Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders ................ 1
Performance Results ................... 3
Portfolio of Investments ............. 4
Statement of Assets and Liabilities ... 9
Statement of Operations ............... 10
Statement of Changes in Net Assets .... 11
Financial Highlights ................. 12
Notes to Financial Statements ......... 13
</TABLE>
Page: 1
Letter to Shareholders
June 16, 1995
Dear Shareholder:
During the six-month period covered by this report, November 1, 1994 through
April 30, 1995, we saw the close of a challenging and difficult year in the
financial markets -- and the beginning of a new year, with renewed optimism and
strength on many fronts.
Market Overview
Most of 1994 was a difficult period for fixed-income investors as the Federal
Reserve Board's crusade against inflation drove interest rates markedly higher.
The yield on 30-year Treasury securities, for example, climbed from 6.35 percent
as the year began to a high of 8.16 percent by early November. As interest rates
rose, fixed-income investments declined in value.
The fixed-income markets have rebounded considerably since late 1994, however,
with growing confidence that the Fed's inflation fighting initiatives have taken
hold. The yield on 30-year Treasury securities fell to 7.34 percent by the end
of April 1995 and to approximately 6.50 percent at the time of this writing.
This rate reversal has pushed bond prices back to February 1994 levels. Closed-
end municipal bond funds, in particular, have been among the greatest
beneficiaries in this rally, earning back virtually all of last year's losses
and posting attractive returns.
Performance Summary
The Trust achieved a six-month total return of 18.45 percent <F1>, based on
market price, for the period ended April 30, 1995. This robust performance can
be partially attributed to the Trust's leveraged capital structure, which has
helped it to more fully benefit from a fall in long- term interest rates over
the last six months. While leveraging adds certain financing risks and
volatility, it is designed, over time, to provide shareholders with enhanced
returns by taking advantage of the yield differential between long-term and
short-term interest rates.
Clearly, the Trust has recovered from the difficult previous six-month period
and made significant price gains. The Trust's closing stock price, for example,
gained almost 14 percent from its $10.750 level on October 31, 1994, to $12.250
on April 30, 1995. As the graph on the following page shows, we've also seen the
Trust's net asset value rebound during the last six months.
Although intermediate- and long-term interest rates eased during this
reporting period, short-term interest rates have remained persistently high,
placing continued pressure on the Trust's preferred rates and common dividend.
After careful consideration, the Trust's Board of Trustees approved a new
annualized dividend level of $0.81 per common share, effective May 1 and payable
May 31, 1995. This new dividend level, which more closely reflects the Trust's
earnings, provides a tax-exempt distribution rate of 6.61 percent, based on the
closing stock
[Photo]
Dennis J. McDonnell and Don G. Powell
(Continued on page two)
Page: 2
price of $12.250 per share on April 30, 1995. For shareholders in
the 36 percent federal income tax bracket, this distribution rate represents a
yield equivalent to a taxable investment earning 10.33 percent <F4>.
Outlook
The outlook for fixed-income securities appears favorable. To date, inflation
remains under control, and recent economic data continues to suggest a slowdown
in the economy. First-quarter gross domestic product, for example, grew at an
annual rate of 2.8 percent, substantially lower than its fourth-quarter rate of
5.1 percent last year. Many analysts now expect GDP to grow at an annual rate
between 1 and 2 percent in the second half of this year. Should this scenario
play out, we suspect that the Fed is more likely to lower than raise short-term
rates, which would be a positive development for all fixed- income investors.
Regarding the municipal market, we remain optimistic about the current supply-
and-demand dynamics. With much of the refinancing by municipal issuers behind
us, we expect new-issue supply to remain low in 1995 and demand for municipals
to be steady, if not strong. A decline in supply combined with steady demand
should end price stability and price support to this market. We believe the
Trust will continue to provide shareholders with long-term value as we seek to
maintain high level of current income over time.
[GRAPH]
Trust Rebounds in 1995
<TABLE>
COMPARISON OF NAV AND MARKET PRICE OF THE TRUST
<CAPTION>
Measurement Market
Period NAV Price
<S> <C> <C>
30-Apr-94 $13.26 12.375
31-May-94 $13.36 13.000
30-Jun-94 $13.22 12.375
31-Jul-94 $13.43 12.375
31-Aug-94 $13.36 12.125
30-Sep-94 $12.95 11.625
31-Oct-94 $12.28 10.750
30-Nov-94 $11.68 11.250
31-Dec-94 $12.26 10.875
31-Jan-95 $12.78 11.750
28-Feb-95 $13.50 12.375
31-Mar-95 $13.47 12.250
30-Apr-95 $13.31 12.250
</TABLE>
Corporate News
As you may have already noticed, we have adopted a new design for our
shareholder reports that reflects our new identity as Van Kampen American
Capital. Going forward, we will continue to look for new ways to improve upon
the presentation of information in your Trust's report. In addition, we have
developed a new corporate advertising campaign introducing Van Kampen
American Capital. Full page ads appeared in The Wall Street Journal in the
first quarter of 1995 -- watch for more advertising throughout the year.
