SELIGMAN
============
SELECT
============
MUNICIPAL
FUND, INC.
[PHOTO]
JWS
Annual Report
December 31, 1998
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To the Stockholders
Seligman Select Municipal Fund had another strong year as the US economic
expansion continued, providing an environment that allowed the nation's states,
cities, and municipalities to overwhelmingly improve their financial conditions.
For the fifth year in a row, credit-rating upgrades in the municipal bond market
outnumbered downgrades, a trend that is expected to continue in 1999.
Throughout the year, US unemployment was down and consumer spending up, all
in a low-inflation environment. However, financial uncertainty elsewhere in the
world prompted the Federal Reserve Board to ease monetary policy through a
series of rate cuts. These moves, in addition to the increasing demand and the
falling supply of US government bonds, pushed US Treasury yields to 30-year
lows.
In the midst of this, yields on municipal bonds remained relatively stable,
making these securities increasingly attractive compared to Treasury bonds.
Long-term municipal yields fluctuated in a narrow trading range throughout the
period, and by year-end yields had declined only modestly from year-ago levels.
At one point during the year, long-term municipal yields actually exceeded
yields available on long-term Treasury bonds, even though municipal bonds enjoy
tax-exempt status. Municipal bonds have not been this attractive, relative to
Treasury bonds, since 1986, when tax reform was a major political issue.
We anticipate that the municipal bond market will remain stable going into
1999. The economy appears to be slowing from its robust pace, which should keep
interest rates near current levels and inflation low. In such a supportive
environment, municipal new-issue supply is likely to be high, as it was in 1998.
Seligman continues to work to ensure that all of its operations are
prepared for the challenges posed by the Year 2000 (Y2K) computer problem. We
are confident that there will be no disruption in the investment and shareholder
services provided by your Fund as a result of Y2K. In addition, your portfolio
management team considers the potential ramifications of Y2K when making
decisions on which securities should be held by the Fund.
Thank you for your continued support of Seligman Select Municipal Fund in
1998. We look forward to serving your investment needs in 1999. A discussion
with your Portfolio Manager, the Fund's portfolio of investments, and financial
statements follow this letter.
By order of the Board of Directors,
/s/ William Morris
William C. Morris
Chairman
/s/ Thomas G. Moles
Thomas G. Moles
President
January 29, 1999
1
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Interview With Your Portfolio Manager, Thomas G. Moles
What economic and market factors affected Seligman Select Municipal Fund over
the past year?
[PHOTO]
Seligman Municipals Team: (from left) Audrey Kuchtyak, Theresa Barion, Debra
McGuinness, (seated) Eileen Comerford, Thomas G. Moles (Portfolio Manager)
The US economic expansion has lasted for eight consecutive years, and while
the pace of growth has been slowing, the economy remains strong. During this
unprecedented period of prosperity, the nation's states, cities, and
municipalities have overwhelmingly improved their financial conditions. For the
fifth year in a row, credit rating upgrades outnumbered downgrades. This
positive trend is expected to continue into 1999.
The lower interest-rate environment led to a surge in municipal bond
issuance in 1998. New issue volume totaled $284 billion, an increase of 29% over
the previous year, and just below the $292 billion record set in 1993. The
majority (51%) of municipal bonds issued were insured, reducing the supply of
lower-rated, higher-yielding bonds at a time when demand for yield paper was
strong. This contributed to the continuation of narrow yield spreads between
higher- and lower-quality bonds. Going forward, the percentage of bonds issued
as insured is likely to decline. The bond insurance industry has been under
criticism for relaxing its underwriting standards. In response, the bond rating
agencies are expected to impose stricter criteria on bond insurers before bonds
being issued are assigned triple "A" ratings. At Seligman, we have always viewed
municipal bond insurance as an enhancement, and it has been our policy not to
purchase any insured municipal bond unless we approve the underlying credit.
The municipal market was relatively stable during 1998, in contrast to the
volatile equity and government markets. Long-term municipal yields fluctuated in
a narrow trading range throughout the period, and by year-end, yields had
declined only modestly from year-ago levels. The US Treasury market, on the
other hand, experienced considerable volatility as investors sought the safety
and stability of US government bonds during periods of equity market turmoil. As
long-term Treasury yields declined and municipal yields remained stable,
municipal bonds became an increasingly attractive investment compared to
Treasury bonds. At one point during the year, long-term municipal yields
actually exceeded yields available on long-term Treasury bonds, even though
municipal bonds enjoy tax-exempt status. Municipal bonds have not been this
attractive, relative to Treasury bonds, since 1986, when tax reform was a major
political issue.
What was your investment strategy?
The relative lack of volatility in the municipal market limited
opportunities to enhance total return performance through trading activity.
Therefore, we emphasized improving the relative value of the Portfolio. Through
in-depth credit analysis and market research, we have been able to identify
municipal credits that have been undervalued or overvalued by the market and
have successfully used this information in our security selection process.
