<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
TWELVE-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGER 7
GLOSSARY OF TERMS 11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 12
FINANCIAL STATEMENTS 21
NOTES TO FINANCIAL STATEMENTS 26
REPORT OF INDEPENDENT AUDITORS 29
DIVIDEND REINVESTMENT PLAN 30
TRUST OFFICERS AND IMPORTANT ADDRESSES 32
RESULTS OF SHAREHOLDER VOTES 33
</TABLE>
Our generations
of money-
management
experience
may help you
pursue life's
true wealth.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
November 20, 2000
Dear Shareholder,
The first three quarters of 2000 proved to be especially volatile, with all of
the major markets declining in the spring and spending the following months
trying to recover. To manage one's portfolio during such unpredictable times
requires investment-management experience, and the following pages should give
you some insight into how we have performed in this difficult environment.
In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your trust during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the trust's largest
investments, and you can examine the complete portfolio to see all of your
trust's holdings as of the end of your trust's reporting period.
At Van Kampen, we place a high priority on providing you and
your financial advisor with the information you need to help
you monitor your investments during all types of markets. With
nearly four generations of investment-management experience,
we've been around long enough to understand that by investing
with Van Kampen you're entrusting us with much more than your
money. Your investments may help make it possible to afford your next house,
keep up with rising college costs, or enjoy a comfortable retirement.
No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH REMAINED RELATIVELY STRONG DURING THE REPORTING PERIOD,
UNDERPINNED BY LOW UNEMPLOYMENT AND RISING PRODUCTIVITY, YET THERE WERE SIGNS
THAT A HEALTHY SLOWDOWN WAS UNDERWAY. GROSS DOMESTIC PRODUCT, THE PRIMARY
MEASURE OF ECONOMIC GROWTH, INCREASED AT A 2.4 PERCENT ANNUALIZED RATE FOR THE
THIRD QUARTER OF 2000. FOLLOWING RELATIVELY MILD FIRST- AND SECOND-QUARTER DATA,
THIS THIRD-QUARTER FIGURE OFFERS FURTHER EVIDENCE THAT GROWTH MIGHT BE SETTLING
BACK TO A MORE MODERATE AND SUSTAINABLE PACE THAN ITS RAPID RATE IN LATE 1999.
CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT INFLATION REMAINED AT BAY DUE IN PART TO A GRADUAL SLOWDOWN IN
CONSUMER SPENDING. RISING INTEREST RATES, HIGHER ENERGY COSTS, AND A
DISAPPOINTING STOCK MARKET BEGAN TO TEMPER RETAIL SALES, WHICH LEVELED OFF FROM
THE BLISTERING PACE OF LATE 1999 AND EARLY 2000. AND WHILE CONSUMER SPENDING WAS
BRISK, THE OVERALL TREND HAS BEEN DOWNWARD THIS YEAR.
THE JOBLESS RATE CONTINUED TO BE EXTREMELY LOW BY HISTORICAL STANDARDS, BUT A
RECENT DECLINE IN NEW JOB CREATION SUPPORTS THE POPULAR BELIEF THAT THE ECONOMY
IS MODERATING. ALTHOUGH EMPLOYER COSTS SUCH AS WAGES AND BENEFITS WERE RISING AT
THE END OF 1999 AND THE BEGINNING OF 2000, OVER THE PAST SIX MONTHS THE
EMPLOYMENT COST INDEX HAS SHOWN MARKED DECELERATION, WHICH SHOULD HELP EASE
INFLATION CONCERNS.
INTEREST RATES AND INFLATION
THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES FOUR TIMES DURING THE
LAST 12 MONTHS IN AN EFFORT TO WARD OFF INFLATION BY CURBING ECONOMIC GROWTH.
OVER THE SAME PERIOD, THE CONSUMER PRICE INDEX ROSE 3.5 PERCENT, WHICH INDICATED
THAT INFLATION GENERALLY REMAINS UNDER CONTROL.
THE FED HAS ACKNOWLEDGED THE RISK OF RISING INFLATION AND WILL STAY ON GUARD, AS
RISING ENERGY COSTS AND LOW UNEMPLOYMENT THREATEN TO PROPEL THIS FIGURE UPWARD
IN THE COMING MONTHS. AS LONG AS INFLATION IS CONTAINED AND THE PACE OF ECONOMIC
GROWTH REMAINS FAVORABLE, THE FED IS LIKELY TO HOLD INTEREST RATES STEADY IN THE
SHORT TERM, WHICH COULD HELP STABILIZE THE STOCK AND BOND MARKETS.
