SELIGMAN
========
SELECT
========
MUNICIPAL
FUND, INC.
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
SELIGMAN SELECT MUNICIPAL FUND, INC.
MANAGED BY
[LOGO]
J. & W. SELIGMAN & CO.
INCORPORATED
INVESTMENT MANAGERS AND ADVISORS
ESTABLISHED 1864
100 PARK AVENUE, NEW YORK, NY 10017
PHOTO: COURTESY MICHIGAN TRAVEL BUREAU
CESEL3c 9/98
<PAGE>
TO THE STOCKHOLDERS
During Seligman Select Municipal Fund's third quarter, the US economic
expansion became one of the longest in the nation's history, although domestic
economic growth began to slow from its record pace. Inflation and interest rates
reached their lowest levels in a quarter century, and unemployment was at its
lowest level since 1970. But, the financial crisis that started in Asia 15
months ago intensified throughout the world during the quarter. Japan's
recession and banking problems deepened, Russia's economy neared ruin, many
emerging markets collapsed, and Brazil suffered fiscal problems that threatened
all of Latin America.
This global financial turmoil contributed to a slowing of the pace of US
economic growth, while the rate of inflation remained muted. In September, and
again in October, the Federal Reserve Board lowered the federal funds rate. The
Fed's unexpected action in October underscored the potential threat to the US
economy of the overseas financial problems, and drove investors into US
Treasuries.
The US municipal market fared well in the third quarter. Interest rates
declined, leading to good performance results for bond investors. The yield
differential between 30-year Treasury bonds and similar municipal obligations
narrowed to levels not seen since 1986. At one point in the period, selected
municipal obligations traded at the same yield as Treasuries, even though
municipals offered more favorable tax treatment. The perception that Treasuries
are a safe haven investment, combined with large new offerings of municipal
securities, exacerbated this trend.
Going forward, we believe the favorable climate for municipal bonds should
continue. Decelerating US economic growth, coupled with global financial
turmoil, should serve to subdue domestic inflationary pressures. Further, the
yield spread between municipal bonds and Treasury bonds should return to a more
normal range in the near future. Finally, there is widespread anticipation that
new issues of municipal bonds will decrease in the months ahead.
We believe that the performance of the municipal market will improve,
relative to that of the Treasury market. Because municipal securities continue
to offer a significant yield advantage when compared with the after-tax returns
of other fixed-income investments, we are confident that Seligman Select
Municipal Fund will continue to play an important role in helping investors meet
their long-term financial goals.
Thank you for your continued support of Seligman Select Municipal Fund. We
look forward to serving your investment needs in the many years to come. A
discussion with your Portfolio Manager and portfolio of investments follow this
letter.
By order of the Board of Directors,
William C. Morris
Chairman
Thomas G. Moles
President
October 30, 1998
1
<PAGE>
INTERVIEW WITH YOUR PORTFOLIO MANAGER, THOMAS G. MOLES
- --------------------------------------------------------------------------------
[IMAGE] SELIGMAN MUNICIPALS TEAM: (FROM LEFT) AUDREY KUCHTYAK, THERESA BARION,
DEBRA MCGUINNESS, (SEATED) EILEEN COMERFORD, THOMAS G. MOLES (PORTFOLIO MANAGER)
- --------------------------------------------------------------------------------
WHAT ECONOMIC AND MARKET FACTORS INFLUENCED SELIGMAN SELECT MUNICIPAL FUND IN
THE THIRD QUARTER OF 1998?
"Global economic uncertainty contributed to a modest slowdown in the pace of
US economic growth, and the rate of inflation was stable. In September, the
Federal Reserve Board lowered the U.S. federal funds rate by one-quarter of one
percent. With a warning that growing fear among investors and lenders was
threatening the nation's economic expansion, the Fed unexpectedly cut interest
rates again in October, the first time in four and one-half years that the
central bank had changed interest-rate policy outside of one its normally
scheduled meetings. The unusual timing suggested that the Fed believed the
domestic economy was deteriorating as the worldwide financial crisis gained
momentum, and that a credit shortage might be developing which could further
curb economic growth. Fed officials have hinted that more interest-rate
reductions will ensue if the global financial turmoil escalates.