2
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Interview With Your Portfolio Manager, Thomas G. Moles
Maintaining Seligman Select Municipal Fund's attractive dividend
distribution has always been a primary focus. To that end, we have worked toward
improving the call protection of the Fund. Most of the Fund's higher-coupon
bonds were purchased when interest rates were much higher than today. Over the
past several years, these bonds have been approaching their optional call dates.
(A callable bond can be redeemed by the issuer prior to maturity on
predetermined dates and at specified prices.) Given the declining interest-rate
environment, our strategy has been to selectively sell shorter-call bonds prior
to their call date and reinvest the proceeds, rather than wait and risk a
further decline in yields. Further, we elected to retain a significant
percentage of higher-coupon bonds with longer call dates to help minimize the
loss of income from the sale of short-call bonds. However, by employing this
strategy, we did sacrifice some capital appreciation potential. In general, when
interest rates decline, higher-coupon bonds do not appreciate in price to the
extent of lower-coupon bonds. The opposite occurs during periods of rising
interest rates.
The Seligman Municipal Team is proud to have been able to provide our
stockholders with consistent monthly dividends since the Fund's inception in
1990. However, as a result of an increase in bond calls, active portfolio
management, and the lower level of interest rates, Seligman Select Municipal
Fund's dividend distribution has been reduced to reflect these realities. The
unique structure of leveraged closed-end municipal bond funds, however, still
enables the Fund to pay an attractive yield.
What is your outlook?
We anticipate a stable municipal bond market going forward. The economy
appears to be slowing from its robust pace, which should keep interest rates
near current levels and prevent inflation from accelerating. Such an environment
will likely allow new issue supply to remain high. We have reduced the Fund's
bond call exposure, which should help to stabilize its dividend in the year
ahead.
A major challenge facing the municipal market is the Y2K issue. Among
individual states, cities, and municipalities, the level of readiness varies
widely. Preparing for the new millennium is an expensive and time-consuming
project, stretching the resources of governments, businesses, and individuals.
Last year, the Securities and Exchange Commission issued disclosure guidelines
requiring municipalities to inform investors about material Y2K concerns. As
Fund manager, we endeavor to ascertain how any material event will impact the
financial well-being of the Fund's holdings. This includes determining, to the
extent possible, municipal issuers' degree of preparedness for Y2K. Given the
complexity of the Y2K problem, there are bound to be disruptions. However, major
studies indicate that while the Y2K problem is serious, it is ultimately
manageable.
3
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Investment Results Per Common Share
- --------------------------------------------------------------------------------
TOTAL RETURNS*
For Periods Ended December 31, 1998
Average Annual
----------------------------------
Since
Three One Five Inception
Months Year Years 2/15/90
------ ---- ----- -------
Market Price** 3.94% (3.28)% 7.05% 8.11%
Net Asset Value** 0.29 6.98 6.36 8.73
PRICE PER SHARE
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31, December 31,
1998 1998 1998 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Market Price $12.5625 $12.375 $12.4375 $12.1875 $13.9375
Net Asset Value 12.29 12.55 12.31 12.26 12.33
DIVIDEND AND CAPITAL GAIN INFORMATION
For the Year Ended December 31, 1998
Capital Gain
---------------------------------------
Dividends Paid+ Paid Realized Unrealized
------------ ------ ------- --------
<C> <C> <C> <C>
$0.768 $0.108 $0.108 $1.288++
</TABLE>
ANNUAL DISTRIBUTION RATE
The annual distribution rate based on current market price at December 31, 1998,
was 6.11%, which is equivalent to a taxable yield of 9.93% 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 December 31, 1998.
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4
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Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Face Ratings+
State Amount Municipal Bonds Moody's/S&P Market Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama-- 2.1% $ 5,000,000 McIntosh Industrial Development Board,
Environmental Facilities Rev. (CIBASpecialty
Chemicals), 53/8% due 6/1/2028 ..................... A2/AA- $ 5,087,300
Alaska-- 2.8% 6,240,000 Alaska Housing Finance Corp. (Collateralized
Home Mortgage Rev.), 7.65% due 6/1/2024 ............ Aaa/AAA 6,649,157
California-- 11.5% 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+ 9,637,537
10,000,000 San Francisco City and County Airports
Commission Rev. (International Airport),
6.30% due 5/1/2025* ................................ Aaa/AAA 10,983,000
6,000,000 San Joaquin Hills Transportation Corridor Agency
Rev. (Orange County Senior Lien Toll Road ),
63/4% due 1/1/2032 ................................. Aaa/AAA 6,797,460
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 6,900,400
Florida-- 2.3% 1,895,000 Florida Housing Finance Agency (Home Ownership
Rev.), 7.90% due 3/1/2022* ......................... Aaa/NR 2,006,502
3,425,000 Orange County Housing Finance Authority
(Mortgage Rev.), 7.80% due 10/1/2022* .............. Aaa/NR 3,566,898
Illinois-- 4.4% 5,000,000 Chicago GO's, 51/4% due 1/1/2028 ..................... Aaa/AAA 5,060,300
5,000,000 Chicago O'Hare International Airport International
Terminal Special Rev., 75/8% due 1/1/2010* ......... Aaa/AAA 5,296,000
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 5,308,350
Louisiana-- 4.8% 9,325,000 Louisiana Public Facilities Authority Hospital Rev.
