<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Glossary of Terms................................ 5
Performance Results.............................. 7
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Financial Highlights............................. 17
Notes to Financial Statements.................... 18
Dividend Reinvestment Plan....................... 23
</TABLE>
VKS SAR 6/98
<PAGE> 2
LETTER TO SHAREHOLDERS
May 22, 1998
Dear Shareholder,
The Taxpayer Relief Act of 1997,
signed into law by President Clinton
last year, was created to fill the need
for a broad variety of tax-advantaged
investments to promote asset growth. We
are pleased that you selected our Trust [PHOTO]
as a vehicle to provide the potential
for tax-free income within your
investment portfolio. As you are aware,
dividends distributed by the Trust are
generally free from federal income DENNIS J. MCDONNELL AND DON G. POWELL
taxes, and often from state and local
taxes as well. At Van Kampen American Capital, we strive not only for a high
level of current income, but total return performance as well.
ECONOMIC OVERVIEW
After nearly seven years of continuous growth, the economy remained buoyant
with few signs of accelerating inflation. Wholesale prices in the first quarter
plummeted at an annual rate of 4.2 percent, while consumer prices inched up 0.2
percent and employment costs rose just 0.7 percent. However, inflationary
pressures were eased by factors such as lower oil prices, increasing
productivity, and a pending budget surplus. The Asian financial crisis led to a
stronger dollar and a decline in the prices of Asian imports, which in turn has
discouraged price increases on competing U.S. goods.
To date, Asia's slowdown has had a modest impact on U.S. economic growth. In
the first quarter, the U.S. economy grew at a 4.2 percent annual rate, its
fastest pace in the past year. Strong consumer spending and inventory buildup by
manufacturers offset a decrease in exports to Asia. Despite the economy's
strength, the Federal Reserve Board refrained from raising interest rates, given
the lack of domestic inflationary pressure and concerns about Asia's economic
future.
MARKET OVERVIEW
Against the backdrop of benign inflation and no action by the Fed, U.S. bond
prices rose during the past six months, although they ended the reporting period
below the highs reached in early January.
The yield of the 30-year Treasury bond, which moves in the opposite
direction of its price, fell from 6.15 percent on October 31 to 5.95 percent on
April 30. Bond prices hit a record high as yields reached 5.69 percent in early
January amidst expectations that the Fed would cut interest rates, but the yield
went back to 6.00 percent in early March after the Fed chose not to act. Yields
were volatile for the rest of the reporting period, as
Continued on page two
1
<PAGE> 3
foreign investors sold U.S. Treasury holdings and investors began to fear that
the Fed was leaning toward a rate hike.
Municipal bond yields generally moved in unison with Treasuries but did not
gain nearly as much in price. By the end of the reporting period, the average
yield of AAA-rated, 30-year generic general obligation bonds was 5.14 percent,
two basis points above the yield posted on October 31 of last year. The
underperformance of municipal bonds can be attributed in part to heavy supply
that outpaced demand. Supply increased as state and local governments took
advantage of low interest rates by issuing bonds to refinance outstanding issues
with higher interest rates, as well as to fund new projects. In the first
quarter, long-term municipal issuance totaled $71 billion, up from $40 billion a
year earlier.
More than half of the new issue volume was AAA-rated and insured, which
significantly diminished the amount of uninsured, higher-yielding securities
available in the marketplace. The dominance of insured volume and the high
demand for uninsured paper created an imbalance that compressed the yields
between higher-quality and lower-quality bonds.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of April 30, 1998*
<TABLE>
<S> <C>
AAA....................... 52.8%
AA........................ 14.1%
A......................... 7.8%
BBB....................... 22.8%
BB........................ 2.5%
</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 mix of high-quality and low-quality bonds in order to
balance the portfolio's volatility in response to changing market conditions.