We look forward to communicating with you on a regular basis, providing
information about your Trust's performance, new investment opportunities, and
our newly created company. We appreciate your continued confidence in your
investment with Van Kampen American Capital.
Sincerely,
Don G. Powell, Chief Executive Officer
Van Kampen American Capital Investment Advisory Corp.
Dennis J. McDonnell, President
Van Kampen American Capital Investment Advisory Corp.
Page: 3
<TABLE>
Performance Results for the Period Ended April 30, 1995
Van Kampen Merritt Strategic Sector Municipal Trust
(NYSE Ticker Symbol VKS)
<CAPTION>
<S> <C>
Total Returns
Six-month total return based on market price<F1> .................................. 18.45%
Six-month total return based on NAV<F2> ........................................... 12.42%
Distribution Rates
Distribution rate as a % of initial offer stock price<F3> ......................... 6.26%
Taxable-equivalent distribution rate as a % of initial offer stock price<F4> ...... 9.78%
Distribution rate as a % of 04/30/95 closing stock price<F3> ...................... 7.66%
Taxable-equivalent distribution rate as a % of 04/30/95 closing stock price<F4> ... 11.97%
Share Valuation
Net asset value as of 04/30/95 .................................................... $ 13.31
Preferred share (Series A) rate as of 04/30/95<F5> ................................ 4.14%
Preferred share (Series B) rate as of 04/30/95<F5> ................................ 4.20%
Closing common stock price as of 04/30/95 ........................................ $ 12.250
Six-month high common stock price (04/27/95) ..................................... $ 12.750
Six-month low common stock price (11/14/94) ...................................... $ 9.875
<FN>
<F1> 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 stock price at the
end of the period indicated.
<F2> 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 net asset value.
<F3> Distribution rate represents the monthly annualized distributions of the
Trust at the end of April 1995, and not the earnings of the Trust.
<F4> The taxable-equivalent distribution rate is calculated assuming a 36%
federal tax bracket.
<F5> See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
</TABLE>
Page: 4
<TABLE>
Portfolio of Investments
April 30,1995 (Unaudited)
<CAPTION>
- --------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
Alabama 1.8%
$ 5,000 Alabama Wtr Pollutn Ctl Auth Revolving Fd Ln
Ser A (AMBAC Insd) ................................... 5.000% 08/15/15 $ 4,380,000
------------
California 11.2%
3,330 Anaheim, CA Ctfs Partn Anaheim Mem Hosp
Assoc Rfdg (AMBAC Insd) ............................. 5.000 05/15/13 2,915,881
3,000 California Hlth Fac Fin Auth Rev
Kaiser Permanente Med ............................... 5.450 10/01/13 2,770,230
6,420 California Pollutn Ctl Fin Auth Pollutn Ctl Rev
Pacific Gas & Elec Co Ser B (MBIA Insd) .............. 6.350 06/01/09 6,567,532
10,000 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Childrens Hosps Rfdg (MBIA Insd) ......... 4.750 06/01/21 8,092,100
5,000 Los Angeles, CA Convention & Exhibition Cent Auth
Lease Rev Ser A Rfdg (MBIA Insd) ..................... 5.150 08/15/08 4,674,800
2,000 Mount Diablo, CA Hosp Dist Rev Ser A
(Embedded Cap) (AMBAC Insd) ......................... 5.125 12/01/23 1,757,260
------------
26,777,803
------------
Colorado 5.3%
2,000 Colorado Hsg Fin Auth Multi-Family Hsg
Insd Mtg Ser A ....................................... 6.750 10/01/37 2,007,940
6,025 Colorado Hsg Fin Auth Single Family Pgm Sr Ser F ..... 8.625 06/01/25 7,038,104
3,415 Denver, CO City & Cnty Arpt Rev Ser B ............... 6.900 11/15/00 3,504,678
------------
12,550,722
------------
Georgia 2.7%
3,000 Atlanta, GA Spl Purp Fac Rev Delta Airls Ser B ...... 7.900 12/01/18 3,116,310
1,425 Georgia Muni Elec Auth Pwr Rev Ser A Rfdg
(FGIC Insd) .......................................... 5.500 01/01/12 1,354,747
2,000 Georgia Muni Elec Auth Pwr Rev Ser Z Rfdg
(FGIC Insd) .......................................... 5.500 01/01/12 1,901,400
------------
6,372,457
------------
Illinois 4.1%
4,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
American Airls Inc Proj Ser A ....................... 7.875 11/01/25 4,693,590
3,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev Intl Terminal
(MBIA Insd) ......................................... 6.750 01/01/12 3,653,475
1,285 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc Proj Ser 84C ....................... 8.200 05/01/18 1,374,796
------------
9,721,861
------------
Indiana 4.0%
3,120 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosp
of Anderson Proj Rfdg (MBIA Insd) .................... 6.000 01/01/14 3,047,835
3,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph
Hosp & Hlth Cent Rfdg ............................... 6.000 08/15/02 2,962,320
See Notes to Financial Statements