"Declining US equity markets reflected these fears, as investors sold stocks
in favor of the relative safety and quality of US Treasury bonds, which are
often considered a haven from a volatile stock market. The Treasury market
surged, but the municipal market underperformed the US Treasury market for the
quarter. Increased demand, especially from foreign investors, caused the decline
in Treasury yields to significantly outpace the drop in municipal yields. This
was exacerbated by a net reduction in Treasury financing. Additionally, the
ongoing increase in the issuance of new municipal bonds prevented municipal
yields from falling to the same degree as Treasury yields. Because of these
factors, long-term municipal bonds have not been as attractive, relative to
long-term Treasuries, since 1986, when proposed tax legislation threatened the
tax-exempt status of municipal securities.
"Moreover, the continuing combination of low inflation, low unemployment, and
steady economic growth contributed to an overall improvement in the financial
condition of America's states, cities, and municipalities. Credit rating
upgrades of municipal issuers significantly outnumbered rating downgrades,
enhancing the creditworthiness of the municipal marketplace during the period."
WHAT WAS YOUR INVESTMENT STRATEGY?
"Our strategy was to position the Fund to benefit from the declining
interest-rate environment that was prevalent during the quarter. Cash positions
were kept to a minimum, given lower yield levels and lack of capital gain
potential. The Seligman Municipals Team engaged in duration-extension trades,
selling shorter-term holdings and replacing them with long-term, current-coupon
bonds. In general, the longer the duration of a bond, the more it will
appreciate in price as yields decline. Additionally, we improved the call
protection of the Fund. As the Fund matures, older holdings approach their
optional call dates (a callable bond can be redeemed by the issuer, prior to
maturity, on specified dates and at predetermined prices). Declining interest
rates increase the risk that these bonds will be called by the issuer. To lessen
the impact of bond calls on the Fund's dividend distributions, we purchased
longer call bonds and reduced our holdings of shorter call bonds.
2
<PAGE>
INTERVIEW WITH YOUR PORTFOLIO MANAGER, THOMAS G. MOLES
"The low interest-rate environment prompted many municipal issuers to retire
outstanding, higher-coupon debt. As a direct result of the significant increase
in refunding volume, many of the Fund's holdings were advance-refunded. In
general, when a municipal bond is refunded, total return performance is
improved, and the bond's rating is often upgraded. This had a positive impact on
the Fund's performance.
"Finally, historically low long-term yields reduced dividend yields in the
third quarter, while the relative lack of volatility limited price appreciation
potential. Therefore, the Seligman Municipals Team placed additional emphasis on
enhancing the relative value of the Fund. Through in-depth credit analysis and
market research, we were able to identify and take advantage of opportunities
and inefficiencies within the municipal marketplace."
WHAT IS YOUR OUTLOOK?
"Long-term municipal yields have fallen to levels not seen in years. However,
municipal securities currently offer a significant yield advantage compared to
the after-tax returns of other fixed-income investments, as well as to the rate
of inflation. Further, the yield spread between municipal bonds and Treasury
bonds should normalize, while the volume of new municipal issues is expected to
slow from its current pace in the months ahead. Lastly, the municipal market's
record of safety and stability may become more appealing should equity market
volatility continue. We are cautiously optimistic that the slowdown of US
economic growth, coupled with global financial turmoil, will continue to subdue
inflationary pressures and lead investors to favor municipal bonds. Therefore,
we anticipate that in the months ahead, the performance of the municipal bond
market should improve, relative to that of the Treasury market."
3
<PAGE>
INVESTMENT RESULTS PER COMMON SHARE
- -------------------------------------------------------------------------------
TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Average Annual
----------------------------------
Since
Three Nine One Five Inception
Months Months Year Years 2/15/90
------ ------ ------ ----- -------
<S> <C> <C> <C> <C> <C>
Market Price** 1.00% (6.94)% (0.98)% 6.12% 8.00%
Net Asset Value** 3.50 6.68 10.12 6.59 9.09
</TABLE>
<TABLE>
<CAPTION>
PRICE PER SHARE
September 30, June 30, March 31, December 31,
1998 1998 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Market Price $12.375 $12.4375 $12.1875 $13.9375
Net Asset Value 12.55 12.31 12.26 12.33
</TABLE>
DIVIDEND AND CAPITAL GAIN INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Capital Gain
------------------------
Dividends Paid+ Realized Unrealized
------------ ------- --------
$0.582 $0.108 $1.416++
ANNUAL DISTRIBUTION RATE
The annual distribution rate based on current market price at September 30,
1998, was 6.21%, which is equivalent to a taxable yield of 10.02% based on the
maximum federal tax rate of 39.6%.