2
<PAGE> 4
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. GROSS DOMESTIC PRODUCT
---------------------------
<S> <C>
Sep 98 3.80
Dec 98 5.90
Mar 99 3.50
Jun 99 2.50
Sep 99 5.70
Dec 99 8.30
Mar 00 4.80
Jun 00 5.60
Sep 00 2.40
</TABLE>
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(October 31, 1998--October 31, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
6.50 3.10
6.50 3.70
Jul 00 6.50 3.70
6.50 3.30
6.50 3.50
Oct 00 6.50 3.50
</TABLE>
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
<PAGE> 5
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of October 31, 2000)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C>
NYSE Ticker Symbol VKS
-----------------------------------------------------------------------
One-year total return based on market price(1) 3.37%
-----------------------------------------------------------------------
One-year total return based on NAV(2) 10.41%
-----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 6.19%
-----------------------------------------------------------------------
Taxable-equivalent distribution rate as a % of closing
common stock price(4) 9.67%
-----------------------------------------------------------------------
Net asset value $13.70
-----------------------------------------------------------------------
Closing common stock price $11.2500
-----------------------------------------------------------------------
One-year high common stock price (08/16/00) $12.3750
-----------------------------------------------------------------------
One-year low common stock price (03/13/00) $10.3750
-----------------------------------------------------------------------
Preferred share (Series A) rate(5) 4.000%
-----------------------------------------------------------------------
Preferred share (Series B) rate(5) 4.110%
-----------------------------------------------------------------------
</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 rate.
(5) See "Notes to Financial Statements" footnote #4, 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 is no guarantee of 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.
4
<PAGE> 6
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
<TABLE>
<CAPTION>
As of October 31, 2000
<S> <C> <C>
- AAA/Aaa............ 67.3%
- AA/Aa.............. 7.0%
- A/A................ 5.4%
- BBB/Baa............ 16.9%
- BB/Ba.............. 3.4%
[PIE CHART]
<CAPTION>
As of October 31, 1999
<S> <C> <C>
- AAA/Aaa............ 62.3%
- AA/Aa.............. 8.1%
- A/A................ 5.4%
- BBB/Baa............ 19.1%
- BB/Ba.............. 3.0%
- Non-Rated.......... 2.1%
[PIE CHART]
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
TWELVE-MONTH DIVIDEND HISTORY
(for the period ended October 31, 2000, for common shares)
[BAR GRAPH]
<TABLE>
<CAPTION>
DIVIDENDS
---------
<S> <C>
11/99 0.065
12/99 0.065
1/00 0.065
2/00 0.065
3/00 0.065
4/00 0.065
5/00 0.065
6/00 0.063
7/00 0.063
8/00 0.063
9/00 0.058
10/00 0.058
</TABLE>
The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.
5
<PAGE> 7
TOP FIVE SECTORS
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
Health Care 20.6 21.8
General Purpose 12.8 18.3
Retail Electric/Gas/Telephone 9.8 9
Industrial Revenue 9.2 9.8
Public Education 8.2 8
</TABLE>
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--January 1993 through October 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICE
--------------- ------------
<S> <C> <C>
1/93 13.9600 15.1250
14.1600 14.2500
14.7200 14.5000
15.3100 14.7500
12/93 15.1100 14.2500
13.3400 12.6250
13.2200 12.3750
12.9500 11.6250
12/94 12.2600 10.8750
13.4700 12.2500
13.3300 11.6250
13.5400 11.6250
12/95 14.0700 12.0000
13.4300 11.8750
13.2300 11.6250
13.5500 11.7500
12/96 13.7800 11.8250
13.4500 11.3750
13.9300 12.5620
14.3200 12.9375
12/97 14.6200 13.1250
14.5800 13.1875
14.6000 13.3125
14.9800 13.8750
12/98 14.7500 13.9375
14.6400 13.6875
13.9500 13.0000
13.4700 11.6250
12/99 12.9900 11.6875
13.3300 11.1875
13.2900 11.3750
13.5600 11.5625
10/00 13.7000 11.2500
</TABLE>
The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
6
<PAGE> 8
[PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGER
WE RECENTLY SPOKE WITH THE PORTFOLIO MANAGER OF THE VAN KAMPEN STRATEGIC
SECTOR MUNICIPAL TRUST ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED
THE MARKETS AND INFLUENCED THE TRUST'S RETURN DURING THE 12 MONTHS ENDED OCTOBER
31, 2000. TIMOTHY D. HANEY, PORTFOLIO MANAGER, HAS MANAGED THE TRUST SINCE 1996
AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE FOLLOWING DISCUSSION
REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q WHAT WERE THE MOST IMPORTANT
DEVELOPMENTS IN THE FIXED-INCOME MARKETS AND HOW DID THE TRUST PERFORM
DURING THE REPORTING PERIOD?
A The key factor in the market's
behavior during the past fiscal year has been generally rising interest rates,
especially at the short end of the maturity spectrum. This rate environment
stemmed from the Federal Reserve Board's commitment to keeping inflation in
check by ratcheting up short-term interest rates whenever the economy threatened
to overheat and push the prices of goods and services higher. In fact, the Fed
increased short-term rates four times during the reporting period, with the last
hike occurring in May 2000.
The strength of the economy, and the accompanying Federal Reserve activity,
caused interest rates to rise across the board for the first half of the
reporting period. In the spring of 2000, the bond market rallied as investors
began to anticipate an end to the Fed's rate-tightening cycle. By the end of
October, short-term rates remained high, but rates in the intermediate to long
maturity segments of the market had actually declined from the levels we had
seen at the start of the reporting period.
Because the trust is leveraged, higher short-term rates placed pressure on
the trust's dividend, as the increased cost of borrowing cut into the fund's
earnings. However, the relatively high long-term rates that prevailed for part
of the reporting period allowed the trust to add new holdings at attractive
yields, partially offsetting the decline in income that occurred as short-term
rates climbed.