</TABLE>
Page: 5
<TABLE>
Portfolio of Investments (Continued)
<CAPTION>
April 30,1995 (Unaudited)
- ---------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indiana (Continued)
$ 2,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph
Hosp & Hlth Cent Rfdg ................................ 6.250% 08/15/05 $ 2,004,240
990 La Porte Cnty, IN Hosp Auth Hosp Fac Rev
La Porte Hosp Inc Rfdg ................................ 5.900 03/01/01 980,189
540 La Porte Cnty, IN Hosp Auth Hosp Fac Rev
La Porte Hosp Inc Rfdg ................................ 6.000 03/01/02 533,660
------------
9,528,244
------------
Iowa 2.1%
5,000 Muscatine, IA Elec Rev Rfdg (AMBAC Insd) .............. 6.125 01/01/12 5,024,500
------------
Kansas 2.2%
5,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co
Proj Rfdg (MBIA Insd) ................................. 7.000 06/01/31 5,379,800
------------
Kentucky 1.8%
4,020 Louisville, KY Hsg Assistance Corp Mtg Rev
Carrousel Pptys Ser A Rfdg (FHA Insd) ................ 8.300 07/01/24 4,364,273
------------
Louisiana 1.0%
2,250 Saint Charles Parish, LA Pollutn Ctl Rev LA
Pwr & Lt Co Proj (FSA Insd) ........................... 7.500 06/01/21 2,448,900
------------
Maine 0.1%
150 Maine St Hsg Auth Mtg Purp Ser A6 .................... 6.350 11/15/22 143,432
------------
Maryland 5.5%
2,000 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty
Dev Rev Single Family Pgm 7th Ser .................... 7.300 04/01/25 2,109,200
6,325 Maryland St Hlth & Higher Edl Fac Auth Rev
Greater Baltimore Med Cent Rfdg (FGIC Insd) .......... 5.000 07/01/13 5,585,544
6,270 Maryland St Hlth & Higher Edl Fac Auth Rev
Subn Hosp Rfdg (AMBAC Insd) ........................... 5.000 07/01/13 5,536,975
------------
13,231,719
------------
Massachusetts 4.1%
1,500 Massachusetts Bay Tran Auth MA Genl Tran Sys Ser B .... 5.875 03/01/19 1,439,550
1,775 Massachusetts Muni Whsl Elec Co Pwr Supply Sys
Rev Ser B Rfdg ........................................ 6.750 07/01/05 1,901,291
1,000 Massachusetts St Hlth & Edl Fac Auth Rev Cent
New England Hlth Sys Ser A ........................... 5.750 08/01/03 918,000
1,500 Massachusetts St Hlth & Edl Fac Auth Rev Cent
New England Hlth Sys Ser A ........................... 6.125 08/01/13 1,330,440
2,500 Massachusetts St Hlth & Edl Fac Auth Rev
North Shore Med Cent Ser A (MBIA Insd) ............... 5.625 07/01/14 2,355,825
1,705 Massachusetts St Hlth & Edl Fac Auth Rev Vly
Regional Hlth Sys Ser C Rfdg (Connie Lee Insd) <F3> ... 7.000 07/01/09 1,876,353
------------
9,821,459
------------
See Notes to Financial Statements
</TABLE>
Page: 6
<TABLE>
Portfolio of Investments (Continued)
<CAPTION>
April 30,1995 (Unaudited)
- ---------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michigan 1.1%
$ 2,745 Michigan Muni Bd Auth Rev St Revolving Fd ............. 5.400% 10/01/14 $ 2,566,355
------------
Mississippi 0.7%
1,500 Mississippi Home Corp Single Family Rev Ser D
(GNMA Collateralized) ................................ 8.100 12/01/24 1,670,550
------------
Nevada 1.2%
2,700 Nevada Hsg Div Single Family Pgm Ser E (FHA Insd) .... 6.900 10/01/11 2,779,083
------------
New Hampshire 0.8%
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Exeter Hosp/Hlthcare Issue ............................ 6.000 10/01/23 1,808,980
------------
New Jersey 5.6%
2,000 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Ser A .............................. 6.200 12/01/10 1,887,400
10,000 New Jersey Econ Dev Auth Wtr Fac Rev NJ
American Wtr Co Inc Proj Ser A ....................... 6.875 11/01/34 10,557,800
1,000 Union Cnty, NJ Util Auth Solid Waste Rev Ser A ....... 7.200 06/15/14 1,011,860
------------
13,457,060
------------
New York 16.5%
3,000 New York City Indl Dev Agy Civic Fac Rev
USTA Natl Tennis Cent Proj (FSA Insd) ................ 6.375 11/15/14 3,050,130
1,615 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A (FGIC Insd) ................................. 6.750 06/15/14 1,683,573
2,520 New York City Ser B .................................. 7.250 08/15/19 2,631,611
5,000 New York City Ser C ................................... 7.000 08/15/16 5,116,850
5,965 New York City Ser C ................................... 7.250 08/15/24 6,152,002
2,250 New York St Dorm Auth Rev St Univ Edl Fac
Ser A Rfdg ............................................. 5.250 05/15/15 1,955,385
3,200 New York St Environmental Fac Corp Wtr Fac Rev
Jamaica Wtr Supply Province (AMBAC Insd) .............. 7.625 04/01/29 3,446,272
2,500 New York St Hsg Fin Agy Svc Contract Oblig Rev Ser D ... 5.375 03/15/23 2,145,525
1,920 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser B .................................. 7.625 08/15/17 2,085,677
2,500 New York St Pwr Auth Rev & Genl Purp Ser CC Rfdg ..... 5.000 01/01/14 2,200,800
3,000 New York St Pwr Auth Rev & Genl Purp Ser Y ........... 6.750 01/01/18 3,176,100