(Southern Baptist Hospitals, Inc. Project), 8%
due 5/15/2012 ...................................... NR/AAA 11,519,359
Massachusetts -- 4.4% 5,500,000 Massachusetts Bay Transportation Authority General
Transportation System Rev., 55/8% due 3/1/2026 ..... Aaa/AAA 6,070,405
4,175,000 Massachusetts Housing Finance Agency Rev.
(Multi-Family Residential Development),
7.65% due 2/1/2028* ................................ Aaa/AAA 4,311,814
Michigan-- 0.9% 2,000,000 Kalamazoo Hospital Finance Authority Rev.
(Bronson Methodist Hospital), 51/2% due 5/15/2028 .. Aaa/NR 2,089,340
Nevada-- 3.2% 7,000,000 Clark County Industrial Development Rev. (Nevada
Power Company Project), 7.80% due 6/1/2020 ......... Aaa/AAA 7,505,750
New Jersey-- 8.3% 7,000,000 New Jersey Economic Development Authority
Water Facilities Rev. (American Water Co. Inc.),
53/8% due 5/1/2032* ................................ Aaa/AAA 7,187,880
</TABLE>
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See footnotes on page 7.
5
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Portfolio of Investments (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 2,208,200
7,140,000 New Jersey Health Care Facilities Financing Authority
Rev. (Riverwood Center), 9.90% due 7/1/2021 ........ Aaa/AAA 8,422,915
1,810,000 New Jersey Housing & Mortgage Finance Agency
(Home Buyer Rev.), 7.70% due 10/1/2029* ............ Aaa/AAA 1,872,173
New York-- 9.4% 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 11,062,000
10,000,000 New York State Thruway Authority General Rev.,
6% due 1/1/2025 .................................... Aaa/AAA 11,249,500
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 6,922,890
Ohio-- 4.8% 5,895,000 Cleveland Waterworks Improvement First
Mortgage Rev., 53/4% due 1/1/2021 .................. Aaa/AAA 6,604,935
105,000 Cleveland Waterworks Improvement First
Mortgage Rev., 53/4% due 1/1/2021 .................. Aaa/AAA 112,458
4,585,000 Ohio Housing Finance Agency (Single Family
Mortgage Rev.), 7.65% due 3/1/2029* ................ NR/AAA 4,708,245
Pennsylvania-- 7.1% 2,500,000 Allegheny County Airport Rev. (Greater Pittsburgh
International Airport), 6.80% due 1/1/2010* ........ Aaa/AAA 2,721,125
3,000,000 Lehigh County Industrial Development Authority
Pollution Control Rev. (Pennsylvania Power &
Light Company Project), 6.15% due 8/1/2029 ......... Aaa/AAA 3,355,530
10,000,000 Philadelphia Airport Rev., 6.10% due 6/15/2025* ...... Aaa/AAA
10,867,100
South Carolina-- 2.1% 5,000,000 South Carolina Ports Authority Rev.,
5.30% due 7/1/2026* ................................ Aaa/AAA 5,021,400
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- 8,916,720
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 5,443,650
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 8,198,925
Virginia-- 2.1% 5,000,000 Pocahontas Parkway Association Toll Road Rev.
(Route 895 Connector), 51/2% due 8/15/2028 ......... Baa3/BBB- 4,992,400
</TABLE>
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See footnotes on page 7.
6
<PAGE>
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December 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 5,279,487
5,000,000 Chelan County Public Utility District No. 001
(Chelan Hydro Consolidated System Rev.),
6.35% due 7/1/2028* ................................ Aaa/AAA 5,595,100
10,000,000 King County Sewer GOs, 61/8% due 1/1/2033 ............ Aaa/AAA 11,083,600
1,000,000 Spokane Regional Solid Waste Management System
Rev., 73/4% due 1/1/2011* .......................... Aaa/AAA 1,020,000
------------
Total Municipal Bonds (Cost $214,537,124)-- 97.2% ...................................................... 231,635,805
Variable Rate Demand Notes (Cost $2,500,000)-- 1.1% .................................................... 2,500,000
Other Assets Less Liabilities-- 1.7% ................................................................... 4,113,227
------------
Net Investment Assets-- 100.0% ......................................................................... $238,249,032
============
</TABLE>
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+ Ratings have not been audited by Deloitte & Touche LLP.
* Interest income earned from this security is subject to the federal
alternative minimum tax.
See Notes to Financial Statements.
