> 32
the acquisition of fewer Common Shares than if the dividend or distribution had
been paid in Common Shares issued by the Trust. All reinvestments are in full
and fractional Common Shares and are carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
changes sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or
capital gains distributions, except for certain brokerage commissions, as
described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan and a cash payment will be made for any fractional Common
Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
Van Kampen Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
31
<PAGE> 33
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST II
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Trust during its taxable year ended
October 31, 2000. The Trust designated 100% of the income distributions as a
tax-exempt income distribution. In January, 2001, the Trust will provide tax
information to shareholders for the 2000 calendar year.
(1) Independent Auditors for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche LLP to
be the Trust's independent auditors.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"), ceased
being the Trust's independent accountants effective April 14, 2000. The
cessation of the client- auditor relationship between the Trust and KPMG was
based solely on a possible future business relationship by KPMG with an
affiliate of the Trust's investment adviser.
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
32
<PAGE> 34
RESULTS OF
SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on June 21, 2000, where
shareholders voted on the election of trustees and the selection of the
independent auditors.
1) 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.......................................... 7,307,955 161,801
Howard J Kerr.......................................... 7,307,099 162,657
</TABLE>
The other trustees of the Trust whose terms did not expire in 2000 are Rod
Dammeyer, Theodore A. Myers, Richard F. Powers III, Hugo F. Sonnenschein and
Wayne W. Whalen.
2) With regard to the selection of Deloitte & Touche LLP to act as independent
auditors for the Trust, 7,377,946 shares voted in favor of the proposal, 26,721
shares voted against, and 65,088 shares abstained.
33