1,750 New York St Pwr Auth Rev & Genl Purp Ser Z Rfdg ...... 6.500 01/01/19 1,808,310
4,350 Triborough Brdg & Tunl Auth NY Rev Genl Purp
Ser A Rfdg ........................................... 5.000 01/01/12 3,878,286
------------
39,330,521
------------
See Notes to Financial Statements
</TABLE>
Page: 7
<TABLE>
Portfolio of Investments (Continued)
<CAPTION>
April 30,1995 (Unaudited)
- ---------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
North Carolina 3.1%
$ 1,845 North Carolina Eastn Muni Pwr Agy Pwr Sys
Rev Ser A Rfdg ......................................... 7.500% 01/01/10 $ 2,006,585
5,800 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev
Ser B Rfdg (Embedded Cap) <F3> ......................... 6.000 01/01/14 5,504,142
------------
7,510,727
------------
Oklahoma 1.0%
2,750 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg ..................................... 6.125 10/01/14 2,453,632
------------
Pennsylvania 9.6%
3,000 Butler Cnty, PA Hosp Auth Hosp Rev North Hills
Passavant Hosp Ser A (Cap Guar Insd) .................. 6.900 06/01/09 3,230,310
6,000 Pennsylvania Intergovtl Coop Auth Spl Tax Rev
City of Philadelphia Fdg Pgm (FGIC Insd) .............. 5.350 06/15/07 5,802,120
10,000 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC Insd) .... 5.400 07/01/09 9,541,700
5,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg
(Cap Guar Insd) ....................................... 5.000 06/15/16 4,351,250
------------
22,925,380
------------
Rhode Island 0.6%
1,500 Rhode Island Hsg & Mtg Fin Homeownership
Oppty Ser 17B <F2> ..................................... 6.600 10/01/25 1,478,595
------------
South Carolina 0.9%
2,000 South Carolina St Port Auth Port Rev (AMBAC Insd) ..... 6.750 07/01/21 2,061,720
------------
Texas 6.1%
2,250 Brazos Cnty, TX Hlth Fac Dev Corp Franciscan Svcs
Rev Saint Joseph Hosp & Hlth Cent Ser B Rfdg .......... 6.000 01/01/19 2,019,960
3,500 Brazos River Auth TX Pollutn Ctl Rev Coll TX
Utils Elec Co Proj A .................................. 7.875 03/01/21 3,803,450
3,000 Harris Cnty, TX Toll Road Sr Lien Rfdg (AMBAC Insd) ... 4.950 08/15/06 2,830,920
3,190 San Antonio, TX Arpt Sys Rev Rfdg (AMBAC Insd) ......... 7.375 07/01/13 3,564,091
2,275 Texas Hsg Agy Residential Dev Rev Mtg Ser D ............ 8.400 01/01/21 2,387,795
------------
14,606,216
------------
Utah 1.3%
3,000 Salt Lake City, UT Arpt Rev Delta Airls Inc Proj ...... 7.900 06/01/17 3,112,230
------------
Washington 1.2%
3,000 Washington St Ser B .................................... 5.500 05/01/18 2,782,410
------------
See Notes to Financial Statements
</TABLE>
Page: 8
<TABLE>
Portfolio of Investments (Continued)
<CAPTION>
April 30,1995 (Unaudited)
- ---------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wisconsin 3.1%
$ 4,500 Wisconsin Hsg & Econ Dev Auth Homeownership
Rev Ser A ................................. 6.450% 03/01/17 $ 4,499,460
2,715 Wisconsin Hsg & Econ Dev Auth Homeownership
Rev Ser E ................................ 8.000 03/01/21 2,808,667
---------------
7,308,127
---------------
Total Long-Term Investments 98.7%
(Cost $229,851,829) <F1> ................................................ 235,596,756
Short-Term Investments at Amortized Cost 2.2% ......................... 5,300,000
Liabilities in Excess of Other Assets (0.9%) .......................... (2,066,539)
---------------
Net Assets 100% ........................................................ $ 238,830,217
---------------
<FN>
<F1> At April 30, 1995, cost for federal income tax purposes is $229,851,829;
the aggregate gross unrealized appreciation is $9,316,197 and the aggregate
gross unrealized depreciation is $5,759,822, resulting in net unrealized
appreciation including futures transactions of $3,556,375.
<F2> Securities purchased on a when issued or delayed delivery basis.
<F3> Assets segregated as collateral for when issued or delayed delivery
purchase commitments and open futures transactions.
</TABLE>
The following table summarizes the portfolio composition at April 30, 1995,
based upon quality ratings issued by Standard & Poor's. For securities not rated
by Standard & Poor's, the Moody's rating is used.
Portfolio Composition by Credit Quality
<TABLE>
<CAPTION>
<S> <C>
AAA ... 50.2%
AA .... 18.1
A ..... 14.4
BBB ... 11.2
BB .... 6.1
-------
100.0%
-------
</TABLE>
The following schedule shows the breakdown of the Trust's long-term investments
by municipal securities market sector as of April 30, 1995.
<TABLE>
<CAPTION>
Municipal Securities Percentage of
Market Sector Long-Term Portfolio
<S> <C>
Healthcare .................. 23.9%
Retail/Wholesale Electric .... 19.1
General Obligation .......... 14.7
Transportation ............... 14.1
Water and Sewer Utilities ... 10.8
Other ........................ 17.4
-------
100.0%
-------
</TABLE>
See Notes to Financial Statements
Page: 9
Statement of Assets and Liabilities
<TABLE>
April 30,1995 (Unaudited)
