<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
A Farewell from the Chairman..................... 6
Glossary of Terms................................ 7
Performance Results.............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 16
Statement of Operations.......................... 17
Statement of Changes in Net Assets............... 18
Financial Highlights............................. 19
Notes to Financial Statements.................... 20
Report of Independent Accountants................ 25
Dividend Reinvestment Plan....................... 26
</TABLE>
VKS ANR 12/98
<PAGE> 2
LETTER TO SHAREHOLDERS
November 20, 1998
Dear Shareholder,
The past decade has been a
remarkable time for investors.
Together, we've witnessed one of the
greatest bull markets in investment
history, unprecedented growth in mutual
fund investing, and a surge in personal
retirement planning. The coming
millennium promises to hold even more [PHOTO]
challenges and opportunities.
To lead us into this new era of
investing, we are proud to announce DENNIS J. MCDONNELL AND DON G. POWELL
that Richard F. Powers III has joined
Van Kampen as President and Chief Executive Officer, and will assume the
additional role of Chairman of Van Kampen in 1999. He comes to us from our
parent company, Morgan Stanley Dean Witter & Co., where he served as Executive
Vice President and Director of Marketing. Dick Powers brings 27 years of
experience in the financial services industry, including vast expertise in
product management, strategic planning and brand development. While at Morgan
Stanley Dean Witter, he developed many of the firm's core products and services.
You'll hear more from Dick Powers in the coming months as he becomes
increasingly involved in matters related to your Trust and joins Dennis
McDonnell in addressing shareholders in future reports. (See Don Powell's
farewell to shareholders on page 6.)
ECONOMIC OVERVIEW
After two years of solid gains, the U.S. economy began to lose some of its
luster during the reporting period. No longer immune to the global economic
turmoil, the economy retreated from a 5.5 percent annual growth rate in the
first quarter to a tepid 1.8 percent in the second quarter (as measured by gross
domestic product). By the third quarter, however, growth rebounded to a 3.3
percent annual rate.
A strong dollar was largely responsible for moderating economic growth. As
the Asian financial crisis worsened and spread to other regions, foreign
investors amassed dollar-denominated U.S. Treasury bonds. These purchases sent
the dollar sharply higher, which increased the price of U.S. exports and slashed
the price of imports--resulting in reduced demand for U.S. goods and services
abroad. In light of the reduced demand and global economic problems, corporate
earnings fell, business investment declined, and stock prices plummeted. By the
end of August, the Dow Jones Industrial Average was down 19 percent from its
record high, set in mid-July. Although the stock market has since recovered much
of its losses, consumer confidence has declined and growth in consumer spending
has slowed.
Concerns about further economic deterioration, weakness in the stock market,
and a potential credit crunch prompted the Federal Reserve Board to cut
short-term interest rates
Continued on page 2
1
<PAGE> 3
0.25 percent in late September. It was the first rate cut in almost three years
and was followed by additional cuts of 0.25 percent in October and November.
Despite these rate cuts, the Fed took care to note that inflation was well
contained.
MARKET OVERVIEW
The volatility in overseas markets and U.S. stocks was a boon to bonds.
Foreign investors bought U.S. Treasury bonds in an attempt to escape the global
turmoil, while domestic investors purchased them to avoid further losses in U.S.
stocks. Because these purchases occurred at a time when the supply of new
Treasury issues was declining, Treasury bond prices soared.
The Fed rate cuts propelled bond prices even higher. Following the Fed's
first rate cut, the yield on the 30-year Treasury bond, which moves in the
opposite direction of its price, dropped to a record low of 4.72 percent on
October 5. However, subsequent sales of Treasuries by Asian and institutional
investors dampened the rally. As of October 31, the 30-year Treasury bond had a
5.15 percent yield, down 1 percent from a year ago.
Municipal bond prices followed Treasuries higher, but, as usual, they didn't
gain nearly as much in price. The yield on a typical AAA-rated general
obligation municipal bond fell only 32 basis points to 4.80 percent as of
October 31, from 5.12 percent a year earlier. Earlier in October, municipal bond
yields topped comparable Treasury bond yields, which is a rare event. Municipal
bonds generally yield less than Treasury securities because their interest
payments are exempt from federal and sometimes state and local income taxes.
During the past year, municipal bonds were burdened by an excess of supply
relative to demand. State and local governments, taking advantage of the
market's low interest rates, issued $230.9 billion worth of long-term bonds
during the first 10 months of the year--34 percent more than they had issued
during the same period last year. Approximately 44 percent of the new issues
were refinancings of older, higher-yielding bonds. However, new issuance slowed
recently as the number of bonds eligible for refinancing shrank.
Despite an abundant supply, many investors were reluctant to purchase
municipal bonds because of their generally low yields. Compounding the situation
was the abundance of insured issues, which accounted for almost 60 percent of
the new supply. The dominance of insured bonds reduced the supply of
lower-rated, higher-yielding bonds and narrowed the yield spread between higher-
and lower-rated bonds. (The insurance relates to the timely payment of principal
and interest, when due, on the bonds. The insurance does not protect the bonds
from market risk.)