7
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Statement of Assets and Liabilities December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Assets:
Investments at value:
Long-term holdings (cost $214,537,124) $231,635,805
Short-term holdings (cost $2,500,000) .......................................................... 2,500,000 $ 234,135,805
------------
Cash .......................................................................................................... 42,501
Interest receivable ........................................................................................... 4,289,460
Expenses prepaid to stockholder service agent ................................................................. 128,811
Other ......................................................................................................... 13,014
-------------
Total Assets .................................................................................................. 238,609,591
-------------
Liabilities:
Accrued expenses, taxes, and other ............................................................................ 360,559
-------------
Net Investment Assets ......................................................................................... 238,249,032
Preferred Stock ............................................................................................... 75,000,000
-------------
Net Assets for Common Stock ................................................................................... $ 163,249,032
=============
Net Assets per Share of Common Stock (Market Value $12.5625) .................................................. $ 12.29
=============
Composition of Net Investment Assets:
Preferred Stock Series A, $.01 par value, liquidation preference and asset
coverage per share--$100,000 and $317,665, respectively; shares authorized,
issued and outstanding--375 ................................................................................ $ 37,500,000
Preferred Stock Series B, $.01 par value, liquidation preference and asset coverage
per share--$100,000 and $317,665, respectively; shares authorized, issued and
outstanding--375 ........................................................................................... 37,500,000
Common Stock, $.01 par value: shares authorized--49,999,250; issued and
outstanding--13,279,220 .................................................................................... 132,792
Additional paid-in capital .................................................................................... 146,076,048
Distributions in excess of net investment income .............................................................. (58,489)
Net unrealized appreciation of investments .................................................................... 17,098,681
-------------
Net Investment Assets ......................................................................................... $ 238,249,032
=============
</TABLE>
- ----------
See Notes to Financial Statements.
8
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Statement of Operations For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Interest ................................................................................................... $14,009,188
Expenses:
Management fee .................................................................... $ 1,311,492
Stockholder account, transfer, and registrar services ............................. 224,180
Preferred stock remarketing fee ................................................... 187,500
Auditing and legal fees ........................................................... 71,893
Stockholder reports and communications ............................................ 60,225
Stockholders' meeting ............................................................. 41,308
Directors' fees and expenses ...................................................... 40,042
Custody and related services ...................................................... 36,939
Miscellaneous ..................................................................... 115,719
-----------
Total Expenses ............................................................................................. 2,089,298
-----------
Net Investment Income ...................................................................................... 1,919,890*
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments .................................................. 1,430,172
Net change in unrealized appreciation of investments .............................. 602,983
-----------
Net Gain on Investments .................................................................................... 2,033,155
-----------
Increase in Net Investment Assets from Operations .......................................................... $13,953,045
===========
</TABLE>
- ----------
* Net investment income available for Common Stock is $9,139,025, which is
net of Preferred Stock dividends.
See Notes to Financial Statements.
9
<PAGE>
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Statement of Changes in Net Investment Assets
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Operations:
Net investment income .............................................................. $ 11,919,890 $ 12,563,028
Net realized gain on investments ................................................... 1,430,172 2,042,013
Net change in unrealized appreciation of investments ............................... 602,983 3,727,924
------------- -------------
Increase in Net Investment Assets from Operations .................................. 13,953,045 18,332,965
------------- -------------
Distributions to Stockholders:
Net investment income:
Preferred Stock, Series A (per share: $3,894.95 and $3,623.18) .................. (1,460,606) (1,358,693)
Preferred Stock, Series B (per share: $3,520.69 and $3,605.33) .................. (1,320,259) (1,351,999)
Common Stock (per share: $0.737 and $0.840) ..................................... (9,755,973) (11,044,089)
------------- -------------
Total ........................................................................... (12,536,838) (13,754,781)
Dividends in excess of net investment income:
Common Stock (per share: $0.031) ................................................ (416,270) --
Net realized gain on investments:
Common Stock (per share: $0.108 and $0.181) ..................................... (1,431,625) (2,386,003)
------------- -------------
Decrease in Net Investment Assets from Distributions ............................... (14,384,733) (16,140,784)
------------- -------------
Capital Share Transactions:
Value of shares of Common Stock issued for investment plan
(64,241 and 76,238 shares) ...................................................... 793,243 940,671
Value of shares of Common Stock issued in payment of gain
distribution (18,595 and 34,506 shares) ......................................... 227,975 452,784
Cost of shares purchased for investment plan (26,400 shares) ....................... (325,032) --
------------- -------------
Increase in Net Investment Assets from
Capital Share Transactions ...................................................... 696,186 1,393,455
------------- -------------
Increase in Net Investment Assets .................................................. 264,498 3,585,636
Net Investment Assets:
Beginning of year .................................................................. 237,984,534 234,398,898
------------- -------------
End of Year (including distributions in excess of net investment
income and undistributed net investment income of $(58,489)
and $558,459, respectively) ..................................................... $ 238,249,032 $ 237,984,534
============= =============
</TABLE>
- ----------
See Notes to Financial Statements.