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $229,851,829) (Note 1) .................................... $ 235,596,756
Short-Term Investments (Note 1) .............................................................. 5,300,000
Cash ........................................................................................ 61,155
Receivables:
Interest ..................................................................................... 5,094,483
Investments Sold ............................................................................. 30,140
Unamortized Organizational Expenses (Note 1) ................................................ 21,836
---------------
Total Assets ................................................................................. 246,104,370
---------------
Liabilities:
Payables:
Investments Purchased ........................................................................ 6,731,232
Income Distributions - Common and Preferred Shares .......................................... 209,085
Investment Advisory Fee (Note 2) ............................................................. 129,350
Margin on Futures (Note 4) .................................................................. 46,875
Administrative Fee (Note 2) ................................................................. 29,851
Accrued Expenses ............................................................................. 127,760
---------------
Total Liabilities ............................................................................ 7,274,153
---------------
Net Assets ................................................................................... $ 238,830,217
---------------
Net Assets Consist of:
Preferred Shares ($.01 par value, authorized 100,000,000 shares, 1,900 issued with liquidation
preference of $50,000 per share) (Note 5) .................................................... $ 95,000,000
---------------
Common Shares ($.01 par value with an unlimited number of shares authorized,
10,806,700 shares issued and outstanding) ................................................... 108,067
Paid in Surplus ............................................................................. 149,167,283
Net Unrealized Appreciation on Investments .................................................. 3,556,375
Accumulated Undistributed Net Investment Income ............................................. 581,211
Accumulated Net Realized Loss on Investments ................................................. (9,582,719)
---------------
Net Assets Applicable to Common Shares ....................................................... 143,830,217
---------------
Net Assets ................................................................................... $ 238,830,217
---------------
Net Asset Value Per Common Share($143,830,217 divided
by 10,806,700 shares outstanding) ............................................................ $ 13.31
---------------
See Notes to Financial Statements
</TABLE>
Page: 10
Statement of Operations
<TABLE>
For the Six Months Ended April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Investment Income:
<S> <C>
Interest ...................................................................................... $ 7,467,038
----------------
Expenses:
Investment Advisory Fee (Note 2) ............................................................. 748,571
Administrative Fee (Note 2) ................................................................... 172,747
Preferred Share Maintenance (Note 5) .......................................................... 129,913
Trustees Fees and Expenses (Note 2) ........................................................... 13,575
Legal (Note 2) ............................................................................... 11,765
Amortization of Organizational Expenses (Note 1) ............................................. 3,966
Other ......................................................................................... 123,086
----------------
Total Expenses ................................................................................ 1,203,623
----------------
Net Investment Income ......................................................................... $ 6,263,415
----------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales ........................................................................... $ 142,845,125
Cost of Securities Sold ....................................................................... (144,088,195)
----------------
Net Realized Loss on Investments (Including realized loss on closed and expired option
transactions of $18,240 and realized gain on futures transactions of $1,856,448) .............. (1,243,070)
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period ...................................................................... (9,429,057)