Higher-quality issues generally have performed better than lower-rated
securities when interest rates are falling, which was the case for most of the
period. Lower-quality securities tend to outperform when rates are rising, and
they usually pay higher yields. During the reporting period, we replaced some
higher-quality securities with bonds rated A and below in order to preserve the
Trust's dividend. The percentage of non-investment-grade holdings, however,
remained well below the 20 percent allowed by the Trust's prospectus because the
yield advantage of these bonds was not significant enough to reward the investor
for the added credit risk.
Continued on page three
2
<PAGE> 4
Overall, we limited the number of acquisitions because current market yields
were below the average yield of bonds in the Trust. However, some of the Trust's
bonds had their durations reduced after they were prerefunded by their issuers
and began to trade like short-term securities. We replaced several of these
bonds with new long-term securities, which extended the call protection of the
Trust.
We sold bonds which had outperformed the market in order to capture the
price appreciation, and replace them with securities we felt were undervalued
and had strong potential for an increase in price. These trades involved swaps
between different states and different coupons. We had little trouble finding
replacement bonds because there was a substantial supply of new securities from
which to choose.
Most of our purchases were discount securities. These bonds have the
potential to appreciate as they reach maturity and tend to have a longer
duration, which makes them more sensitive to changing interest rates. Discount
bonds helped offset the declining duration of the portfolio that occurred as the
low interest rate environment caused bonds to be priced to call dates rather
than maturities. As of April 30, the duration of the Trust was 6.9 years
compared with 7.76 years for the Lehman Brothers Insured Municipal Index.
Because of the longer-term nature of the Trust, the calculation of this index's
duration has been adjusted to eliminate bonds with maturities of five years or
less.
TOP FIVE PORTFOLIO SECTORS AS OF APRIL 30, 1998*
Health Care....................... 25.3%
General Purpose................... 17.3%
Single-Family Housing............. 10.8%
Retail Electric/Gas/Telephone...... 8.5%
Public Education................... 7.1%
*As a Percentage of Long-Term Investments
PERFORMANCE SUMMARY
For the six-month period ended April 30, 1998, the Trust generated a total
return of 5.99 percent(1). This reflects a gain in market price per common share
from $12.750 on October 31, 1997, to $13.125 on April 30, 1998, plus
reinvestment of all dividends. The Trust had a tax-exempt distribution rate of
5.94 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 9.28 percent(4) on a taxable investment for investors
in the 36 percent federal income tax bracket. Please refer to the chart on page
seven for additional performance numbers.
Continued on page four
3
<PAGE> 5
[DIVIDEND HISTORY GRAPH]
Six-month Dividend History
For the Period Ended April 30, 1998
<TABLE>
<CAPTION>
Distribution per Common Share
<S> <C>
Nov 1997......................................... $.065
Dec 1997......................................... $.065
Jan 1998......................................... $.065
Feb 1998......................................... $.065
Mar 1998......................................... $.065
Apr 1998......................................... $.065
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
ECONOMIC OUTLOOK
We expect the economy to slow from its brisk first-quarter pace, although
the extent of the slowdown depends on the continued effects of Asia's crisis and
on Fed policy. We believe the Fed is biased toward raising rates, given concerns
about the economy's increasing strength. If economic strength ignites
inflationary pressures, then we believe the Fed will raise interest rates later
this year. As a result, the yield of the 30-year Treasury bond could top 6.25
percent.
We will continue to track market developments and their effects on the
Trust. When appropriate, we will make adjustments to the portfolio. As we
mentioned earlier, our goal remains a high level of current income for
investors, plus gains in total return. Thank you for your continued support and
confidence in Van Kampen American Capital and the management of your Trust.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
Please see footnotes on page seven
4
<PAGE> 6
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting bond yields. One hundred basis points is
equal to one 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 call dates before
maturity. Call dates and prices are set when the bond is issued. To compensate
the bond holder for loss of income and ownership, the 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.
A callable bond is "priced to call" when it is selling at a premium, because it
is assumed that the issuer will redeem the bond at its call date, rather than at
maturity.
COUPON RATE: The stated rate of interest a bond pays until maturity, expressed
as a percentage of its face value.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investor Services are two
companies that assign bond ratings. Standard & Poor's ratings range from a high
of AAA to a low of D; Moody's ratings range from a high of Aaa to a low of D.