After the steady increase in short-term interest rates over the past year,
we have seen a more stable environment in recent months, as the Fed has reacted
to slower economic growth, more efficient workforce output, and moderate price
gains by keeping target lending rates unchanged. The inflation rate, as measured
by the consumer price index, peaked in March 2000 at 3.8 percent and has since
dropped back below the 3 percent level.
7
<PAGE> 9
Supply in the municipal bond market was sharply lower from the levels of a
year ago, as higher interest rates have made it unattractive for municipalities
to retire existing debt. At the same time, strong economic activity has allowed
many municipalities to generate a budget surplus, enabling them to cover
spending that would normally require municipal bond financing.
Because demand has remained strong, the lack of new issuance in the primary
market helped support bond prices, although the somewhat limited selection of
available securities required us to be very selective in choosing new bonds for
the trust's portfolio. In many cases, we found attractive values in the
secondary market, buying and selling bonds that have been in the market for a
while.
The trust continued to provide shareholders with an attractive dividend,
even though the dividend was decreased slightly during the reporting period,
once in June and once in September. Its monthly dividend of $0.058 per share
translates to a distribution rate of 6.19 percent based on the trust's closing
market price on October 31, 2000. Because income from the trust is exempt from
federal income taxes, this distribution rate is equivalent to a yield of 9.67
percent for an investor in the 36 percent federal income tax bracket.
For the 12 months through October 31, 2000, the trust produced a total
return of 3.37 percent based on market price. At the same time, the trust's
market price decreased from $11.6250 per share on October 31, 1999, to $11.2500
per share on October 31, 2000. Of course, past performance is no guarantee of
future results. As a result of recent market activity, current performance may
vary from the figures shown. By comparison, the Lehman Brothers Municipal Bond
Index posted a total return of 8.51 percent for the same period. This
broad-based, unmanaged index, which reflects the general performance of
municipal securities, does not reflect any commissions or fees that would be
paid by an investor purchasing the securities it represents. Such costs would
lower the performance of the index. It is not possible to invest directly in an
index. For additional performance results, please refer to the chart and
footnotes on page 4.
Q HOW DID YOU REACT TO THE
MARKET CONDITIONS YOU ENCOUNTERED IN MANAGING THE TRUST?
A Much of the activity in the trust's
portfolio during the reporting period was guided by a strategic direction we
adopted in February of 2000 and had largely implemented by the end of March. It
was our goal to lengthen the duration of the portfolio (a measure of its
sensitivity to changes in interest rates) so that it more closely mirrored the
benchmark indicators we use to gauge the trust's performance. At the time, we
felt the market had solid upside potential, and a longer duration would allow
the trust to more fully participate in the gains of the market if it rallied
over time.
As we began implementing this strategy, we caught the market at a good time.
Early in the year, the market presented us with attractive
8
<PAGE> 10
yields on long-duration securities, particularly those priced at deep discounts.
We purchased some of these bonds and sold prerefunded securities and bonds with
short calls--many of which were scheduled to be called or refunded within the
next year or two. In effect, this strategy helped us capture added par value and
the potential for capital appreciation, all while achieving the desired effect
of extending the portfolio's duration. This strategy was a positive in terms of
the trust's performance, especially during the market rally that occurred in the
second and third quarters of 2000.
Q HOW DID THIS STRATEGY AFFECT THE
COMPOSITION OF THE PORTFOLIO?
A A by-product of this market
activity--and the trust's positioning within the market--was an increase in the
overall credit quality of the portfolio. The rallies were strongest at the high
end of the quality spectrum, so these securities saw solid price gains while the
valuations of nonrated and lower-rated securities, such as those rated BBB or
lower, remained fairly flat or decreased.
Over the course of the reporting period, the portfolio composition came to
reflect this trend, as the trust's AAA allocation increased by 5 percent (up to
67.3 percent of total long-term investments), and its BBB allocation declined by
2.2 percent (down to 16.9 percent). In general, our bias toward high-quality
securities was a boost to portfolio performance.
Still, we did some buying and selling within the BBB rating category, taking
advantage of the wide yield spreads on selected health-care and industrial
revenue bonds, and we added an electric power bond that was rated BB at the time
of investment. Some of the lower-rated securities we added were of very short
maturities, providing what we believed to be favorable risk/reward potential.
In this trust, we have tended to hold a significant amount of lower-rated,
higher-yielding securities, though we've had a bias toward the shorter
maturities in this quality sector. Also, we have typically kept the portfolio
widely diversified by industry sector and issuer to help spread risk over a
broad base of assets.
Q YOU MENTIONED THAT THE TRUST'S
DIVIDEND WAS REDUCED DURING THE REPORTING PERIOD. CAN YOU EXPLAIN WHY?
A A combination of factors made it
necessary to cut the trust's dividend in June 2000 and in September 2000. First,
as a leveraged portfolio, the trust must pay interest on money borrowed at
short-term rates, while investing these funds in longer-term securities. As
short-term rates rose more significantly than longer-term rates, the cost of
this leverage increased during the reporting period and reduced the trust's
income stream.