- -------------------------------------------------------------------------------
The rates of return will vary and the principal value of an investment will
fluctuate. Shares, if sold, may be worth more or less than their original cost.
Past performance is not indicative of future investment results.
* Returns for periods of less than one year are not annualized.
** These rates of return reflect changes in the market price or net asset
value, as applicable, and assume that all distributions within the period
are invested in additional shares.
+ Preferred Stockholders were paid dividends at annual rates ranging from
3.40% to 4.00%. Earnings on the Fund's assets in excess of the Preferred
dividend requirements constituted dividend income for Common Stockholders.
A portion of dividends paid to Common Stockholders is taxable as ordinary
income.
++ Represents the per share amount of unrealized appreciation of portfolio
securities as of September 30, 1998.
4
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (unaudited) SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Face Ratings
State Amount Municipal Bonds Moody's/S&P Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama -- 2.2% $ 5,000,000 McIntosh Industrial Development Board,
Environmental Facilities Rev. (CIBASpecialty
Chemicals), 53/8% due 6/1/2028 A2/AA- $ 5,168,350
Alaska -- 3.6% 8,175,000 Alaska Housing Finance Corp. (Collateralized
Home Mortgage Rev.), 7.65% due 6/1/2024 Aaa/AAA 8,749,948
California -- 11.4% 9,130,000 California Pollution Control Financing Authority
Sewage and Solid Waste Disposal Facilities
Rev. (Anheuser-Busch Project),
53/4% due 12/1/2030* A1/A+ 9,710,851
10,000,000 San Francisco City and County Airports
Commission Rev. (International Airport),
6.30% due 5/1/2025* Aaa/AAA 11,004,700
6,000,000 San Joaquin Hills Transportation Corridor Agency
Rev. (Orange County Senior Lien Toll Road ),
63/4% due 1/1/2032 Aaa/AAA 6,846,900
Delaware -- 2.9% 6,500,000 Delaware Economic Development Authority
Exempt Facilities Rev. (Delmarva Power and
Light Co. Project), 7.60% due 3/1/2020* Aaa/AAA 6,941,155
Florida -- 2.3% 1,895,000 Florida Housing Finance Agency (Home Ownership
Rev.), 7.90% due 3/1/2022* Aaa/NR 2,001,234
3,425,000 Orange County Housing Finance Authority
(Mortgage Rev.), 7.80% due 10/1/2022* Aaa/NR 3,581,728
Illinois -- 4.3% 5,000,000 Chicago GO's, 51/4% due 1/1/2028 Aaa/AAA 5,109,700
5,000,000 Chicago O'Hare International Airport International
Terminal Special Rev., 75/8% due 1/1/2010* Aaa/AAA 5,314,050
Indiana -- 2.2% 5,000,000 Indiana Employment Development Commission
Environmental Rev. (Public Service Company of
Indiana Inc.), 71/2% due 3/15/2015* Aaa/AAA 5,338,600
Louisiana -- 4.8% 9,325,000 Louisiana Public Facilities Authority Hospital Rev.
(Southern Baptist Hospitals, Inc. Project), 8%
due 5/15/2012 NR/AAA 11,574,656
Massachusetts -- 4.3% 5,500,000 Massachusetts Bay Transportation Authority General
Transportation System Rev., 55/8% due 3/1/2026 Aaa/AAA 6,113,415
4,175,000 Massachusetts Housing Finance Agency Rev.
(Multi-Family Residential Development),
7.65% due 2/1/2028* Aaa/AAA 4,315,238
Michigan -- 0.9% 2,000,000 Kalamazoo Hospital Finance Authority Rev.
(Bronson Methodist Hospital), 51/2% due 5/15/2028 Aaa/NR 2,108,360
Nevada -- 3.1% 7,000,000 Clark County Industrial Development Rev. (Nevada
Power Company Project), 7.80% due 6/1/2020* Aaa/AAA 7,552,020
New Jersey -- 8.2% 7,000,000 New Jersey Economic Development Authority
Water Facilities Rev. (American Water Co. Inc.),
53/8% due 5/1/2032* Aaa/AAA 7,262,150
</TABLE>
- -----------------
See footnotes on page 7.
5
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (unaudited) (continued) SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Face Ratings
State Amount Municipal Bonds Moody's/S&P Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey (continued) $ 2,000,000 New Jersey Educational Facilities Authority Rev.