10
<PAGE>
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Notes to Financial Statements
1. Significant Accounting Policies -- The financial statements have been
prepared in conformity with generally accepted accounting principles which
require management to make certain estimates and assumptions at the date of the
financial statements. The following summarizes the significant accounting
policies of the Fund:
a. Security Valuation-- All 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.
b. Federal Taxes -- The Fund has elected to be taxed as a regulated investment
company and intends to distribute substantially all taxable net income and
net gain realized.
c. Security Transactions and Related Investment Income -- Investment
transactions are recorded on trade dates. Identified cost of investments
sold is used for both financial statement and federal income tax purposes.
Interest income is recorded on the accrual basis. The Fund amortizes
original issue discounts and premiums paid on purchases of portfolio
securities. Discounts other than original issue discounts are not
amortized.
d. Distributions to Stockholders -- Dividends and distributions paid by the
Fund are recorded on the ex-dividend date.
The treatment for financial statement purposes of distributions made
during the year from net investment income or net realized gains may differ
from their ultimate treatment for federal income tax purposes. These
differences primarily are caused by differences in the timing of the
recognition of certain components of income, expense, or realized capital
gain. Where such differences are permanent in nature, they are reclassified
in the components of net assets based on their ultimate characterization
for federal income tax purposes. Any such reclassification will have no
effect on net assets, results of operations, or net asset value per share
of the Fund.
2. Purchases and Sales of Securities -- Purchases and sales of portfolio
securities, excluding short-term investments, for the year ended December 31,
1998, amounted to $39,438,468 and $41,009,054, respectively.
At December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as the cost for financial reporting
purposes, and the tax basis gross unrealized appreciation of portfolio
securities amounted to $17,098,681.
3. Dividend Investment Plan -- Under the Fund's Charter, dividends or other
distributions on the Common Stock cannot be declared unless the Fund can satisfy
the requirements of two separate asset maintenance tests after giving effect to
such distributions.
The Fund, in connection with its Dividend Investment Plan (the "Plan"),
acquires and issues shares of its own Common Stock, as needed, to satisfy Plan
requirements. For the year ended December 31, 1998, 26,400 shares purchased in
the open market at a cost of $325,032, which represented a weighted average
discount of 0.75% from the net asset value of those acquired shares. A total of
64,241 shares were issued to Plan participants during the period for proceeds of
$793,243, a premium of 0.02% from the net asset value of those shares.
4. Capitalization -- The Fund is authorized to issue 50,000,000 shares of
Capital Stock, par value $.01 per share, all of which were initially classified
as Common Stock. The Board of Directors is authorized to classify and reclassify
any unissued shares of Capital Stock, and has reclassified 750 shares of
unissued Common Stock as Preferred Stock.
The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at $100,000 per share plus any accumulated
but unpaid dividends. The Preferred Stock is also subject to mandatory
redemption at $100,000
11
<PAGE>
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Notes to Financial Statements
per share plus any accumulated but unpaid dividends in April 2020 (Series A) and
April 2022 (Series B) or if certain requirements relating to the composition of
the assets and liabilities of the Fund as set forth in its Charter are not
satisfied. Liquidation preference of the Preferred Stock is $100,000 per share
plus accumulated and unpaid dividends.
Dividends on each series of Preferred Stock are cumulative at a rate
established at the initial public offering and typically are reset every 28 days
based on the lowest rate which would permit the shares to be remarketed at
$100,000 per share.
The holders of Preferred Stock have voting rights equal to the holders of
Common Stock (one vote per share) and generally will vote together with holders
of shares of Common Stock as a single class. Voting as a separate class, holders
of Preferred Stock are entitled to elect two of the Fund's directors.
5. Management Fee, Administrative Services, and Other Transactions -- J. & W.
Seligman & Co. Incorporated (the "Manager") manages the affairs of the Fund and
provides the necessary personnel and facilities. Compensation of all officers of
the Fund, all directors of the Fund who are employees or consultants of the
Manager, and all personnel of the Fund and the Manager, is paid by the Manager.
The Manager's fee, calculated daily and payable monthly, is equal to 0.55% per
annum of the Fund's average daily net assets.
Seligman Data Corp., which is owned by certain associated investment
companies, charged at cost $171,937 for stockholder account services.
Certain officers and directors of the Fund are officers or directors of the
Manager and/or Seligman Data Corp.
The Fund has a compensation arrangement under which directors who receive
fees may elect to defer receiving such fees. Directors may elect to have their
deferred fees accrue interest or earn a return based on the performance of the
Fund or other funds in the Seligman Group of Investment Companies. The cost of
such fees and earnings accrued thereon is included in directors' fees and
expenses, and the accumulated balance thereof at December 31, 1998, of $58,489
is included in other liabilities. Deferred fees and related accrued earnings are
not deductible for federal income tax purposes until such amounts are paid.