End of the Period (Including unrealized depreciation on futures transactions of $2,188,552) ... 3,556,375
----------------
Net Unrealized Appreciation on Investments During the Period .................................. 12,985,432
----------------
Net Realized and Unrealized Gain on Investments ............................................... $ 11,742,362
----------------
Net Increase in Net Assets from Operations .................................................... $ 18,005,777
----------------
See Notes to Financial Statements
</TABLE>
Page: 11
Statement of Changes in Net Assets
<TABLE>
For the Six Months Ended April 30,1995 and the Year Ended October 31,1994
(Unaudited)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Year Ended
April 30,1995 October 31,1994
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 6,263,415 $ 12,768,777
Net Realized Loss on Investments .................................. (1,243,070) (8,339,649)
Net Unrealized Appreciation/Depreciation on Investments
During the Period ................................................ 12,985,432 (23,291,649)
---------------- ---------------
Change in Net Assets from Operations ............................. 18,005,777 (18,862,521)
---------------- ---------------
Distributions from Net Investment Income:
Common Shares ..................................................... (5,070,155) (10,140,849)
Preferred Shares ................................................. (1,855,096) (2,640,060)
---------------- ---------------
(6,925,251) (12,780,909)
---------------- ---------------
Distributions from Net Realized Gain on Investments:
Common Shares ..................................................... -0- (362,025)
Preferred Shares ................................................. -0- (76,733)
---------------- ---------------
-0- (438,758)
---------------- ---------------
Total Distributions .............................................. (6,925,251) (13,219,667)
---------------- ---------------
Net Change in Net Assets from Investment Activities ............... 11,080,526 (32,082,188)
Net Assets:
Beginning of the Period .......................................... 227,749,691 259,831,879
---------------- ---------------
End of the Period (Including undistributed net investment income of
$581,211 and $1,243,047, respectively) ............................ $ 238,830,217 $ 227,749,691
---------------- ---------------
See Notes to Financial Statements
</TABLE>
Page: 12
Financial Highlights
The following schedule presents financial highlights for one common share of the
Trust outstanding throughout the periods indicated.(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 22,1993
Six Months Year (Commencement
Ended Ended of Investment
April 30, October 31, Operations) to
1995 1994 October 31,1993
<S> <C> <C> <C>
Net Asset Value, Beginning of Period <F1> ............... $ 12.284 $ 15.253 $ 13.808
---------- ------------ ---------------
Net Investment Income .................................. .580 1.181 .803
Net Realized and Unrealized
Gain/Loss on Investments ................................ 1.086 (2.927) 1.329
---------- ------------ ---------------
Total from Investment Operations ........................ 1.666 (1.746) 2.132
---------- ------------ ---------------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders ............................. .469 .938 .547
Common Share Equivalent of Distributions Paid
to Preferred Shareholders ............................... .172 .244 .140
Distributions from Net Realized Gain on Investments:
Paid to Common Shareholders ............................. -0- .034 -0-
Common Share Equivalent of Distributions Paid
to Preferred Shareholders ............................... -0- .007 -0-
---------- ------------ ---------------
Total Distributions ..................................... .641 1.223 .687
---------- ------------ ---------------
Net Asset Value, End of Period .......................... $ 13.309 $ 12.284 $ 15.253
---------- ------------ ---------------
Market Price Per Share at End of Period ................. $ 12.250 $ 10.750 $ 14.625
Total Investment Return at Market Price
(Non-Annualized) <F2> ................................... 18.45% (20.83%) 8.26%
Total Return at Net Asset Value
(Non-Annualized) <F3> ................................... 12.42% (13.59%) 12.82%
Net Assets at End of Period (In millions) .............. $ 238.8 $ 227.7 $ 259.8
Ratio of Expenses to Average Net Assets Applicable to
Common Shares (Annualized) .............................. 1.75% 1.61% 1.49%
Ratio of Expenses to Average Net Assets (Annualized) ... 1.03% .99% 1.02%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (Annualized) <F4> ........... 6.40% 6.76% 5.97%
Portfolio Turnover ...................................... 59.68% 165.20% 114.39%
<FN>
<F1> Net asset value at January 22, 1993 is adjusted for common and preferred
share offering costs of $.217 per common share.