(Princeton University), 6% due 7/1/2024 Aaa/AAA $ 2,218,780
7,140,000 New Jersey Health Care Facilities Financing Authority
Rev. (Riverwood Center), 9.90% due 7/1/2021 Aaa/AAA 8,435,410
1,810,000 New Jersey Housing & Mortgage Finance Agency
(Home Buyer Rev.), 7.70% due 10/1/2029* Aaa/AAA 1,881,893
New York -- 9.3% 10,000,000 New York State Energy Research & Development
Authority Electric Facilities Rev. (Consolidated
Edison Co. NY Inc. Project), 6.10% due 8/15/2020 Aaa/AAA 11,053,400
10,000,000 New York State Thruway Authority General Rev.,
6% due 1/1/2025 Aaa/AAA 11,335,600
New York and 6,500,000 Port Authority of New York and New Jersey
New Jersey -- 2.9% (JFK International Air Terminal LLC Project
Rev.), 53/4% due 12/1/2022* Aaa/AAA 7,022,730
Ohio -- 4.8% 5,895,000 Cleveland Waterworks Improvement First
Mortgage Rev., 53/4% due 1/1/2021 Aaa/AAA 6,642,899
105,000 Cleveland Waterworks Improvement First
Mortgage Rev., 53/4% due 1/1/2021 Aaa/AAA 114,914
4,585,000 Ohio Housing Finance Agency (Single Family
Mortgage Rev.), 7.65% due 3/1/2029* NR/AAA 4,782,522
Pennsylvania -- 7.1% 2,500,000 Allegheny County Airport Rev. (Greater Pittsburgh
International Airport), 6.80% due 1/1/2010* Aaa/AAA 2,725,575
3,000,000 Lehigh County Industrial Development Authority
Pollution Control Rev. (Pennsylvania Power &
Light Company Project), 6.15% due 8/1/2029 Aaa/AAA 3,349,500
10,000,000 Philadelphia Airport Rev., 6.10% due 6/15/2025* Aaa/AAA 10,979,600
South Carolina -- 2.1% 5,000,000 South Carolina Ports Authority Rev.,
5.30% due 7/1/2026* Aaa/AAA 5,100,500
Tennessee -- 3.7% 8,000,000 Humphreys County Industrial Development Board
Solid Waste Disposal Rev. (E.I. duPont de
Nemours & Co. Project), 6.70% due 5/1/2024* Aa3/AA- 8,959,840
Texas -- 5.7% 5,000,000 Lower Neches Valley Authority Industrial
Development Corp. Sewer Facilities Rev. (Mobil
Oil Refining Corp. Project), 6.40% due 3/1/2030* Aa2/AA 5,516,850
7,500,000 Matagorda County Navigation District No. 1
Pollution Control Rev. (Central Power and Light
Co. Project), 61/8% due 5/1/2030* Aaa/AAA 8,321,175
Virginia -- 2.1% 5,000,000 Pocahontas Parkway Association Toll Road Bonds
(Route 895 Connector), 51/2% due 8/15/2028 Baa3/BBB- 5,025,650
</TABLE>
- -----------------
See footnotes on page 7.
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Face Ratings
State Amount Municipal Bonds Moody's/S&P Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Washington -- 9.6% $ 4,795,000 Chelan County Public Utility District No. 001
(Chelan Hydro Consolidated System Rev.),
61/4% due 7/1/2017* Aaa/AAA $ 5,401,519
5,000,000 Chelan County Public Utility District No. 001
(Chelan Hydro Consolidated System Rev.),
6.35% due 7/1/2028* Aaa/AAA 5,679,700
10,000,000 King County Sewer GOs, 61/8% due 1/1/2033 Aaa/AAA 11,094,900
1,000,000 Spokane Regional Solid Waste Management System
Rev., 73/4% due 1/1/2011* Aaa/AAA 1,029,410
-----------
Total Municipal Bonds (Cost $216,585,605)-- 97.5%...................................................... 235,365,422
Variable Rate Demand Notes (Cost $2,000,000)-- 0.8%.................................................... 2,000,000
OTHER ASSETS LESS LIABILITIES -- 1.7% ................................................................. 4,099,475
------------
Net Investment Asset -- 100.0% ........................................................................ $241,464,897
============
</TABLE>
- -----------
* Interest income earned from this security is subject to the federal
alternative minimum tax.
Note: Investments in municipal securities and other short-term holdings maturing
in more than 60 days are valued based upon quotations provided by an independent
pricing service or, in their absence, at fair value determined in accordance
with procedures approved by the Board of Directors. Short-term holdings maturing
in 60 days or less are generally valued at amortized cost.
7