Second, as we took advantage of higher rates in long-maturity bonds, we
tended to sell older, higher-yielding bonds that had strengthened the trust's
income stream but were susceptible to being called out of the portfolio in the
near future. Essentially, we exchanged their near-term contribution to the
trust's income for an improvement in
9
<PAGE> 11
the portfolio's overall structure and long-term income potential.
Q WHAT DO YOU SEE AHEAD
FOR THE ECONOMY AND THE MUNICIPAL MARKET?
A The outlook for the municipal
bond market will be closely tied to the prospects of the U.S. economy and the
Fed's reaction to key economic indicators. While interest rates have been fairly
steady of late, the Fed's next move will be based on whether inflation shows
signs of heating up. We believe inflation appears to be under control at this
time, but the Fed will be watching economic growth statistics, the labor market,
and the prices of key commodities, such as crude oil, for signs of inflationary
pressures.
Clearly, the direction of interest rates will be determined by the Fed's
reaction to inflationary signals, so we feel it would be imprudent to make a bet
on the direction of interest rates in terms of how we position the trust.
Consequently, we will seek to maintain a neutral stance with respect to the
portfolio's duration in the near term.
We believe the demand for municipal securities should remain healthy. This
will hopefully bode well for the trust, although it will be competing with a
range of investment options, such as individual bonds, mutual funds, and managed
accounts, for investor assets. Also, the stock market may continue to attract
assets away from bonds, depending on its return prospects and price volatility.
We believe bond supply should remain tight, helping to support prices, as
municipalities continue to operate with budget surpluses that can be used for
construction projects, education funding, road improvements, and other
expenditures typically financed by new bond issuance.
We will continue to search for securities that have the potential to enhance
the trust's long-term performance. If our analysis indicates that it would be
advantageous to sell certain bonds--or as bonds are prerefunded, mature
according to schedule, or are called from the portfolio--we will strive to
replace them with bonds that offer the best relative value available at the
time.
10
<PAGE> 12
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CALL FEATURE: Allows a bond issuer to buy back a bond on specific dates at set
prices before the bond's maturity date. 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.
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 its price. Typically, funds with shorter durations perform better
in rising-rate environments, while funds with longer durations perform better
when rates decline.
MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1999
and maturing in 2009 is a 10-year bond. Typically, short-term bonds mature in
five years or less, intermediate-term bonds mature in five to ten years, and
long-term bonds mature after ten years.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding 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.
SECONDARY MARKET: A market where securities are traded after they are initially
offered.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit 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.
11
<PAGE> 13
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
October 31, 2000
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 97.6%
ALABAMA 2.0%
$5,000 Alabama Wtr Pollutn Ctl Auth Revolving Fd
Ln Ser A (AMBAC Insd)...................... 5.000% 08/15/15 $ 4,849,650
------------
ARIZONA 0.8%
2,000 Maricopa Cnty, AZ Pollutn Ctl Rfdg (Var
Rate Cpn).................................. 6.150 12/01/14 2,001,500
------------
CALIFORNIA 17.2%
3,330 Anaheim, CA Ctfs Partn Anaheim Mem Hosp
Assn Rfdg (AMBAC Insd)..................... 5.000 05/15/13 3,387,076
19,900 Anaheim, CA Pub Fin Auth Lease Rev Cap
Apprec Sub Pub Impt Proj C (FSA Insd)...... * 09/01/25 4,922,464
5,000 Anaheim, CA Pub Fin Auth Lease Rev Cap
Apprec Sub Pub Impt Proj C (FSA Insd)...... * 09/01/26 1,166,200
2,500 California Hlth Fac Fin Auth Rev Kaiser
Permanente Med Cent........................ 5.450 10/01/13 2,508,550
6,420 California Pollutn Ctl Fin Auth Pollutn Ctl
Rev Pacific Gas & Elec Co Ser B (MBIA
Insd)...................................... 6.350 06/01/09 6,769,120
775 California Rural Home Mtg Fin Auth Single