Continued on page 3
2
<PAGE> 4
[CREDIT QUALITY PIE CHART]
PORTFOLIO COMPOSITION BY CREDIT QUALITY*
AS OF OCTOBER 31, 1998
<TABLE>
<S> <C>
AAA................... 56.3%
AA.................... 13.2%
A..................... 5.8%
BBB................... 21.4%
BB.................... 1.2%
Non-Rated............. 2.1%
</TABLE>
*As a Percentage of Long-Term Investments
Based upon the highest credit quality ratings as issued by Standard &
Poor's or Moody's
TRUST STRATEGY
We used the following strategies to manage the Trust during the period:
We maintained a portfolio consisting primarily of high-quality bonds with a
heavy emphasis on AAA-rated securities. As of October 31, 56 percent of
long-term investments were invested in AAA-rated bonds. Under current market
conditions, the yield spread between higher- and lower-rated bonds is modest,
and we believe that investors are not adequately compensated for the additional
credit risk associated with lower-rated securities. Also, higher-rated bonds
have generally performed better than lower-rated securities when interest rates
are falling, which was the case for most of the reporting period. We had little
difficulty finding suitable AAA-rated issues for the portfolio, due to an
abundance of new insured bonds.
Overall, we made a limited number of purchases and sales during the past
year, because current market yields were lower than the yields provided by most
of the Trust's holdings. Our acquisitions favored long-term insured bonds
because they offer the most potential for price appreciation if interest rates
continue to fall. Meanwhile, we sold a number of bonds that were vulnerable to
being called from the portfolio. Also, we sold several bonds issued by states we
believed were overvalued and used the proceeds to purchase bonds from
undervalued states. Prerefundings contributed to the Trust's total return, as
several bonds in the portfolio enjoyed upward price movement when they were
prerefunded. Keep in mind, however, that past performance does not guarantee
future results.
At the end of the reporting period, the Trust's top sector weightings were
health care (25 percent), general purpose (17 percent), and single-family
housing (10 percent). We focused on these sectors because we believed they
offered attractive relative value within the municipal bond market. Our
substantial weighting in health care benefited the Trust's performance, as this
sector has been among the top-performing areas of the municipal bond market this
year.
As of October 31, the duration of the Trust was 6.64 years compared with
7.72 years for the Lehman Brothers Municipal Bond Index. Because of the
longer-term
Continued on page 4
3
<PAGE> 5
nature of the Trust, the calculation of the index's duration has been adjusted
to eliminate bonds with maturities of five years or less.
Top Five Portfolio Sectors as of October 31, 1998*
Health Care....................... 25.0%
General Purpose................... 17.3%
Single-Family Housing.............. 9.8%
Retail Electric/Gas/Telephone...... 8.4%
Industrial Revenue................. 8.3%
*As a Percentage of Long-Term
Investments
PERFORMANCE SUMMARY
For the one-year period ended October 31, 1998, the Trust generated a total
return of 20.97 percent.(1) This reflects a gain in market price per common
share from $12.7500 on October 31, 1997, to $14.5625 on October 31, 1998, plus
reinvestment of all dividends. The Trust had a tax-exempt distribution rate of
5.36 percent,(3) based on the closing price of its common shares. Because income
from the Trust is exempt from federal income taxes, this distribution rate is
equivalent to a yield of 8.38 percent(4) on a taxable investment for investors
in the 36 percent federal income tax bracket. Please refer to the chart on page
9 for additional performance numbers.
[BAR GRAPH]
Distribution per Common Share
TWELVE-MONTH DIVIDEND HISTORY
FOR THE PERIOD ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Dividend
<S> <C>
Nov 1997......................................... $ 0.065
Dec 1997......................................... $ 0.065
Jan 1998......................................... $ 0.065
Feb 1998......................................... $ 0.065
Mar 1998......................................... $ 0.065
Apr 1998......................................... $ 0.065
May 1998......................................... $ 0.065
Jun 1998......................................... $ 0.065
Jul 1998......................................... $ 0.065
Aug 1998......................................... $ 0.065
Sep 1998......................................... $ 0.065
Oct 1998......................................... $ 0.065
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
ECONOMIC OUTLOOK
We believe the economy will continue to grow at a moderate rate for the
remainder of the year, supported by low interest rates. The housing industry has
already benefited from the sharp decline in interest rates, and other sectors
could follow if consumer and business spending picks up.
Continued on page 5
4
<PAGE> 6
Looking ahead into next year, we see the potential for stronger economic
growth as long as domestic interest rates remain low and the global financial
crisis stabilizes. We believe the current low inflationary environment in the
United States paves the way for further Fed rate cuts if the economy resumes its
slowdown.
Overseas, we see some promising signs of recovery, including Japan's new
bank reform package, which includes a willingness to let problem banks fail, and
approval of an International Monetary Fund rescue package for Brazil.
We will closely monitor these global and domestic events and their effects
on the performance of the Trust, adjusting the portfolio when appropriate. We
remain committed to the goal of providing a high level of tax-exempt income
while preserving shareholders' capital. Thank you for your continued support and
confidence in Van Kampen and the management of your Trust.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen
Investment Advisory Corp.
Please see footnotes on page 9
5
<PAGE> 7
A FAREWELL FROM THE CHAIRMAN
------------------------ - ------------------------
Dear Shareholder,
Since I became president and chief executive officer in 1987, much has
changed in our business. However, one thing has remained constant through these
years--my commitment to you, the trust shareholder. Through the many events at
Van Kampen that have marked the passage of time--including several mergers,
company name changes, and leadership changes--we have always focused on
providing superior investments and the highest level of customer service to help
you meet your investment objectives. I'm proud to say that during my tenure, Van
Kampen won eight consecutive awards for high-quality customer service--more
consecutive service awards than any other firm in the financial services
industry.(1) My successor, Dick Powers, shares this commitment to meeting your
needs and providing innovative and efficient ways to help you work with your
investment adviser to reach your financial goals.
Although my official retirement begins on January 1, 1999, I will remain
active in the industry and the community. I plan to continue my service as a
member of the board of directors of the Investment Company Institute, the
leading mutual fund industry association, and I will remain a trustee of your
Trust.