CREDIT SPREAD: The difference in yield between higher-quality issues and
lower-quality issues. Normally, lower-quality issues provide higher yields than
higher-quality issues in order to compensate investors for the additional credit
risk.
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.
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
one-percent change in the price of the bond for every one-percent change in
interest rates. The longer a fund's duration, the greater the effect of interest
rate movements on net asset value. Typically, funds with shorter durations have
performed better in rising rate environments, while funds with longer durations
have performed better when rates decline.
FEDERAL RESERVE BOARD (THE FED): A group that meets eight times a year to
establish monetary policy and monitor the economic pulse of the United States.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. These
bonds are issued to finance essential government projects, such as highways and
schools.
5
<PAGE> 7
INFLATION: An economic situation in which money supply and business activity
dramatically increase, accompanied by sharply rising 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 municipal bond
insurer. If the issuer defaults, the insurance company will step in and take
over payments of interest and principal. As a result of this protection against
credit risk, most municipal bonds are AAA-rated. Insurance on the bonds does not
relate to mutual fund shares, which will fluctuate in price.
INVESTMENT GRADE BONDS: Securities rated BBB and above by Standard & Poor's or
Baa and above by Moody's Investor Services. Bonds rated below BBB or Baa are
noninvestment grade.
MARKET PRICE: The price of a share of a closed-end fund trading on a stock
exchange. When the price is less than a fund's NAV, the fund is trading at a
discount. When the price is more than the NAV, the fund is trading at a premium.
MUNICIPAL BOND: A debt security issued by a state, municipality, or other
governmental entity to finance capital expenditures such as the construction of
highways or public works.
NET ASSET VALUE (NAV): The value of a fund share, calculated by deducting a
fund's liabilities from its total assets and dividing this amount by the number
of shares outstanding.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This 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.
YIELD SPREAD: The difference between the yields of distinct bonds, due to
variant credit ratings or maturities. When yield spreads between bonds of
different credit quality are narrow, there is less incentive to own the
lower-quality bond. When yield spreads between bonds of different maturities are
narrow, there is less incentive to own the bond with the longer maturity. In
both cases, the investor is not being compensated for the additional risk.
ZERO COUPON BONDS: A corporate or municipal debt security that trades at a deep
discount to face value and pays no interest. It may be redeemed at maturity for
full face value.
6
<PAGE> 8
PERFORMANCE RESULTS FOR THE PERIOD ENDED APRIL 30, 1998
VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
(NYSE TICKER SYMBOL--VKS)
<TABLE>
COMMON SHARE TOTAL RETURNS
<S> <C>
Six-month total return based on market price(1)............ 5.99%
Six-month total return based on NAV(2)..................... 2.71%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 5.94%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 9.28%
SHARE VALUATIONS
Net asset value........................................... $ 14.35
Closing common stock price................................ $13.125
Six-month high common stock price (04/03/98).............. $13.875
Six-month low common stock price (11/07/97)............... $12.750
Preferred share (Series A) rate(5)........................ 3.530%
Preferred share (Series B) rate(5)........................ 3.648%
</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.