12
<PAGE>
================================================================================
Financial Highlights
The Fund's financial highlights are presented below. "Per share operating
performance" data is designed to allow investors to trace the operating
performance, on a per Common share basis, from the beginning net asset value to
the ending net asset value, so that investors can understand what effect the
individual items have on their investment, assuming it was held throughout the
period. Generally, the per share amounts are derived by converting the actual
dollar amounts incurred for each item, as disclosed in the financial statements,
to their equivalent per Common share amount, based on average shares
outstanding.
"Total investment return" measures the Fund's performance assuming that
investors purchased Fund shares at market value or net asset value as of the
beginning of the period, invested dividends and capital gains paid, as provided
for in the Fund's dividend investment plan, and then sold their shares at the
closing market value or net asset value on the last day of the period. The
computations do not reflect any sales commissions investors may incur in
purchasing or selling Fund shares.
The ratios of expenses and net investment income to average net assets and
to average net assets for Common Stock, for the years presented, do not reflect
the effect of dividends paid to Preferred Stockholders.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
Per Share Operating Performance: 1998 1997 1996 1995 1994
----------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............... $ 12.33 $ 12.16 $ 12.51 $ 11.54 $ 13.14
----------- ---------- ------------- ------------- -------------
Net investment income ............................ 0.90 0.96 1.02 1.03 1.05
Net realized and unrealized investment gain (loss) 0.15 0.44 (0.29) 1.11 (1.61)
----------- ---------- ------------- ------------- -------------
Increase (Decrease) from Investment
Operations .................................... 1.05 1.40 0.73 2.14 (0.56)
Dividends paid from net investment income
on Preferred Stock ............................ (0.21) (0.21) (0.20) (0.23) (0.17)
Dividends in excess of net investment income paid
on Common Stock ............................... (0.03) -- -- -- --
Dividends paid from net investment income
on Common Stock ............................... (0.74) (0.84) (0.84) (0.84) (0.84)
Distribution from net realized gain .............. (0.11) (0.18) (0.04) (0.10) (0.03)
----------- ---------- ------------- ------------- -------------
Net Increase (Decrease) in Net Asset Value ....... (0.04) 0.17 (0.35) 0.97 (1.60)
----------- ---------- ------------- ------------- -------------
Net Asset Value, End of Year ..................... $ 12.29 $ 12.33 $ 12.16 $ 12.51 $ 11.54
=========== ========== ============= ============= =============
Market Value, End of Year ........................ $ 12.5625 $ 13.9375 $ 12.50 $ 12.50 $ 10.50
=========== ========== ============= ============= =============
Total Investment Return:
Based upon market value .......................... (3.28)% 20.97% 7.49% 28.58% (13.05)%
Based upon net asset value ....................... 6.98% 10.01% 4.48% 17.09% (5.46)%
Ratios/Supplemental Data:
Expenses to average net investment assets ........ 0.88% 0.90% 0.86% 0.91% 0.90%
Expenses to average net assets for Common Stock .. 1.28% 1.32% 1.27% 1.34% 1.32%
Net investment income to average net
investment assets ............................. 5.00% 5.35% 5.70% 5.74% 5.84%
Net investment income to average net assets for
Common Stock .................................. 7.29% 7.87% 8.40% 8.45% 8.60%
Portfolio turnover ............................... 16.85% 27.83% 21.74% 13.37% 10.74%
Net Investment Assets, End of Year (000s omitted):
For Common Stock ................................. $ 163,249 $ 162,985 $ 159,399 $ 162,953 $ 150,100
For Preferred Stock .............................. 75,000 75,000 75,000 75,000 75,000
----------- ---------- ------------- ------------- -------------
Total Net Investment Assets ...................... $ 238,249 $ 237,985 $ 234,399 $ 237,953 $ 225,100
=========== ========== ============= ============= =============
</TABLE>
- ----------
See Notes to Financial Statements.
13
<PAGE>
================================================================================
Report of Independent Auditors
The Board of Directors and Stockholders,
Seligman Select Municipal Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Seligman Select Municipal Fund, Inc. as of
December 31, 1998, the related statements of operations for the year then ended
and of changes in net investment assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the 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 at December
31, 1998, by correspondence with the Fund's custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Seligman Select
Municipal Fund, Inc. as of December 31, 1998, the results of its operations, the
changes in its net investment assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1999
14
<PAGE>
================================================================================
Dividend Investment Plan
The Dividend Investment Plan (the "Plan") is available for any holder of
Common Stock with shares registered in his/her own name who wishes to purchase
additional shares of Common Stock with dividends or distributions received on
Fund shares owned. The Plan is not automatic; a Stockholder may elect to
participate in the Plan by notifying his/her broker when the account is set up
or, if the account is maintained by the Fund, by sending a written request to
Seligman Data Corp. ("Seligman Data"), P.O. Box 9759, Providence, RI02940-9759.