In closing, I want to say farewell to all of you. Thank you for your support
of Van Kampen over the years and for giving me the opportunity to serve you.
Best wishes,
[SIG]
Don G. Powell
------------------------ - ------------------------
(1)American Capital, which merged with Van Kampen in 1995, received the DALBAR
Service Award annually from 1990 to 1994. The award was called the Quality
Tested Service Seal until 1997.
6
<PAGE> 8
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting bond yields. One hundred basis points is
equal to 1 percent. For example, if a bond's yield changes from 7.00 to 6.65
percent, it is a 35 basis-point move.
CALL FEATURE: Allows the issuer to buy back a bond on specific dates at set
prices before maturity. These dates and prices are set when the bond is
issued. To compensate the bondholder for the potential loss of income and
ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly
that the issuer can save money by issuing new bonds at lower rates.
COUPON RATE: The stated rate of interest the bond pays on an annual basis,
expressed as a percentage of the face value.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are
two companies that assign bond ratings. Standard & Poor's ratings range from
a high of AAA to a low of D, while Moody's ratings range from a high of Aaa
to a low of C.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has
more potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest rate
movements on net asset value. Typically, funds with shorter durations are
expected to perform better in rising rate environments, while funds with
longer durations are expected to perform better when rates decline.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank system of the United States. Its
policy-making committee, called the Federal Open Market Committee, meets
eight times a year to establish monetary policy and monitor the economic
pulse of the United States.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
INSURED BOND: A bond that is insured against default by the bond insurer. If the
issuer defaults, the insurance company will step in and take over payments
of interest and principal when due. Once a bond is insured, it typically
carries the rating of the insurer. Most insurers are rated AAA.
7
<PAGE> 9
MUNICIPAL BOND: A debt security issued by a state, municipality, or other
government entity to finance capital expenditures of public projects, such
as the construction of highways, public works, or school buildings. Interest
on public-purpose municipal bonds is exempt from federal income taxes and,
potentially, from state and local income taxes.
NET ASSET VALUE (NAV): The value of a trust share, calculated by deducting a
trust's liabilities from the total assets applicable to common shareholders
in its portfolio and dividing this amount by the number of common shares
outstanding.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding
municipal bond issue prior to its maturity or call date. The proceeds from
the new bonds are generally invested in U.S. government securities.
Prerefunding typically occurs when interest rates decline and an issuer
replaces its higher-yielding bonds with current lower-yielding issues.
PREMIUM BOND: A bond whose market price is above its face value (or "par
value"). Because bonds usually mature at face value, a premium bond has less
potential to appreciate in price than a par bond does.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
ZERO COUPON BONDS: A corporate or municipal bond that is traded at a deep
discount to face value and pays no interest. It may be redeemed at maturity
for full face value.
8
<PAGE> 10
PERFORMANCE RESULTS FOR THE PERIOD ENDED OCTOBER 31, 1998
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
(NYSE TICKER SYMBOL--VKS)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
One-year total return based on market price(1)............. 20.97%
One-year total return based on NAV(2)...................... 8.91%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 5.36%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 8.38%
SHARE VALUATIONS
Net asset value........................................... $ 14.82
Closing common stock price................................ $14.5625
One-year high common stock price (10/26/98)............... $14.8750
One-year low common stock price (05/14/98)................ $12.7500
Preferred share (Series A) rate(5)........................ 3.240%
Preferred share (Series B) rate(5)........................ 3.340%
</TABLE>
(1)Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common stock price at the end of the period
indicated.
(2)Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3)Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4)The taxable-equivalent distribution rate is calculated assuming a 36% federal
income tax bracket.
(5)See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 100.6%
ALABAMA 2.0%
$ 5,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln
Ser A (AMBAC Insd).............................. 5.000% 08/15/15 $ 5,020,850
------------
CALIFORNIA 14.1%
3,330 Anaheim, CA Ctfs Partn Anaheim Mem Hosp Assn
Rfdg (AMBAC Insd)............................... 5.000 05/15/13 3,391,705
3,000 California Hlth Fac Fin Auth Rev Kaiser
Permanente Med Cent............................. 5.450 10/01/13 3,086,880
6,420 California Pollutn Ctl Fin Auth Pollutn Ctl Rev
Pacific Gas & Elec Co Ser B (MBIA Insd)......... 6.350 06/01/09 7,110,985
1,110 California Rural Home Mtg Fin Auth Single Family
Mtg Rev Ser C (GNMA Collateralized)............. 7.800 02/01/28 1,309,189
10,000 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Children's Hosp Rfdg (MBIA Insd)..... 4.750 06/01/21 9,539,800
2,000 Los Angeles Cnty, CA Pub Wks (FSA Insd)......... 5.500 10/01/18 2,187,660
3,000 Orange Cnty, CA Recovery Ser A Rfdg (MBIA
Insd)........................................... 6.000 06/01/08 3,446,670
2,000 Paramount, CA Redev Agy Tax Alloc Redev Proj
Area No 1 Rfdg (MBIA Insd)...................... 6.250 08/01/23 2,204,460
1,865 Santa Clara Cnty, CA Fin Auth Lease Rev Multi
Facs Projs Ser B (AMBAC Insd) (c)............... 5.500 05/15/08 1,962,353
1,000 Santa Clara Cnty, CA Fin Auth Lease Rev Multi
Facs Projs Ser B (AMBAC Insd) (c)............... 5.500 05/15/09 1,050,620
1,330 Temple City, CA Unified Sch Dist Cap Apprec Ser
A (FGIC Insd)................................... * 08/01/16 553,945
------------
35,844,267
------------
COLORADO 4.6%