<F2> Total investment return at market price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends in
accordance with the Trust's dividend reinvestment plan.
<F3> Total return at net asset value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
<F4> Net investment income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
</TABLE>
See Notes to Financial Statements
Page: 13
Notes to Financial Statements
April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Strategic Sector Municipal Trust (the "Trust") is registered
as a non-diversified closed-end management investment company under the
Investment Company Act of 1940, as amended. The Trust commenced investment
operations on January 22, 1993.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
D. Organizational Expenses-The Trust has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates ("VKAC") for costs incurred in connection
with the Trust's organization and initial registration in the amount of $40,000.
These costs are being amortized on a straight line basis over the 60 month
period ending January 21, 1998. Van Kampen American Capital Investment Advisory
Corp. (the "Adviser") has agreed that in the event any of the initial shares of
the Trust originally purchased by VKAC are redeemed during the amortization
period, the Trust will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Trust's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Page: 14
Notes to Financial Statements (Continued)
April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------
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, 1994, the Trust had an accumulated capital loss
carryforward for tax purposes of $8,339,649, which will expire on October 31,
2002.
F. Distribution of Income and Gains-The Trust declares and pays dividends from
net investment income to common shareholders monthly. Net realized gains, if
any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .65% of the average net assets of the Trust. In addition, the Trust
will pay a monthly administrative fee to VKAC, the Trust's Administrator, at an
annual rate of .15% 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.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Trust, of which a trustee of the Trust is an affiliated person.
For the six months ended April 30, 1995, the Trust recognized expenses of
approximately $8,000 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors of
VKAC. The Trust does not compensate its officers or trustees who are officers of
VKAC.
The Trust has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC. The Trust's liability under the
deferred compensation and retirement plans at April 30, 1995, was $13,300.
At April 30, 1995, VKAC owned 6,700 common shares of the Trust.
Page: 15
Notes to Financial Statements (Continued)
April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------
3. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended April 30, 1995 were $136,912,234 and
$144,088,195, respectively.
4. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Trust's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by
the Trust.
A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Trust
to manage the portfolio's effective maturity and duration.
Transactions in options for the six months ended April 30, 1995, were as
follows:
<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1994 .................... -0- $ -0-
Options Written and Purchased (Net) ................ 2,500 (1,381,909)
Options Terminated in Closing Transactions (Net) ... (900) 658,832
Options Expired (Net) .............................. (1,600) 723,077
--------- --------------
Outstanding at April 30, 1995 ...................... -0- $ -0-
--------- --------------
</TABLE>
B.Futures Contracts-A futures contract is an agreement involving the delivery of
a particular asset on a specified future date at an agreed upon price. The Trust
generally invests in futures on U.S. Treasury Bonds and the Municipal Bond Index
and typically closes the contract prior to the delivery date. These contracts
are generally used to manage the portfolio's effective maturity and duration.
Page: 16
Notes to Financial Statements (Continued)
April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the contracts
are closed or expire.