Under the Plan, Stockholders appoint the Fund as Plan Agent to invest dividends
in shares of the Fund. Such shares will be acquired by the Fund for Stockholders
either through open market purchases if the Fund is trading at a discount or
through the issuance of authorized but unissued shares of Common Stock if the
Fund is trading at a premium. If the market price of a share on the payable date
of a dividend is at or above the Fund's net asset value per share on such date,
the number of shares to be issued by the Fund to each Stockholder receiving
shares in lieu of cash dividends will be determined by dividing the amount of
the cash distribution to which such Stockholder would be entitled by the greater
of the net asset value per share on such date, or 95% of the market price of a
share on such date. If the market price of a share on such a distribution date
is below the net asset value per share, the number of shares to be issued to
such Stockholder will be determined by dividing such amount by the per share
market price.
Purchases will be made by the Fund from time to time on the New York Stock
Exchange (the "Exchange") or elsewhere to satisfy dividend and distribution
investment requirements under the Plan. Purchases will be suspended on any day
when the closing price (or closing bid price if there were no sales) of the
shares on the Exchange on the preceding trading day was higher than the net
asset value per share. If on the dividend payable date, purchases by the Fund
are insufficient to satisfy dividend investments and on the last trading day
immediately preceding the dividend payable date the closing sale or bid price of
the shares is lower than or the same as the net asset value per share, the Fund
will continue to purchase shares until all investments by Stockholders have been
completed or the closing sale or bid price of the shares becomes higher than the
net asset value, in which case the Fund will issue the necessary additional
shares from authorized but unissued shares. If on the last trading day
immediately preceding the dividend payable date, the closing sale or bid price
of the shares of Common Stock is higher than the net asset value per share, and
if the number of shares previously purchased on the Exchange or elsewhere is
insufficient to satisfy dividend investments, the Fund will issue the necessary
additional shares from authorized but unissued shares of Common Stock. There
will be no brokerage charges with respect to shares of Common Stock issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares purchased for each Common Stockholder's account will be
the average cost, including brokerage commissions, of any shares of Common Stock
purchased in the open market plus the cost of any shares issued by the Fund. For
the year ended December 31, 1998, the Fund purchased 26,400 shares in the open
market for dividend and gain investment purposes.
Common Stockholders who elect to hold their shares in the name of a broker
or other nominee should contact such broker or other nominee to determine
whether they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time by the broker or other nominee as
representing the total amount registered in the nominee's name and
15
<PAGE>
================================================================================
Dividend Investment Plan
held for the account of beneficial owners who are participating in such Plan by
delivering shares on behalf of such holder to such nominee's account at
Depository Trust Company ("DTC"). Stockholders holding shares that participate
in the Plan in a brokerage account may not be able to transfer the shares to
another broker and continue to participate in the Plan.
A Common Stockholder who has elected to participate in the Plan may
withdraw from the Plan at any time. There will be no penalty for withdrawal from
the Plan, and Common Stockholders who have previously withdrawn from the Plan
may rejoin it at any time. Changes in elections must be in writing and should
include the Common Stockholder's name and address as they appear on the account
registration, or, in respect of an account held at DTC, the account
registration. An election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a Common Stockholder to take all
subsequent distributions in cash. An election will be effective only for a
dividend or gain distribution if it is received by Seligman Data on or before
such record date.
Seligman Data will maintain all Common Stockholders' account in the Plan
not held by DTC, and furnish written confirmation of all transactions in the
account, including information needed by Common Stockholders for tax records.
Shares in the account of each Plan participant may be held by the Plan Agent in
non-certificated form in the name of the participant, and each Common
Stockholder's proxy will include those shares purchased or received pursuant to
the Plan.
The Fund seeks to pay dividends that are exempt from regular federal income
taxes; however, to the extent that any dividends or distributions do not qualify
as exempt from regular federal income taxes or are subject to state income
taxes, the automatic investment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Stockholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the Stockholders receiving cash dividends or distributions will receive and
should have a cost basis in the shares received equal to such amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable to
the Fund by the participants. All correspondence concerning the Plan, including
requests for additional information about the Plan, should be directed to
Seligman Data.
The Fund may make additional purchases of its Common Stock in the open
market and elsewhere at such prices and in such amounts as the Board of
Directors may deem advisable. No such additional purchases were made during the
year ended December 31, 1998.
16
<PAGE>
================================================================================
Year 2000
As the millennium approaches, financial and business organizations,
including Seligman Select Municipal Fund, Inc. (the "Fund"), and individuals
could be adversely affected if their computer systems do not properly process
and calculate date-related information and data on and after January 1, 2000.
Like other mutual funds and closed-end investment companies, the Fund relies
upon service providers and their computer systems for its day-to-day operations.
Many of the Fund's service providers in turn depend upon computer systems of
their vendors. J. & W. Seligman & Co. Incorporated (the "Manager") and Seligman
Data Corp. ("Seligman Data") have established a year 2000 project team. The
team's purpose is to assess the state of readiness of the Manager and Seligman
Data, and the Fund's other service providers and vendors. The team is comprised
of several information technology and business professionals, as well as outside
consultants. The Project Manager of the team reports directly to the
Administrative Committee of the Manager. The Project Manager and other members
of the team also report to the Fund's Board of Directors and its Audit
Committee.