1,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser B (Prerefunded @ 08/31/05)....... 7.000 08/31/26 1,202,990
1,875 Colorado Hsg Fin Auth Multi-Family Hsg Insd Mtg
Ser A........................................... 6.800 10/01/37 2,048,756
1,500 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
C1.............................................. 7.550 11/01/27 1,713,840
2,605 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
F............................................... 8.625 06/01/25 2,851,199
3,415 Denver, CO City & Cnty Arpt Rev Ser B........... 6.900 11/15/00 3,613,138
1,000 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
Rfdg (MBIA Insd)................................ * 09/01/22 299,470
------------
11,729,393
------------
CONNECTICUT 1.3%
1,500 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A, 144A Private Placement (b)................... 6.400 09/01/11 1,662,255
1,500 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A, 144A Private Placement (Prerefunded @
09/01/07) (b)................................... 6.400 09/01/11 1,757,250
------------
3,419,505
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA 0.8%
$ 2,000 Miami Dade Cnty, FL Pub Fac Rev Jackson Mem Hosp
(FSA Insd)...................................... 5.000% 06/01/18 $ 1,988,800
------------
GEORGIA 2.7%
3,000 Atlanta, GA Spl Purp Fac Rev Delta Airls Ser
B............................................... 7.900 12/01/18 3,164,910
1,425 Georgia Muni Elec Auth Pwr Rev Ser A Rfdg (FGIC
Insd)........................................... 5.500 01/01/12 1,554,219
2,000 Georgia Muni Elec Auth Pwr Rev Ser Z Rfdg (FGIC
Insd)........................................... 5.500 01/01/12 2,181,360
------------
6,900,489
------------
ILLINOIS 6.3%
2,060 Alton, IL Hosp Fac Rev Saint Anthony's Hlth
Cent............................................ 5.875 09/01/06 2,198,906
4,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
American Airls Inc Proj Ser A................... 7.875 11/01/25 4,850,280
1,210 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc Proj Ser 84C.......................... 8.200 05/01/18 1,268,625
1,635 Cook Cnty, IL Sch Dist 100 Berwyn South Rfdg
(FSA Insd)...................................... 8.100 12/01/15 2,257,232
5,450 Illinois Hlth Fac Auth Rev Westlake Cmnty
Hosp............................................ 7.750 01/01/04 5,586,086
------------
16,161,129
------------
INDIANA 2.7%
3,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph Hosp
& Hlth Cent Rfdg................................ 6.000 08/15/02 3,172,950
2,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph Hosp
& Hlth Cent Rfdg................................ 6.250 08/15/05 2,208,020
990 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg............................. 5.900 03/01/01 1,026,679
540 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg............................. 6.000 03/01/02 567,783
------------
6,975,432
------------
IOWA 2.1%
5,000 Muscatine, IA Elec Rev Rfdg (AMBAC Insd)........ 6.125 01/01/12 5,388,000
------------
KANSAS 2.2%
5,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co
Proj Rfdg (MBIA Insd)........................... 7.000 06/01/31 5,462,100
------------
KENTUCKY 1.7%
4,020 Louisville, KY Hsg Assistance Corp Mtg Rev
Carrousel Pptys Ser A Rfdg (FHA Gtd)............ 8.300 07/01/24 4,303,691
------------
LOUISIANA 0.5%
1,250 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj (FSA Insd)......................... 7.500 06/01/21 1,375,850
------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARYLAND 7.4%
$ 1,275 Baltimore, MD Ctfs Partn Brd of Ed Admin Proj
Ser A Rfdg (MBIA Insd) (c)...................... 5.000% 04/01/15 $ 1,260,618
4,435 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Rev Single Family Pgm Ser 7..................... 7.300 04/01/25 4,783,857
6,325 Maryland St Hlth & Higher Edl Fac Auth Rev
Greater Baltimore Med Cent Rfdg (FGIC Insd)..... 5.000 07/01/13 6,401,975
6,270 Maryland St Hlth & Higher Edl Fac Auth Rev Subn
Hosp Rfdg (AMBAC Insd).......................... 5.000 07/01/13 6,374,396
------------
18,820,846
------------
MASSACHUSETTS 1.6%
1,775 Massachusetts Muni Whsl Elec Co Pwr Supply Sys
Rev Ser B Rfdg.................................. 6.750 07/01/05 1,939,667
1,705 Massachusetts St Hlth & Edl Fac Auth Rev Vly
Regl Hlth Sys Ser C Rfdg (Connie Lee Insd)...... 7.000 07/01/09 2,070,177
------------
4,009,844
------------
MICHIGAN 2.5%
1,355 Flint, MI Hosp Bldg Auth Rev Hurley Med Cent Ser
A Rfdg.......................................... 5.750 07/01/03 1,434,877
2,745 Michigan Muni Bond Auth Rev St Revolving Fund... 5.400 10/01/14 2,853,153
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................. 5.500 10/01/18 1,017,620
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................. 5.500 10/01/27 1,014,300
------------
6,319,950
------------
MINNESOTA 0.5%
1,295 Eden Prairie, MN Multi-Family Hsg Rev Edendale
Apts Ser A Rfdg (GNMA Collateralized)........... 5.550 12/01/24 1,344,935
------------
MISSISSIPPI 1.8%
1,990 Mississippi Home Corp Single Family Rev Mtg Ser
C (GNMA Collateralized)......................... 7.600 06/01/29 2,273,535
1,071 Mississippi Home Corp Single Family Rev Mtg Ser
D (GNMA Collateralized)......................... 8.100 12/01/24 1,205,543
990 Mississippi Home Corp Single Family Rev Mtg Ser
F (GNMA Collateralized)......................... 7.550 12/01/27 1,133,916
------------
4,612,994
------------
MISSOURI 1.1%
765 Missouri St Hlth & Edl Facs Auth Hlth Facs Rev
Lake of the Ozarks Genl Hosp.................... 6.250 02/15/11 825,619
1,000 Missouri St Hlth & Edl Facs Auth Hlth Facs Rev
Lake of the Ozarks Genl Hosp Rfdg (FSA Insd).... 5.125 02/15/24 991,520
940 Missouri St Hsg Dev Comm Mtg Rev Single Family
Ln Ser A (GNMA Collateralized).................. 7.200 09/01/26 1,066,749
------------
2,883,888
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MONTANA 0.4%
$ 1,000 Crow Fin Auth MT Tribal Purp Rev................ 5.700% 10/01/27 $ 1,029,860
------------
NEVADA 0.9%
2,140 Nevada Hsg Division Single Family Pgm Ser E (FHA
Gtd)............................................ 6.900 10/01/11 2,302,191
------------
NEW JERSEY 2.0%
2,000 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Ser A........................ 6.200 12/01/10 2,127,400
2,500 New Jersey Econ Dev Auth Wtr Fac Rev NJ American
Wtr Co Inc Proj Ser A (FGIC Insd)............... 6.875 11/01/34 2,856,825
------------
4,984,225