Family Mtg Rev Ser C (GNMA
Collateralized)............................ 7.800 02/01/28 864,373
10,000 California Statewide Cmntys Dev Auth Rev
Ctfs Partn Insd Children's Hosp Rfdg (MBIA
Insd)...................................... 4.750 06/01/21 8,996,900
5,000 Foothill/Eastern Corridor Agy CA Toll Rd
Rev Conv Cap Apprec Rfdg (c)............... 0/5.800 01/15/20 2,843,650
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$2,000 Los Angeles Cnty, CA Pub Wks (FSA Insd).... 5.500% 10/01/18 $ 2,094,340
1,800 Paramount, CA Redev Agy Tax Alloc Redev
Proj Area No 1 Rfdg (MBIA Insd)............ 6.250 08/01/23 1,883,898
3,750 San Diego, CA Convention Cent Expansion Fin
Auth Lease Rev Ser A (AMBAC Insd).......... 4.750 04/01/28 3,332,212
13,880 San Joaquin Hills, CA Tran Corridor Agy
Toll Rd Rev Cap Apprec Ser A Rfdg (MBIA
Insd)...................................... * 01/15/28 2,980,730
------------
41,749,513
------------
COLORADO 2.1%
1,000 Arapahoe Cnty, CO Cap Impt Trust Fd Hwy Rev
E-470 Proj Ser B (Prerefunded @
08/31/05).................................. 7.000 08/31/26 1,129,520
1,875 Colorado Hsg Fin Auth Multi-Family Hsg Insd
Mtg Ser A.................................. 6.800 10/01/37 1,943,700
980 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser C1..................................... 7.550 11/01/27 1,025,854
1,000 Colorado Hsg Fin Auth Single Family Pgm Sr
Ser F...................................... 8.625 06/01/25 1,074,470
------------
5,173,544
------------
CONNECTICUT 1.3%
1,500 Mashantucket Western Pequot Tribe CT Spl
Rev Ser A, 144A - Private Placement (d).... 6.400 09/01/11 1,577,055
1,500 Mashantucket Western Pequot Tribe CT Spl
Rev Ser A, 144A - Private Placement
(Prerefunded @ 09/01/07) (d)............... 6.400 09/01/11 1,669,425
------------
3,246,480
------------
FLORIDA 1.5%
4,000 South Miami, FL Hlth Fac Auth Hosp Rev
Baptist Hlth Sys Oblig Grp (MBIA Insd)..... 5.000 11/15/28 3,589,720
------------
GEORGIA 1.5%
1,425 Georgia Muni Elec Auth Pwr Rev Ser A Rfdg
(FGIC Insd)................................ 5.500 01/01/12 1,484,679
2,000 Georgia Muni Elec Auth Pwr Rev Ser Z Rfdg
(FGIC Insd)................................ 5.500 01/01/12 2,083,760
------------
3,568,439
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
ILLINOIS 7.9%
$2,060 Alton, IL Hosp Fac Rev Saint Anthony's Hlth
Cent Rfdg.................................. 5.875% 09/01/06 $ 2,017,111
5,000 Chicago, IL Brd of Ed Cap Apprec Sch Reform
Ser A (FGIC Insd).......................... * 12/01/27 1,027,900
5,500 Chicago, IL Brd of Ed Cap Apprec Sch Reform
Ser B-1 (FGIC Insd)........................ * 12/01/28 1,061,335
2,000 Chicago, IL Brd of Ed Chicago Sch Reform
Ser A (AMBAC Insd)......................... 5.250 12/01/30 1,877,940
4,335 Chicago, IL Cap Apprec City Colleges (FGIC
Insd)...................................... * 01/01/30 801,932
4,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
American Airls Inc Proj Ser A.............. 7.875 11/01/25 4,595,130
2,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Proj Ser B.................... 5.200 04/01/11 1,817,460
2,000 Chicago, IL Wtr Rev (FGIC Insd)............ 5.250 11/01/27 1,883,800
1,635 Cook Cnty, IL Sch Dist No 100 Berwyn South
Rfdg (FSA Insd)............................ 8.100 12/01/15 2,119,074
1,000 Illinois Hlth Facs Auth Rev Midwest
Physician Grp Ltd Rfdg..................... 5.500 11/15/19 802,380
3,000 Will Cnty, IL Fst Presv Dist Ser B (FGIC
Insd)...................................... * 12/01/16 1,241,040
------------
19,245,102
------------
INDIANA 1.0%
1,000 East Chicago, IN Solid Waste Disp Rev USG
Corp Proj.................................. 6.375 08/01/29 887,100
990 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg........................ 5.900 03/01/01 992,604
540 La Porte Cnty, IN Hosp Auth Hosp Fac Rev La
Porte Hosp Inc Rfdg........................ 6.000 03/01/02 545,670
------------
2,425,374
------------
IOWA 2.1%
5,000 Muscatine, IA Elec Rev Rfdg (AMBAC Insd)... 6.125 01/01/12 5,168,800
------------
KANSAS 2.1%
5,000 Burlington, KS Pollutn Ctl Rev KS Gas &
Elec Co Proj Rfdg (MBIA Insd).............. 7.000 06/01/31 5,160,300
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
LOUISIANA 1.7%
$1,000 New Orleans, LA Rfdg (FGIC Insd)........... 4.750% 12/01/26 $ 862,430
2,000 New Orleans, LA Rfdg (FGIC Insd)........... 5.500 12/01/21 2,001,140
1,250 Saint Charles Parish, LA Pollutn Ctl Rev LA
Pwr & Lt Co Proj (FSA Insd)................ 7.500 06/01/21 1,292,150
------------
4,155,720
------------