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 99.2%
ALABAMA 1.9%
$ 5,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln
Ser A (AMBAC Insd)............................. 5.000% 08/15/15 $ 4,842,150
------------
CALIFORNIA 14.2%
3,330 Anaheim, CA Ctfs Partn Anaheim Mem Hosp Assn
Rfdg (AMBAC Insd).............................. 5.000 05/15/13 3,284,912
3,000 California Hlth Fac Fin Auth Rev Kaiser
Permanente Med Cent............................ 5.450 10/01/13 3,029,670
6,420 California Pollutn Ctl Fin Auth Pollutn Ctl Rev
Pacific Gas & Elec Co Ser B (MBIA Insd)........ 6.350 06/01/09 6,926,024
1,110 California Rural Home Mtg Fin Auth Single
Family Mtg Rev Ser C (GNMA Collateralized)..... 7.800 02/01/28 1,257,908
10,000 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Children's Hosp Rfdg (MBIA Insd).... 4.750 06/01/21 9,123,000
2,000 Los Angeles Cnty, CA Pub Wks (FSA Insd)........ 5.500 10/01/18 2,064,620
2,000 Mount Diablo, CA Hosp Dist Rev Ser A (Embedded
Cap) (AMBAC Insd).............................. 5.125 12/01/23 1,926,460
3,000 Orange Cnty, CA Recovery Ser A Rfdg (MBIA
Insd).......................................... 6.000 06/01/08 3,300,150
4,300 Paramount, CA Redev Agy Tax Alloc Redev Proj
Area No 1 Rfdg (MBIA Insd)..................... 6.250 08/01/23 4,640,603
------------
35,553,347
------------
COLORADO 5.2%
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 1,177,980
1,875 Colorado Hsg Fin Auth Multi-Family Hsg Insd Mtg
Ser A.......................................... 6.800 10/01/37 2,014,650
1,500 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
C1............................................. 7.550 11/01/27 1,694,340
3,705 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
F.............................................. 8.625 06/01/25 4,117,070
3,415 Denver, CO City & Cnty Arpt Rev Ser B.......... 6.900 11/15/00 3,624,169
1,000 E-470 Pub Hwy Auth CO Rev Cap Apprec Sr Ser B
Rfdg (MBIA Insd)............................... * 09/01/22 268,480
------------
12,896,689
------------
CONNECTICUT 1.3%
1,500 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A - Private Placement (b)............ 6.400 09/01/11 1,655,520
1,500 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A - Private Placement (Prerefunded @
09/01/07) (b).................................. 6.400 09/01/11 1,702,350
------------
3,357,870
------------
FLORIDA 0.4%
1,000 Tampa, FL Rev Hlth Sys Catholic Hlth Ser 3
(MBIA Insd).................................... 4.750 11/15/28 903,250
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GEORGIA 2.7%
$ 3,000 Atlanta, GA Spl Purp Fac Rev Delta Airls Ser
B.............................................. 7.900% 12/01/18 $ 3,198,960
1,425 Georgia Muni Elec Auth Pwr Rev Ser A Rfdg (FGIC
Insd).......................................... 5.500 01/01/12 1,491,961
2,000 Georgia Muni Elec Auth Pwr Rev Ser Z Rfdg (FGIC
Insd).......................................... 5.500 01/01/12 2,098,020
------------
6,788,941
------------
ILLINOIS 6.5%
2,060 Alton, IL Hosp Fac Rev Saint Anthony's Hlth
Cent........................................... 5.875 09/01/06 2,173,588
4,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
American Airls Inc Proj Ser A.................. 7.875 11/01/25 4,898,160
1,210 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc Proj Ser 84C......................... 8.200 05/01/18 1,287,827
1,635 Cook Cnty, IL Sch Dist 100 Berwyn South Rfdg
(FSA Insd)..................................... 8.100 12/01/15 2,196,966
5,450 Illinois Hlth Fac Auth Rev Westlake Cmnty
Hosp........................................... 7.750 01/01/04 5,659,389
------------
16,215,930
------------
INDIANA 2.8%
3,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph Hosp
& Hlth Cent Rfdg............................... 6.000 08/15/02 3,145,020
2,000 Kokomo, IN Hosp Auth Hosp Rev Saint Joseph Hosp
& Hlth Cent Rfdg............................... 6.250 08/15/05 2,174,160
990 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg............................ 5.900 03/01/01 1,016,156
540 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg............................ 6.000 03/01/02 559,321
------------
6,894,657
------------
IOWA 2.1%
5,000 Muscatine, IA Elec Rev Rfdg (AMBAC Insd) (d)... 6.125 01/01/12 5,316,300
------------
KANSAS 2.2%
5,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co
Proj Rfdg (MBIA Insd).......................... 7.000 06/01/31 5,423,700
------------
KENTUCKY 1.7%
4,020 Louisville, KY Hsg Assistance Corp Mtg Rev
Carrousel Pptys Ser A Rfdg (FHA Gtd)........... 8.300 07/01/24 4,329,661
------------
LOUISIANA 0.5%
1,250 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj (FSA Insd)........................ 7.500 06/01/21 1,368,025
------------