------------
NEW YORK 12.3%
1,615 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A (Prerefunded @ 06/15/99) (FGIC
Insd)........................................... 6.750 06/15/14 1,677,727
2,520 New York City Ser B (Prerefunded @ 08/15/04).... 7.250 08/15/19 2,974,532
5,000 New York City Ser B1 (Prerefunded @ 08/15/04)... 7.000 08/15/16 5,840,450
5 New York City Ser C............................. 7.250 08/15/24 5,431
5,960 New York City Ser C (Prerefunded @ 08/15/01).... 7.250 08/15/24 6,534,067
2,000 New York City Ser G............................. 5.750 02/01/14 2,142,040
4,355 New York St Dorm Auth Rev Court Fac Lease Ser
A............................................... 5.500 05/15/10 4,561,558
1,155 New York St Dorm Auth Rev Secured Hosp Wyckoff
Hts Ser H Rfdg.................................. 5.200 02/15/14 1,182,570
595 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser B............................. 7.625 08/15/17 659,950
1,285 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser B (Prerefunded @ 08/15/01).... 7.625 08/15/17 1,442,528
4,350 Triborough Brdg & Tunl Auth NY Rev Genl Purp Ser
A Rfdg.......................................... 5.000 01/01/12 4,415,902
------------
31,436,755
------------
NORTH CAROLINA 0.3%
2,500 University of NC Chapel Hill Rev Util Sys
Rfdg............................................ * 08/01/20 844,850
------------
OHIO 4.7%
1,000 Akron, OH Ctfs Partn Akron Muni Baseball Stadium
Proj (a)........................................ 0/6.500 12/01/07 969,040
1,000 Cleveland, OH Arpt Spl Rev Continental Airls Inc
Rfdg (c)........................................ 5.700 12/01/19 970,570
1,000 Delaware Cnty, OH Hlthcare Fac Rev Mtg Centrum
at Willow Brook (FHA Gtd)....................... 6.550 02/01/35 1,106,700
2,045 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp Rfdg... 6.000 05/15/05 2,234,653
1,000 Miami Cnty, OH Hosp Fac Rev Upper Vly Med Cent
Ser C Rfdg & Impt............................... 6.000 05/15/06 1,084,700
1,300 Montgomery Cnty, OH Hosp Rev Grandview Hosp &
Med Cent Rfdg................................... 5.500 12/01/10 1,378,039
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OHIO (CONTINUED)
$ 2,990 Ohio Hsg Fin Agy Mtg Rev (GNMA
Collateralized)................................. 6.050% 09/01/17 $ 3,205,968
885 Toledo, OH Multi-Family Hsg Impt Commodore Perry
(FGIC Insd)..................................... 5.400 12/01/23 902,284
------------
11,851,954
------------
OKLAHOMA 1.1%
2,750 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 6.125 10/01/14 2,891,213
------------
PENNSYLVANIA 10.2%
1,000 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt USX Corp Proj Rfdg........... 6.100 07/15/20 1,061,540
3,000 Delaware Cnty, PA Auth Hlthcare Rev Mercy Hlth
Corp Southeastn Ser B (Prerefunded @
11/15/05)....................................... 6.000 11/15/07 3,307,800
6,000 Pennsylvania Intergovtl Coop Auth Spl Tax Rev
City of Philadelphia Fdg Pgm (FGIC Insd)........ 5.350 06/15/07 6,306,300
10,000 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC
Insd) (d)....................................... 5.400 07/01/09 10,368,300
4,325 Philadelphia, PA Hosps & Higher Edl Auth Fac
Hosp Rev........................................ 6.350 07/01/07 4,999,657
------------
26,043,597
------------
SOUTH CAROLINA 0.8%
2,000 South Carolina St Pub Svc Auth Rev Ser B Rfdg
(MBIA Insd)..................................... 5.000 01/01/25 1,978,260
------------
TENNESSEE 1.0%
2,485 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev Edl
Fac Christian Brother Rfdg...................... 5.750 09/01/16 2,559,525
------------
TEXAS 5.3%
3,000 Brazos River Auth TX Rev Houston Inds Inc Proj
Ser D Rfdg (MBIA Insd).......................... 4.900 10/01/15 3,039,600
3,000 Harris Cnty, TX Toll Road Sr Lien Rfdg (AMBAC
Insd)........................................... 4.950 08/15/06 3,183,840
2,000 Houston, TX Arpt Sys Rev Spl Fac Continental
Airls........................................... 6.125 07/15/17 2,061,660
2,490 San Antonio, TX Arpt Sys Rev Rfdg (AMBAC
Insd)........................................... 7.375 07/01/13 2,881,851
1,650 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized)........................... 8.400 01/01/21 1,705,803
2,090 Wylie, TX Indpt Sch Dist Cap Apprec Rfdg (PSF
Gtd)............................................ * 08/15/20 657,326
------------
13,530,080
------------
UTAH 3.1%
3,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B
Rfdg (MBIA Insd)................................ 5.750 07/01/19 3,252,540
3,000 Salt Lake City, UT Arpt Rev Delta Airls Inc
Proj............................................ 7.900 06/01/17 3,116,970
1,495 Utah St Hsg Fin Agy Single Family Mtg Sr Ser
D2.............................................. 6.850 07/01/25 1,588,378
------------
7,957,888
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WASHINGTON 2.2%
$ 2,030 Washington St Pub Pwr Supply Sys Nuclear Proj No
3 Rev Ser C Rfdg (MBIA Insd).................... * 07/01/13 $ 996,466
3,380 Washington St Pub Pwr Supply Sys Nuclear Proj No
3 Rev Ser C Rfdg (MBIA Insd).................... * 07/01/15 1,474,255
3,000 Washington St Ser B............................. 5.500% 05/01/18 3,246,120
------------
5,716,841
------------
WISCONSIN 0.4%
1,000 Wisconsin St Hlth & Edl Facs Auth Rev Marquette
Univ (MBIA Insd) (c)............................ 4.750 06/01/28 946,070
------------
TOTAL LONG-TERM INVESTMENTS 100.6%
(Cost $231,842,366).......................................................... 256,635,272
SHORT-TERM INVESTMENTS 0.1%
(Cost $400,000).............................................................. 400,000
------------
TOTAL INVESTMENTS 100.7%
(Cost $232,242,366).......................................................... 257,035,272
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7%).................................. (1,871,466)
------------
NET ASSETS 100.0%............................................................. $255,163,806
============
</TABLE>
* Zero coupon bond
(a) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(c) Securities purchased on a when issued or delayed delivery basis.
(d) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open option transactions.
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $232,242,366)....................... $257,035,272
Cash........................................................ 30,753
Receivables:
Interest.................................................. 4,709,483