MARYLAND 5.7%
1,500 Maryland St Econ Dev Corp Student Hsg Rev
Allegany College Proj Ser A (ACA Insd)
(a)........................................ 5.750 09/01/20 1,459,245
6,325 Maryland St Hlth & Higher Edl Fac Auth Rev
Greater Baltimore Med Cent Rfdg (FGIC
Insd)...................................... 5.000 07/01/13 6,274,780
6,270 Maryland St Hlth & Higher Edl Fac Auth Rev
Subn Hosp Rfdg (AMBAC Insd)................ 5.000 07/01/13 6,220,216
------------
13,954,241
------------
MASSACHUSETTS 0.8%
1,705 Massachusetts St Hlth & Edl Fac Auth Rev
Vly Regl Hlth Sys Ser C (Connie Lee
Insd)...................................... 7.000 07/01/09 1,954,578
------------
MICHIGAN 4.8%
1,250 Avondale, MI Sch Dist Rfdg (AMBAC Insd).... 4.750 05/01/22 1,101,212
2,500 Detroit, MI Downtown Dev Auth Tax Increment
Rev Dev Area No 1 Proj Ser A Rfdg (MBIA
Insd)...................................... 4.750 07/01/25 2,188,800
2,745 Michigan Muni Bond Auth Rev St Revolving
Fd......................................... 5.400 10/01/14 2,774,948
2,000 Michigan St Hosp Fin Auth Rev Detroit Med
Cent Oblig Ser A........................... 5.250 08/15/28 1,420,440
1,500 Michigan St Hsg Dev Auth Multi-Family Rev
(Var Rate Cpn)............................. 6.250 08/01/39 1,477,050
3,000 Wayne Charter Cnty, MI Arpt Rev (MBIA
Insd)...................................... 5.000 12/01/28 2,655,900
------------
11,618,350
------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MISSISSIPPI 2.5%
$2,000 Mississippi Business Fin Corp MS Pollutn
Ctl Rev Sys Energy Res Inc Proj............ 5.875% 04/01/22 $ 1,841,300
1,990 Mississippi Home Corp Single Family Rev Mtg
Ser C (GNMA Collateralized)................ 7.600 06/01/29 2,232,581
785 Mississippi Home Corp Single Family Rev Mtg
Ser D (GNMA Collateralized)................ 8.100 12/01/24 847,886
990 Mississippi Home Corp Single Family Rev Mtg
Ser F (GNMA Collateralized)................ 7.550 12/01/27 1,080,298
------------
6,002,065
------------
MISSOURI 2.4%
250 Missouri St Hlth & Edl Fac Auth Hlth Fac
Rev........................................ 6.250 02/15/11 241,520
1,000 Missouri St Hlth & Edl Fac Auth Rev BJC
Hlth Sys................................... 5.000 05/15/28 873,050
700 Missouri St Hsg Dev Comm Mtg Rev Single
Family Ln Ser A (GNMA Collateralized)...... 7.200 09/01/26 739,886
2,585 St Louis, MO Arpt Rev...................... 6.000 01/01/05 2,611,367
1,625 West Plains, MO Indl Dev Auth Hosp Rev
Ozarks Med Ctr............................. 6.750 11/15/24 1,441,733
------------
5,907,556
------------
NEVADA 0.7%
1,565 Nevada Hsg Div Single Family Pgm Ser E (FHA
Gtd)....................................... 6.900 10/01/11 1,618,993
------------
NEW JERSEY 3.3%
2,000 New Jersey Econ Dev Auth Dist Heating &
Cooling Rev Trigen Trenton Ser A........... 6.200 12/01/10 1,964,660
2,000 New Jersey Econ Dev Auth Spl Facs Rev
Continental Airls Inc Proj................. 6.250 09/15/29 1,837,960
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 2,670,075
775 New Jersey Hlthcare Facs Fing Auth Rev
Trinitas Hosp Oblig Grp.................... 6.500 07/01/02 781,611
830 New Jersey Hlthcare Facs Fing Auth Rev
Trinitas Hosp Oblig Grp.................... 6.500 07/01/03 839,512
------------
8,093,818
------------
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
NEW YORK 11.5%
$3,000 Metropolitan Transn Auth NY Tran Facs Rev
Ser B (FGIC Insd).......................... 4.750% 07/01/26 $ 2,623,410
1,000 New York City Indl Dev Agy Civic Fac Rev
Touro College Proj Ser A................... 6.350 06/01/29 961,650
2,000 New York City Muni Wtr Fin Auth Wtr & Swr
Sys Rev Ser B (FGIC Insd).................. 5.250 06/15/29 1,891,060
5,000 New York City Ser B-1 (Prerefunded @
08/15/04).................................. 7.000 08/15/16 5,490,200
2,520 New York City Ser B-1 (Prerefunded @
08/15/04).................................. 7.250 08/15/19 2,788,808
5 New York City Ser C........................ 7.250 08/15/24 5,098
2,000 New York City Ser G........................ 5.750 02/01/14 2,049,180
3,820 New York St Dorm Auth Lease Rev Muni Hlth
Fac Impt Ser 1 (FSA Insd).................. 4.750 01/15/29 3,296,736
4,355 New York St Dorm Auth Rev Court Fac Lease
Ser A...................................... 5.500 05/15/10 4,430,864
4,350 Triborough Brdg & Tunl Auth NY Rev Genl
Purp Ser A Rfdg............................ 5.000 01/01/12 4,347,869
------------
27,884,875
------------
NORTH CAROLINA 0.3%
2,500 Univ of NC Chapel Hill Rev Util Sys Rfdg... * 08/01/20 838,250