Transactions in futures contracts for the six months ended April 30, 1995,
were as follows:
<TABLE>
<CAPTION>
Contracts
<S> <C>
Outstanding at October 31, 1994 ... 2,523
Futures Opened .................... 5,200
Futures Closed .................... (4,948)
--------
Outstanding at April 30, 1995 ..... 2,775
--------
</TABLE>
The futures contracts outstanding as of April 30, 1995, and the descriptions
and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION> Unrealized
Appreciation/
Contracts Depreciation
- --------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
June 1995-Buys to Open .... 600 $ 1,518,596
June 1995-Sells to Open ... 1,225 (3,561,981)
Sept 1995-Buys to Open .... 450 319,806
Sept 1995-Sells to Open ... 350 (359,075)
Municipal Bond Futures
Mar 1995-Buys to Open ...... 150 (105,898)
--------- ---------------
2,775 $ (2,188,552)
--------- ---------------
</TABLE>
C.Indexed Securities-These instruments are identified in the portfolio of
investments. Their price may be more volatile than the price of a comparable
fixed rate security.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short term interest rates which it
pays on its preferred shares.
Page: 17
Notes to Financial Statements (Continued)
April 30,1995 (Unaudited)
- --------------------------------------------------------------------------------
5. Preferred Shares
The Trust has outstanding 1,900 Auction Preferred Shares ("APS") in two series.
Series A contains 1,000 shares while Series B contains 900 shares. Dividends are
cumulative and the dividend rate for both Series is currently reset every 28
days through an auction process. At April 30, 1995, the average rate in effect
was 4.168%. During the six months ended April 30, 1995, the rates ranged from
3.274% to 4.50%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $50,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
Page: 18
Funds Distributed by Van Kampen American Capital
GLOBAL AND INTERNATIONAL
Govett Emerging Markets Fund
AC Global Equity Fund
Govett Global Government Income Fund
AC Global Government Securities
AC Global Managed Assets Fund
Govett International Equity Fund
Govett Latin America Fund
Govett Pacific Strategy Fund
VKM Short-Term Global Income Fund
VKM Strategic Income Fund
EQUITY
Growth
AC Emerging Growth Fund
AC Enterprise Fund
AC Pace Fund
Govett Smaller Companies Fund
Growth & Income
VKM Balanced Fund
AC Comstock Fund
AC Equity Income Fund
AC Growth and Income Fund
VKM Growth and Income Fund
AC Harbor Fund
AC Real Estate Securities Fund
VKM Utility Fund
AC Utilities Income Fund
FIXED INCOME
VKM Adjustable Rate U.S. Government Fund
AC Corporate Bond Fund
AC Federal Mortgage Trust
AC Government Securities
VKM High Yield Fund
AC High Yield Investments
VKM Money Market Fund
VKM Prime Rate Income Trust
AC Reserve Fund
VKM U.S. Government Fund
AC U.S. Government Trust for Income
TAX-FREE
VKM California Insured Tax Free Fund
VKM Florida Insured Tax Free Income Fund
VKM Insured Tax Free Income Fund
VKM Limited Term Municipal Income Fund
AC Municipal Bond Fund
VKM Municipal Income Fund
VKM New Jersey Tax Free Income Fund
VKM New York Tax Free Income Fund
VKM Pennsylvania Tax Free Income Fund
AC Tax-Exempt Trust
-- High Yield Municipal Portfolio
-- Insured Municipal Portfolio
VKM Tax Free High Income Fund
VKM Tax Free Money Fund
AC Texas Municipal Securities
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us direct at 1-800-421-5666 weekdays
from 7:00 a.m. to 7:00 p.m. Central time.
Page: 19
Van Kampen Merritt Strategic Sector Municipal Trust
Officers and Trustees
Don G. Powell*
Chairman and Trustee
Dennis J. McDonnell*
President and Trustee
David C. Arch
Trustee
Rod Dammeyer
Trustee
Howard J Kerr
Trustee
Theodore A. Myers
Trustee
Hugo F. Sonnenschein
Trustee
Wayne W. Whalen*
Trustee
Peter W. Hegel*
Vice President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Treasurer
Scott E. Martin*
Assistant Secretary
Weston B. Wetherell*
Assistant Secretary
Nicholas Dalmaso*
Assistant Secretary
John L. Sullivan*
Controller
Steven M. Hill*
Assistant Treasurer
Investment Adviser
Van Kampen American Capital Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Custodian and Transfer Agent
State Street Bank
and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive Chicago, Illinois 60606
Independent Auditors
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive Chicago, Illinois 60601
*"Interested" persons of the Trust, as defined in the Investment Company Act of
1940.
(C)Van Kampen American Capital Distributors, Inc., 1995 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.
Page: 20
Van Kampen Merritt Strategic Sector Municipal Trust
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