Investments Sold.......................................... 129,078
Other....................................................... 852
------------
Total Assets.......................................... 261,905,438
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 6,162,469
Income Distributions--Common and Preferred Shares......... 181,939
Investment Advisory Fee................................... 141,464
Administrative Fee........................................ 32,645
Affiliates................................................ 9,556
Trustees' Deferred Compensation and Retirement Plans........ 89,114
Accrued Expenses............................................ 85,383
Options at Market Value (Net premiums received of
$61,690).................................................. 39,062
------------
Total Liabilities..................................... 6,741,632
------------
NET ASSETS.................................................. $255,163,806
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000
shares, 1,900 issued with liquidation preference of
$50,000 per share)........................................ $ 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................................. 24,815,534
Accumulated Undistributed Net Investment Income............. 736,971
Accumulated Net Realized Loss............................... (14,664,049)
------------
Net Assets Applicable to Common Shares................ 160,163,806
------------
NET ASSETS.................................................. $255,163,806
============
NET ASSET VALUE PER COMMON SHARE ($160,163,806 divided
by 10,806,700 shares outstanding)......................... $ 14.82
============
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $14,358,611
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,644,217
Administrative Fee.......................................... 379,435
Preferred Share Maintenance................................. 258,522
Trustees' Fees and Expenses................................. 24,913
Custody..................................................... 16,402
Legal....................................................... 12,436
Amortization of Organizational Costs........................ 1,789
Other....................................................... 220,944
-----------
Total Expenses.......................................... 2,558,658
-----------
NET INVESTMENT INCOME....................................... $11,799,953
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 849,066
Options................................................... 114,664
Futures................................................... (102,025)
-----------
Net Realized Gain........................................... 861,705
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 20,631,407
-----------
End of the Period:
Investments............................................. 24,792,906
Options................................................. 22,628
-----------
24,815,534
-----------
Net Unrealized Appreciation During the Period............... 4,184,127
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 5,045,832
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $16,845,785
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended October 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1998 October 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 11,799,953 $ 11,846,255
Net Realized Gain....................................... 861,705 601,101
Net Unrealized Appreciation During the Period........... 4,184,127 6,699,050
------------ ------------
Change in Net Assets from Operations.................... 16,845,785 19,146,406
------------ ------------
Distributions from Net Investment Income:
Common Shares......................................... (8,428,547) (8,428,596)
Preferred Shares...................................... (3,351,758) (3,331,038)
------------ ------------
Total Distributions..................................... (11,780,305) (11,759,634)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... 5,065,480 7,386,772
NET ASSETS:
Beginning of the Period................................. 250,098,326 242,711,554
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $736,971 and $717,323,
respectively)......................................... $255,163,806 $250,098,326
============ ============
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 22, 1993
(Commencement
Year Ended October 31, of Investment
------------------------------------------------------ Operations) to
1998 1997 1996 1995 1994 October 31, 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period (a)...................... $14.352 $13.669 $13.722 $12.284 $15.253 $13.808
--------- ------- ------- ------- ------- ----------
Net Investment Income........... 1.092 1.096 1.116 1.147 1.181 .803
Net Realized and Unrealized
Gain/Loss..................... .467 .675 (.065) 1.507 (2.927) 1.329
--------- ------- ------- ------- ------- ----------
Total from Investment
Operations...................... 1.559 1.771 1.051 2.654 (1.746) 2.132
--------- ------- ------- ------- ------- ----------
Less:
Distributions from Net
Investment Income:
Paid to Common Shareholders... .780 .780 .790 .874 .938 .547
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders...... .310 .308 .314 .342 .244 .140
Distributions from Net Realized
Gain:
Paid to Common Shareholders... -0- -0- -0- -0- .034 -0-
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders...... -0- -0- -0- -0- .007 -0-
--------- ------- ------- ------- ------- ----------
Total Distributions.............. 1.090 1.088 1.104 1.216 1.223 .687
--------- ------- ------- ------- ------- ----------
Net Asset Value, End of the
Period.......................... $14.821 $14.352 $13.669 $13.722 $12.284 $15.253
========= ======= ======= ======= ======= ==========
Market Price Per Share at End of
the Period...................... $14.5625 $12.750 $11.750 $11.875 $10.750 $14.625
Total Investment Return at Market
Price (b)....................... 20.97% 15.55% 5.69% 18.79% (20.83%) 8.26%*
Total Return at Net Asset
Value (c)....................... 8.91% 11.01% 5.58% 19.39% (13.59%) 12.82%*
Net Assets at End of the Period
(In millions)................... $255.2 $250.1 $242.7 $243.3 $227.7 $259.8
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares**........................ 1.62% 1.65% 1.67% 1.77% 1.61% 1.49%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d)............... 5.35% 5.67% 5.91% 6.14% 6.76% 5.97%