The team has identified the service providers and vendors who furnish
critical services or software systems to the Fund, including firms with which
the Fund trades and firms responsible for stockholder account recordkeeping. The
team is working with these critical service providers and vendors to evaluate
the impact year 2000 issues may have on their ability to provide uninterrupted
services to the Fund. The team will assess the feasibility of their year 2000
plans. The team has made progress on its year 2000 contingency plans -- recovery
efforts the team will employ in the event that year 2000 issues adversely affect
the Fund. The team anticipates finalizing these plans in the near future.
The Fund anticipates the team will have implemented all significant
components of the team's year 2000 plans by mid-1999, including appropriate
testing of critical systems and receipt of satisfactory assurances from critical
service providers and vendors regarding their year 2000 compliance. The Fund
believes that the critical systems on which it relies will function properly on
and after the year 2000, but this is not guaranteed. If these systems do not
function properly, or the Fund's critical service providers are not successful
in implementing their year 2000 plans, the Fund's operations may be adversely
affected, including pricing and securities trading and settlement, and the
provision of stockholder services.
In addition, the Fund holds securities issued by governmental or
quasi-governmental issuers, which, like other organizations, may be susceptible
to year 2000 concerns. Year 2000 issues may affect an issuer's operations,
creditworthiness, and ability to make timely payment on any indebtedness and
could have an adverse impact on the value of its securities. If the Fund holds
these securities, its performance could be negatively affected. The Manager
seeks to identify an issuer's state of year 2000 readiness as part of the
research it employs. However, the perception of an issuer's year 2000
preparedness is only one of the many factors considered in determining whether
to buy, sell, or continue to hold a security. Information provided by issuers
concerning their state of readiness may or may not be accurate or readily
available.
Seligman Data has informed the Fund that it does not expect the cost of its
services to increase materially as a result of the modifications to its computer
systems necessary to prepare for the year 2000. The Fund will not pay to
remediate the systems of the Manager or bear directly the costs to remediate the
systems of any other service providers or vendors, other than Seligman Data.
17
<PAGE>
================================================================================
Board of Directors
John R. Galvin 2, 4
Dean, Fletcher School of Law and Diplomacy
at Tufts University
Director, Raytheon Company
Alice S. Ilchman 3, 4
Trustee, Committee for Economic Development
Chairman, The Rockefeller Foundation
Frank A. McPherson 2, 4
Director, Kimberly-Clark Corporation
Director, Baptist Medical Center
John E. Merow 2, 4
Retired Chairman and Senior Partner,
Sullivan & Cromwell, Law Firm
Director, Commonwealth Industries, Inc.
Director, New York Presbyterian Hospital
Betsy S. Michel 2, 4
Trustee, The Geraldine R. Dodge Foundation
Chairman of the Board of Trustees,
St. George's School
William C. Morris 1
Chairman
Chairman of the Board,
J. & W. Seligman & Co. Incorporated
Chairman, Carbo Ceramics Inc.
Director, Kerr-McGee Corporation
James C. Pitney 3, 4
Retired Partner,
Pitney, Hardin, Kipp & Szuch, Law Firm
James Q. Riordan 3, 4
Director, KeySpan Energy Corporation
Trustee, Committee for Economic Development
Director, Public Broadcasting Service
Richard R. Schmaltz 1
Managing Director, Director of Investments,
J. & W. Seligman & Co. Incorporated
Trustee Emeritus, Colby College
Robert L. Shafer 3, 4
Retired Vice President, Pfizer Inc.
James N. Whitson 2, 4
Director and Consultant,
Sammons Enterprises, Inc.
Director, C-SPAN
Director, CommScope, Inc.
Brian T. Zino 1
President, J. & W. Seligman & Co. Incorporated
Chairman, Seligman Data Corp.
Director, ICI Mutual Insurance Company
Director Emeritus
Fred E. Brown
Director and Consultant,
J. & W. Seligman & Co. Incorporated
- ----------
Member: 1 Executive Committee
2 Audit Committee
3 Director Nominating Committee
4 Board Operations Committee
18
<PAGE>
================================================================================
Executive Officers
William C. Morris Audrey G. Kuchtyak Thomas G. Rose
Chairman Vice President Treasurer
Thomas G. Moles Lawrence P. Vogel Frank J. Nasta
President Vice President Secretary
Eileen A. Comerford
Vice President
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Manager Independent Auditors Important Telephone Numbers
J. & W. Seligman &Co. Incorporated Deloitte & Touche LLP (800) 874-1092 Stockholder Services
100 Park Avenue (212) 682-7600 Outside the United States
New York, NY 10017 Stockholder Service Agent (800) 622-4597 24-Hour Automated
Seligman Data Corp. Telephone Access Service
General Counsel 100 Park Avenue
Sullivan &Cromwell New York, NY 10017
</TABLE>
19
<PAGE>
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
CSEL2 12/98