MARYLAND 7.4%
1,275 Baltimore, MD Ctfs Partn Brd of Edl Admin Proj
Ser A Rfdg (MBIA Insd) (c)..................... 5.000 04/01/15 1,193,936
4,435 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty
Dev Rev Single Family Pgm Seventh Ser.......... 7.300 04/01/25 4,748,821
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MARYLAND (CONTINUED)
$ 6,325 Maryland St Hlth & Higher Edl Fac Auth Rev
Greater Baltimore Med Cent Rfdg (FGIC Insd).... 5.000% 07/01/13 $ 6,258,334
6,270 Maryland St Hlth & Higher Edl Fac Auth Rev Subn
Hosp Rfdg (AMBAC Insd)......................... 5.000 07/01/13 6,203,914
------------
18,405,005
------------
MASSACHUSETTS 2.1%
1,775 Massachusetts Muni Whsl Elec Co Pwr Supply Sys
Rev Ser B Rfdg................................. 6.750 07/01/05 1,933,366
1,500 Massachusetts St Hlth & Edl Fac Auth Rev Cmnty
Colleges Prog Ser B Rfdg (AMBAC Insd).......... 5.000 10/01/18 1,442,400
1,705 Massachusetts St Hlth & Edl Fac Auth Rev Vly
Regl Hlth Sys Ser C Rfdg (Connie Lee Insd)..... 7.000 07/01/09 1,997,987
------------
5,373,753
------------
MICHIGAN 2.5%
1,355 Flint, MI Hosp Bldg Auth Rev Hurley Med Cent
Ser A Rfdg..................................... 5.750 07/01/03 1,409,444
2,745 Michigan Muni Bond Auth Rev St Revolving
Fund........................................... 5.400 10/01/14 2,788,453
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................ 5.500 10/01/18 1,002,470
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................ 5.500 10/01/27 997,060
------------
6,197,427
------------
MINNESOTA 0.5%
1,295 Eden Prairie, MN Multi-Family Hsg Rev Edendale
Apts Ser A Rfdg (GNMA Collateralized).......... 5.550 12/01/24 1,319,320
------------
MISSISSIPPI 1.9%
1,990 Mississippi Home Corp Single Family Rev Mtg Ser
C (GNMA Collateralized)........................ 7.600 06/01/29 2,249,576
1,171 Mississippi Home Corp Single Family Rev Mtg Ser
D (GNMA Collateralized)........................ 8.100 12/01/24 1,307,652
1,000 Mississippi Home Corp Single Family Rev Mtg Ser
F (GNMA Collateralized)........................ 7.550 12/01/27 1,132,260
------------
4,689,488
------------
MISSOURI 0.8%
765 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev
Lake of the Ozarks Genl Hosp................... 6.250 02/15/11 814,771
980 Missouri St Hsg Dev Comm Mtg Rev Single Family
Ln Ser A (GNMA Collateralized)................. 7.200 09/01/26 1,099,364
------------
1,914,135
------------
MONTANA 0.4%
1,000 Crow Fin Auth MT Tribal Purp Rev............... 5.700 10/01/27 1,005,780
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEVADA 0.9%
$ 2,160 Nevada Hsg Division Single Family Pgm Ser E
(FHA Gtd)...................................... 6.900% 10/01/11 $ 2,306,038
------------
NEW JERSEY 2.0%
2,000 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Ser A....................... 6.200 12/01/10 2,112,400
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 2,796,725
------------
4,909,125
------------
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 1,690,291
2,520 New York City Ser B (Prerefunded @ 08/15/04)... 7.250 08/15/19 2,927,660
5,000 New York City Ser B1 (Prerefunded @
08/15/04)...................................... 7.000 08/15/16 5,740,850
4,235 New York City Ser C............................ 7.250 08/15/24 4,556,352
1,730 New York City Ser C (Prerefunded @ 08/15/01)... 7.250 08/15/24 1,889,662
2,000 New York City Ser G............................ 5.750 02/01/14 2,067,660
4,355 New York St Dorm Auth Rev Court Fac Lease Ser
A.............................................. 5.500 05/15/10 4,443,973
1,155 New York St Dorm Auth Rev Secured Hosp Wyckoff
Hts Ser H Rfdg................................. 5.200 02/15/14 1,128,643
595 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Impt Ser B....................... 7.625 08/15/17 662,098
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 1,437,697
4,350 Triborough Brdg & Tunl Auth NY Rev Genl Purp
Ser A Rfdg..................................... 5.000 01/01/12 4,307,239
------------
30,852,125
------------
NORTH CAROLINA 0.3%
2,500 University of NC Chapel Hill Rev Util Sys
Rfdg........................................... * 08/01/20 777,175
------------
OHIO 4.6%
1,000 Akron, OH Ctfs Partn Akron Muni Baseball
Stadium Proj (a)............................... 0/6.500 12/01/07 894,400
1,000 Cleveland, OH Arpt Spl Rev Ref Continental
Airlines Inc (c)............................... 5.700 12/01/19 977,480
1,000 Delaware Cnty, OH Hlthcare Fac Rev Mtg Centrum
at Willow Brook (FHA Gtd)...................... 6.550 02/01/35 1,093,750
2,045 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp
Rfdg........................................... 6.000 05/15/05 2,169,438
1,000 Miami Cnty, OH Hosp Fac Rev Upper Vly Med Cent