Portfolio Turnover............... 18% 23% 24% 75% 165% 114%*
* Non-Annualized
** Ratio of Expenses to Average
Net Assets including Preferred
Shares......................... 1.01% 1.01% 1.01% 1.06% .99% 1.02%
</TABLE>
(a) Net Asset Value at January 22, 1993, is adjusted for common and preferred
share offering costs of $.217 per common share.
(b) Total Investment Return at Market Price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends
in accordance with the Trust's dividend reinvestment plan.
(c) Total Return at Net Asset Value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
See Notes to Financial Statements
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Strategic Sector Municipal Trust, formerly known as Van Kampen
American Capital 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's investment objective is
to provide a high level of current income exempt from federal income tax,
consistent with preservation of capital. The Trust will invest in a portfolio
consisting substantially of municipal obligations from those market sectors
which the Adviser feels will best meet the Trust's investment objective. 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. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
D. ORGANIZATIONAL COSTS--The Trust has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Trust's
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
organization in the amount of $40,000. These costs were amortized on a straight
line basis over the 60 month period ending January 21, 1998.
E. FEDERAL INCOME TAXES--It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At October 31, 1998, the Trust had an accumulated capital loss
carryforward for tax purposes of $14,641,421 which will expire between October
31, 2002 and October 31, 2004. Net realized gains or losses differ for financial
and tax reporting purposes as a result of gains or losses recognized for tax
purposes on open option positions at October 31, 1998.
At October 31, 1998, for federal income tax purposes the cost of long- and
short-term investments is $232,242,366, the aggregate gross unrealized
appreciation is $24,825,614 and the aggregate gross unrealized depreciation is
$32,708, resulting in net unrealized appreciation on long- and short-term
investments of $24,792,906.
F. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
For the year ended October 31, 1998, 100% of the income distributions made
by the Trust were exempt from federal income taxes. In January, 1999 the Trust
will provide tax information to shareholders for the 1998 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .65% of the average
net assets of the Trust. In addition, the Trust will pay a monthly
administrative fee to Van Kampen, 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.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
For the year ended October 31, 1998, the Trust recognized expenses of
approximately $5,500, representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust of which a trustee of the
Trust is an affiliated person.
For the year ended October 31, 1998, the Trust recognized expenses of
approximately $92,300 representing Van Kampen's cost of providing accounting and
legal services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $47,331,681 and $45,262,562,
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 unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising an option contract or taking
delivery of a security underlying a futures contract. In these instances, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
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
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
specified period. These contracts are generally used by the Trust to manage the
portfolio's effective maturity and duration.
Transactions in options for the year ended October 31, 1998, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1997.................. 150 $ 43,321
Options Written and Purchased (Net).............. 500 141,275
Options Terminated in Closing Transactions
(Net).......................................... (150) (43,321)
Options Expired (Net)............................ (400) (79,585)
---- ---------
Outstanding at October 31, 1998.................. 100 $ 61,690
====== =========
</TABLE>
The related futures contracts of the outstanding option transactions as of
October 31, 1998, and the descriptions and market values are as follows:
<TABLE>
<CAPTION>
MARKET
EXPIRATION MONTH/ VALUE OF
CONTRACTS EXERCISE PRICE OPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bond Index
December 1998--Written Puts
(Current notional value of
$125,344 per contract)............ 100 Dec/121 $(39,062)
=== ========
</TABLE>
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Trust generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration. Upon entering into futures contracts, the Trust maintains, in a
segregated account with its custodian, securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts, each with a par value of $100,000, for
the year ended October 31, 1998, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ---------------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1997............................ -0-
Futures Opened............................................. 135
Futures Closed............................................. (135)
----
Outstanding at October 31, 1998............................ -0-
====
</TABLE>
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
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 October 31, 1998, the average rate in effect
was 3.287%. During the year ended October 31, 1998, the rates ranged from 3.240%
to 3.990%.
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.
6. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996, Van Kampen initiated a CountDown 2000
Project to review both the internal systems and external vendor connections. The
goal of this project is to position its business to continue unaffected as a
result of the century change. At this time, there can be no assurance that the
steps taken will be sufficient to avoid any adverse impact to the Trust, but Van
Kampen does not anticipate that the move to Year 2000 will have a material
impact on its ability to continue to provide the Trust with service at current
levels. In addition, it is possible that the securities markets in which the
Trust invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues.