------------
OHIO 3.8%
1,000 Akron, OH Ctfs Partn Akron Muni Baseball
Stadium Proj (c)........................... 0/6.500 12/01/07 982,700
1,000 Cuyahoga Cnty, OH Hosp Facs Rev Canton Inc
Proj....................................... 7.500 01/01/30 1,037,260
1,000 Delaware Cnty, OH Hlthcare Facs Rev Mtg
Centrum at Willow Brook (FHA Gtd).......... 6.550 02/01/35 1,047,480
2,045 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp
Rfdg....................................... 6.000 05/15/05 2,068,436
1,000 Miami Cnty, OH Hosp Fac Rev Upper Vly Med
Cent Ser C Rfdg & Impt..................... 6.000 05/15/06 996,760
2,950 Ohio Hsg Fin Agy Mtg Rev (GNMA
Collateralized)............................ 6.050 09/01/17 3,030,092
------------
9,162,728
------------
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
OKLAHOMA 0.4%
$1,000 Tulsa Cnty, OK Pub Facs Auth Cap Impt
Rev........................................ 6.250% 11/01/22 $ 1,011,990
------------
PENNSYLVANIA 10.5%
1,000 Carbon Cnty, PA Indl Dev Auth Panther Creek
Partners Proj Rfdg (LOC: Paribas).......... 6.650 05/01/10 1,017,950
2,635 Delaware Cnty, PA Auth Hlthcare Rev Mercy
Hlth Corp Southeastn Ser B (Prerefunded @
11/15/05).................................. 6.000 11/15/07 2,772,995
6,000 Pennsylvania Intergovtl Coop Auth Spl Tax
Rev City of Philadelphia Fdg Pgm
(Prerefunded @ 06/15/03) (FGIC Insd)....... 5.350 06/15/07 6,131,220
10,000 Pennsylvania St Ctfs Partn Ser A Rfdg
(AMBAC Insd)............................... 5.400 07/01/09 10,157,700
2,000 Philadelphia, PA Hosps & Higher Ed Facs
Auth Hosp Rev Rfdg......................... 6.350 07/01/07 2,166,740
2,500 Pittsburgh & Allegheny Cnty, PA Pub Aud
Regl Asset Dist Sales Tax (AMBAC Insd)..... 5.250 02/01/31 2,364,575
1,000 Southeastern, PA Transn Auth PA Spl Rev Ser
A (FGIC Insd).............................. 4.750 03/01/29 861,280
------------
25,472,460
------------
TENNESSEE 1.0%
1,000 Johnson City, TN Hlth & Edl Facs Brd Hosp
Rev First Mtg Mtn States Hlth Ser A Rfdg... 7.500 07/01/25 970,930
1,500 Metropolitan Govt Nashville & Davidson Cnty
TN Ser A (FGIC Insd)....................... 5.125 11/15/27 1,407,060
------------
2,377,990
------------
TEXAS 4.4%
3,000 Brazos River Auth TX Rev Houston Inds Inc
Proj Ser D Rfdg (MBIA Insd)................ 4.900 10/01/15 2,781,660
2,000 Dallas-Fort Worth, TX Intl Arpt Fac Impt
Corp Rev American Airls Ser A Rfdg (Var
Rate Cpn).................................. 5.950 05/01/29 2,012,520
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
YOUR TRUST'S INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$3,000 Harris Cnty, TX Toll Road Sr Lien Rfdg
(AMBAC Insd)............................... 4.950% 08/15/06 $ 3,047,310
2,000 Houston, TX Arpt Sys Rev Spl Fac
Continental Airls Ser B.................... 6.125 07/15/17 1,832,620
1,000 Matagorda Cnty, TX Navigation Dist 1
Houston Ltg Pwr Co (AMBAC Insd)............ 5.125 11/01/28 910,560
------------
10,584,670
------------
UTAH 1.6%
3,000 Salt Lake City, UT Arpt Rev Delta Airls Inc
Proj (b)................................... 7.900 06/01/17 3,030,420
735 Utah St Hsg Fin Agy Single Family Mtg Sr
Ser D-2 (FHA Gtd) (Var Rate Cpn)........... 6.850 07/01/25 749,259
------------
3,779,679
------------
WASHINGTON 2.7%
1,000 Grant Cnty, WA Pub Util Dist No 002 Wanapum
Hydro Elec Rev Ser B Rfdg (MBIA Insd)...... 5.375 01/01/18 963,780
2,030 Washington St Pub Pwr Supply Sys Nuclear
Proj No 3 Rev Ser C Rfdg (MBIA Insd)....... * 07/01/13 1,036,213
3,380 Washington St Pub Pwr Supply Sys Nuclear
Proj No 3 Rev Ser C Rfdg (MBIA Insd)....... * 07/01/15 1,520,831
3,000 Washington St Ser B........................ 5.500 05/01/18 3,059,280
------------
6,580,104
------------
TOTAL LONG-TERM INVESTMENTS 97.6%
(Cost $222,388,049)................................................... 237,176,489
SHORT-TERM INVESTMENTS 0.6%
(Cost $1,600,000)..................................................... 1,600,000
------------
TOTAL INVESTMENTS 98.2%
(Cost $223,988,049)................................................... 238,776,489
OTHER ASSETS IN EXCESS OF LIABILITIES 1.8%............................. 4,263,741
------------
NET ASSETS 100.0%...................................................... $243,040,230
============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
YOUR TRUST'S INVESTMENTS
October 31, 2000
* Zero coupon bond
(a) Securities purchased on a when-issued or delayed delivery basis.
(b) Assets segregated as collateral for when-issued or delayed delivery purchase
commitments.