Ser C Rfdg & Impt.............................. 6.000 05/15/06 1,073,740
1,300 Montgomery Cnty, OH Hosp Rev Grandview Hosp &
Med Cent Rfdg.................................. 5.500 12/01/10 1,320,540
3,000 Ohio Hsg Fin Agy Mtg Rev (GNMA
Collateralized)................................ 6.050 09/01/17 3,160,860
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO (CONTINUED)
$ 885 Toledo, OH Multi-Family Hsg Impt Commodore
Perry (FGIC Insd).............................. 5.400% 12/01/23 $ 882,522
------------
11,572,730
------------
OKLAHOMA 1.1%
2,750 Shawnee, OK Hosp Auth Hosp Rev MidAmerica
Hlthcare Inc Rfdg.............................. 6.125 10/01/14 2,861,045
------------
PENNSYLVANIA 10.2%
1,000 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt USX Corp Proj Rfdg.......... 6.100 07/15/20 1,048,800
3,000 Delaware Cnty, PA Auth Hlth Care Rev Mercy Hlth
Corp Southeastn Ser B (Prerefunded @
11/15/05)...................................... 6.000 11/15/07 3,266,010
6,000 Pennsylvania Intergovtl Coop Auth Spl Tax Rev
City of Philadelphia Fdg Pgm (FGIC Insd)....... 5.350 06/15/07 6,178,200
10,000 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC
Insd).......................................... 5.400 07/01/09 10,229,900
4,325 Philadelphia, PA Hosps & Higher Edl Auth Fac
Hosp Rev....................................... 6.350 07/01/07 4,678,785
------------
25,401,695
------------
TENNESSEE 1.0%
2,485 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev Edl
Fac Christian Brother Rfdg..................... 5.750 09/01/16 2,523,517
------------
TEXAS 4.2%
3,000 Harris Cnty, TX Toll Road Sr Lien Rfdg (AMBAC
Insd).......................................... 4.950 08/15/06 3,077,760
2,000 Houston, TX Arpt Sys Rev Spl Fac Continental
Airls.......................................... 6.125 07/15/17 2,087,700
2,490 San Antonio, TX Arpt Sys Rev Rfdg (AMBAC
Insd).......................................... 7.375 07/01/13 2,833,944
1,750 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized).......................... 8.400 01/01/21 1,821,960
2,090 Wylie, TX Indpt Sch Dist Cap Apprec Rfdg (PSF
Gtd)........................................... * 08/15/20 614,146
------------
10,435,510
------------
UTAH 3.3%
3,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B
Rfdg (MBIA Insd)............................... 5.750 07/01/19 3,133,050
3,000 Salt Lake City, UT Arpt Rev Delta Airls Inc
Proj........................................... 7.900 06/01/17 3,161,790
1,800 Utah St Hsg Fin Agy Single Family Mtg Sr Ser
D2............................................. 6.850 07/01/25 1,901,088
------------
8,195,928
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <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 $ 904,609
3,380 Washington St Pub Pwr Supply Sys Nuclear Proj
No 3 Rev Ser C Rfdg (MBIA Insd)................ * 07/01/15 1,331,517
3,000 Washington St Ser B............................ 5.500% 05/01/18 3,149,370
------------
5,385,496
------------
TOTAL INVESTMENTS 99.2%
(Cost $227,928,826)......................................................... 248,015,812
OTHER ASSETS IN EXCESS OF LIABILITIES 0.8%................................... 2,107,274
------------
NET ASSETS 100.0%............................................................ $250,123,086
============
</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
13
<PAGE> 15
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $227,928,826)....................... $248,015,812
Cash........................................................ 70,767
Receivables:
Interest.................................................. 4,638,786
Investments Sold.......................................... 156,299
Other....................................................... 3,426
------------
Total Assets.......................................... 252,885,090
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,187,730
Income Distributions--Common and Preferred Shares......... 180,493
Investment Advisory Fee................................... 134,569
Administrative Fee........................................ 31,055
Affiliates................................................ 10,006
Trustees' Deferred Compensation and Retirement Plans........ 81,510
Options at Market Value (Net premiums received of
$48,386).................................................. 68,750
Accrued Expenses............................................ 67,891
------------
Total Liabilities..................................... 2,762,004
------------
NET ASSETS.................................................. $250,123,086
============
NET ASSETS CONSIST OF:
Preferred Shares ($.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................................. 20,066,622