24
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Strategic Sector Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Strategic Sector Municipal Trust (the "Trust"), including the portfolio
of investments, as of October 31, 1998, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
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 financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Strategic Sector Municipal Trust as of October 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period ended, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 1, 1998
25
<PAGE> 27
DIVIDEND REINVESTMENT PLAN
The Trust offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders who are participants in the Plan may have dividends and
capital gains distributions automatically reinvested in Common Shares of the
Trust. All Common Shareholders are deemed to be participants in the Plan unless
they specifically elect not to participate. Common Shareholders who elect not to
participate in the Plan will receive all distributions of dividends and capital
gains in cash paid by check mailed directly to the Common Shareholder by the
Trust's dividend disbursing agent.
HOW THE PLAN WORKS
State Street Bank and Trust Company, as your Plan Agent, serves as agent for
the Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
All Common Shareholders of the Trust are deemed to be participants in the Plan
unless they specifically elect not to participate. You may withdraw from the
Plan at any time by calling 1-800-341-2929 or by writing State Street Bank and
Trust Company, P.O. Box 8200, Boston, MA 02266-8200. If you withdraw, you will
receive, without charge, a share certificate issued in your name for all full
Common Shares credited to your account under the Plan and a cash payment will be
made for any fractional Common Share credited to your account under the Plan.
You may again elect to participate in the Plan at any time by calling
1-800-341-2929 or writing to the Trust at:
Van Kampen Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
26
<PAGE> 28
VAN KAMPEN FUNDS
EQUITY FUNDS
Domestic
Aggressive Equity
Aggressive Growth
American Value
Comstock
Emerging Growth
Enterprise
Equity Growth
Equity Income
Growth
Growth and Income
Harbor
Pace
Real Estate Securities
U.S. Real Estate
Utility
Value
International/Global
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
Global Franchise
Global Managed Assets
International Magnum
Latin American
FIXED-INCOME FUNDS
Income
Corporate Bond
Global Fixed Income
Global Government Securities
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return
Limited Maturity Government
Short-Term Global Income
Strategic Income
U.S. Government
U.S. Government Trust for Income
Worldwide High Income
Tax Exempt Income
California Insured Tax Free
Florida Insured Tax Free Income
High Yield Municipal
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Tax Free High Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Prime Rate Income Trust
Senior Floating Rate
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - visit our web site at
WWW.VANKAMPEN.COM -- to view a prospectus, select Download Prospectus
- - call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- - e-mail us by visiting
WWW.VANKAMPEN.COM and selecting Contact Us
27
<PAGE> 29
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
STEVEN MULLER
THEODORE A. MYERS
DON G. POWELL*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in
the Investment Company Act of 1940.
(C) Van Kampen Funds Inc., 1998 All rights reserved.
(SM) denotes a service mark of
Van Kampen Funds Inc.
28
<PAGE> 30
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on July 28, 1998, where
shareholders voted on the election of trustees and the selection of independent
public accountants.
1) With regard to the election of the following trustee by the preferred
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
--------------------
IN FAVOR WITHHELD
- -------------------------------------------------------------------------
<S> <C> <C>
Rod Dammeyer........................................ 1,656 5
</TABLE>
2) With regard to the election of the following trustees by the common
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
----------------------
IN FAVOR WITHHELD
- ------------------------------------------------------------------------
<S> <C> <C>
Steven Muller.................................... 9,327,295 184,883
Wayne W. Whalen.................................. 9,335,335 176,843
</TABLE>
The other Trustees of the Trust whose term did not expire in 1998 are David C.
Arch, Howard J Kerr, Dennis J. McDonnell, Theodore A. Myers, Don G. Powell and
Hugo F. Sonnenschein.
3) With regard to the ratification of KPMG Peat Marwick LLP as independent
public accountants for the Trust, 9,347,079 shares voted in favor of the
proposal, 25,045 shares voted against, and 141,715 shares abstained.
29
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> STRAT SECT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 232,242,366
<INVESTMENTS-AT-VALUE> 257,035,272
<RECEIVABLES> 4,838,561
<ASSETS-OTHER> 852
<OTHER-ITEMS-ASSETS> 30,753
<TOTAL-ASSETS> 261,905,438
<PAYABLE-FOR-SECURITIES> 6,162,469
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 579,163
<TOTAL-LIABILITIES> 6,741,632
<SENIOR-EQUITY> 95,000,000
<PAID-IN-CAPITAL-COMMON> 149,275,350
<SHARES-COMMON-STOCK> 10,806,700
<SHARES-COMMON-PRIOR> 10,806,700
<ACCUMULATED-NII-CURRENT> 736,971
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,664,049)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,815,534
<NET-ASSETS> 255,163,806
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,358,611
<OTHER-INCOME> 0
<EXPENSES-NET> (2,558,658)
<NET-INVESTMENT-INCOME> 11,799,953
<REALIZED-GAINS-CURRENT> 861,705
<APPREC-INCREASE-CURRENT> 4,184,127
<NET-CHANGE-FROM-OPS> 16,845,785
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,780,305)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,065,480
<ACCUMULATED-NII-PRIOR> 717,323
<ACCUMULATED-GAINS-PRIOR> (15,525,754)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,644,217
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,558,658
<AVERAGE-NET-ASSETS> 253,001,298
<PER-SHARE-NAV-BEGIN> 14.352
<PER-SHARE-NII> 1.092
<PER-SHARE-GAIN-APPREC> 0.467
<PER-SHARE-DIVIDEND> (1.090)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.821
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