Accumulated Undistributed Net Investment Income............. 702,459
Accumulated Net Realized Loss............................... (14,921,345)
------------
Net Assets Applicable to Common Shares................ 155,123,086
------------
NET ASSETS.................................................. $250,123,086
============
NET ASSET VALUE PER COMMON SHARE ($155,123,086 divided
by 10,806,700 shares outstanding)......................... $ 14.35
============
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 7,146,514
-----------
EXPENSES:
Investment Advisory Fee..................................... 813,446
Administrative Fee.......................................... 187,718
Preferred Share Maintenance................................. 128,199
Trustees' Fees and Expenses................................. 13,211
Custody..................................................... 7,845
Legal....................................................... 5,383
Amortization of Organizational Costs........................ 1,789
Other....................................................... 95,349
-----------
Total Expenses.......................................... 1,252,940
-----------
NET INVESTMENT INCOME....................................... $ 5,893,574
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 544,433
Options................................................... 66,278
Futures................................................... (6,302)
-----------
Net Realized Gain........................................... 604,409
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 20,631,407
-----------
End of the Period:
Investments............................................. 20,086,986
Options................................................. (20,364)
-----------
20,066,622
-----------
Net Unrealized Depreciation During the Period............... (564,785)
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 39,624
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 5,933,198
===========
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1998
and the Year Ended October 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1998 October 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 5,893,574 $ 11,846,255
Net Realized Gain....................................... 604,409 601,101
Net Unrealized Appreciation/Depreciation During the
Period................................................ (564,785) 6,699,050
------------ ------------
Change in Net Assets from Operations.................... 5,933,198 19,146,406
------------ ------------
Distributions from Net Investment Income:
Common Shares......................................... (4,214,281) (8,428,596)
Preferred Shares...................................... (1,694,157) (3,331,038)
------------ ------------
Total Distributions..................................... (5,908,438) (11,759,634)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... 24,760 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 $702,459 and $717,323,
respectively)......................................... $250,123,086 $250,098,326
============ ============
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
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
(Commencement
Six Months Year Ended October 31, of Investment
Ended ------------------------------------- Operations) to
April 30, 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........... .545 1.096 1.116 1.147 1.181 .803
Net Realized and Unrealized
Gain/Loss..................... .004 .675 (.065) 1.507 (2.927) 1.329
------- ------- ------- ------- ------- -------
Total from Investment
Operations...................... .549 1.771 1.051 2.654 (1.746) 2.132
------- ------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income:
Paid to Common Shareholders... .390 .780 .790 .874 .938 .547
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders...... .157 .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.............. .547 1.088 1.104 1.216 1.223 .687
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.......................... $14.354 $14.352 $13.669 $13.722 $12.284 $15.253
======= ======= ======= ======= ======= =======
Market Price Per Share at End of
the Period...................... $13.125 $12.750 $11.750 $11.875 $10.750 $14.625
Total Investment Return at Market
Price (b)....................... 5.99%* 15.55% 5.69% 18.79% (20.83%) 8.26%*
Total Return at Net Asset
Value (c)....................... 2.71%* 11.01% 5.58% 19.39% (13.59%) 12.82%*
Net Assets at End of the Period
(In millions)................... $250.1 $250.1 $242.7 $243.3 $227.7 $259.8
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares**........................ 1.61% 1.65% 1.67% 1.77% 1.61% 1.49%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d)............... 5.38% 5.67% 5.91% 6.14% 6.76% 5.97%
Portfolio Turnover............... 9%* 23% 24% 75% 165% 114%*
* Non-Annualized
** Ratio of Expenses to Average
Net Assets including Preferred
Shares......................... 1.00% 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
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
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 American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
the Trust's 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, 1997, the Trust had an accumulated capital loss
carryforward for tax purposes of $15,498,839 which will expire between October
31, 2002 and October 31, 2004.
At April 30, 1998, for federal income tax purposes, cost of long-term
investments is $227,928,826; the aggregate gross unrealized appreciation is
$20,205,130 and the aggregate gross unrealized depreciation is $138,508,
resulting in net unrealized appreciation including open option transactions of
$20,066,622.
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.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
American Capital 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 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.
For the six months ended April 30, 1998, the Trust recognized expenses of
approximately $1,800, 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.
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
For the six months ended April 30, 1998, the Trust recognized expenses of
approximately $36,500 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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is $2,500.
At April 30, 1998, VKAC owned 6,700 common shares of the Trust.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $22,076,513 and $23,625,048,
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 specified period. These contracts are generally used by the Trust
to manage the portfolio's effective maturity and duration.
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Transactions in options for the six months ended April 30, 1998, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1997................... 150 $ 43,321
Options Written and Purchased (Net)............... 400 79,585
Options Terminated in Closing Transactions
(Net)........................................... (150) (43,321)
Options Expired (Net)............................. (200) (31,199)
------ --------
Outstanding at April 30, 1998..................... 200 $ 48,386
====== ========
</TABLE>
The related futures contracts of the outstanding option transactions as of
April 30, 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
June 1998--Written Puts
(Current notional value of
$121,063 per contract)............ 200 Jun/118 $(68,750)
=== ========
</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 for the six months ended April 30, 1998,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1997............................ -0-
Futures Opened............................................. 100
Futures Closed............................................. (100)
----
Outstanding at April 30, 1998.............................. -0-
====
</TABLE>
C. EMBEDDED CAPS--These securities, which are identified in the portfolio of
investments, include 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
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
rises above the strike level. The price of these securities may be more volatile
than the price of a comparable fixed rate security. 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.
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, 1998, the average rate in effect
was 3.586%. During the six months ended April 30, 1998, the rates ranged from
3.390% 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.
22
<PAGE> 24
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 American Capital
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
23
<PAGE> 25
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
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 American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a 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.VKAC.COM and selecting Investors' Place
24
<PAGE> 26
VAN KAMPEN AMERICAN CAPITAL 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
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
Vice President
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 (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 American Capital Distributors, Inc., 1998
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
25
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<NAME> STRAT SECT
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
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