(c) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(d) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
ACA--American Capital Access Insurance Company
AMBAC--AMBAC Indemnity Corporation
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Administration
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
20
<PAGE> 22
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $223,988,049)....................... $238,776,489
Cash........................................................ 46,404
Receivables:
Interest.................................................. 4,165,864
Investments Sold.......................................... 1,894,777
Other....................................................... 5,890
------------
Total Assets............................................ 244,889,424
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,455,707
Investment Advisory Fee................................... 134,828
Income Distributions--Preferred Shares.................... 37,527
Administrative Fee........................................ 20,872
Affiliates................................................ 7,444
Trustees' Deferred Compensation and Retirement Plans........ 119,921
Accrued Expenses............................................ 72,895
------------
Total Liabilities....................................... 1,849,194
------------
NET ASSETS.................................................. $243,040,230
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000
shares, 3,800 issued with liquidation preference of
$25,000 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................................. 14,788,440
Accumulated Undistributed Net Investment Income............. 280,354
Accumulated Net Realized Loss............................... (16,303,914)
------------
Net Assets Applicable to Common Shares.................. 148,040,230
------------
NET ASSETS.................................................. $243,040,230
============
NET ASSET VALUE PER COMMON SHARE ($148,040,230 divided by
10,806,700 shares outstanding)............................ $ 13.70
============
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
Statement of Operations
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $13,912,473
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,548,836
Administrative Fee.......................................... 337,207
Preferred Share Maintenance................................. 258,268
Custody..................................................... 19,958
Legal....................................................... 11,955
Trustees' Fees and Related Expenses......................... 23,987
Other....................................................... 175,434
-----------
Total Expenses.......................................... 2,375,645
-----------
NET INVESTMENT INCOME....................................... $11,536,828
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (477,188)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 7,709,516
End of the Period
Investments............................................. 14,788,440
-----------
Net Unrealized Appreciation During the Period............... 7,078,924
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 6,601,736
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $18,138,564
===========
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
Statement of Changes in Net Assets
For the Years Ended October 31, 2000 and 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 11,536,828 $ 11,526,684
Net Realized Loss................................... (477,188) (1,162,677)
Net Unrealized Appreciation/Depreciation During the
Period............................................ 7,078,924 (17,106,018)
------------ ------------
Change in Net Assets from Operations................ 18,138,564 (6,742,011)
------------ ------------
Distributions from Net Investment Income:
Common Shares..................................... (8,212,189) (8,428,611)
Preferred Shares.................................. (3,842,502) (3,036,827)
------------ ------------
Total Distributions................................. (12,054,691) (11,465,438)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES........................................ 6,083,873 (18,207,449)
NET ASSETS:
Beginning of the Period............................. 236,956,357 255,163,806
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $280,354
and $798,217, respectively)....................... $243,040,230 $236,956,357
============ ============
</TABLE>
See Notes to Financial Statements
23
<PAGE> 25
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
----------------------------------------
2000 1999 1998 1997
----------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD
(A)...................................... $ 13.14 $ 14.82 $ 14.35 $ 13.67
-------- -------- -------- -------
Net Investment Income.................... 1.07 1.07 1.09 1.10
Net Realized and Unrealized Gain/Loss.... .61 (1.69) .47 .67
-------- -------- -------- -------
Total from Investment Operations........... 1.68 (0.62) 1.56 1.77
-------- -------- -------- -------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders............ .76 .78 .78 .78
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders......................... .36 .28 .31 .31
Distributions from Net Realized Gain:
Paid to Common Shareholders............ -0- -0- -0- -0-
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders......................... -0- -0- -0- -0-
-------- -------- -------- -------
Total Distributions........................ 1.12 1.06 1.09 1.09
-------- -------- -------- -------
NET ASSET VALUE, END OF THE PERIOD......... $ 13.70 $ 13.14 $ 14.82 $ 14.35
======== ======== ======== =======
Market Price Per Share at End of the
Period................................... $11.2500 $ 11.625 $14.5625 $12.750
Total Investment Return at Market Price
(b)...................................... 3.37% -15.30% 20.97% 15.55%
Total Return at Net Asset Value (c)........ 10.41% -6.35% 8.91% 11.01%
Net Assets at End of the Period (In
millions)................................ $ 243.0 $ 237.0 $ 255.2 $ 250.1
Ratio of Expenses to Average Net Assets
Applicable to Common Shares**............ 1.66% 1.64% 1.62% 1.65%
Ratio of Net Investment Income to Average
Net Assets Applicable to Common Shares
(d)...................................... 5.38% 5.50% 5.35% 5.67%
Portfolio Turnover......................... 22% 39% 18% 23%
* Non-Annualized
** Ratio of Expenses to Average Net Assets
including Preferred Shares.............. 1.00% 1.01% 1.01% 1.01%
</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 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.
(c) 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.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
24
<PAGE> 26
<TABLE>
<CAPTION>
JANUARY 22, 1993
(COMMENCEMENT
YEAR ENDED OCTOBER 31, OF INVESTMENT
--------------------------------- OPERATIONS) TO
1996 1995 1994 OCTOBER 31, 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
$ 13.72 $ 12.28 $ 15.25 $ 13.81
------- ------- -------- -------
1.12 1.15 1.18 .80
(.07) 1.51 (2.93) 1.33
------- ------- -------- -------
1.05 2.66 (1.75) 2.13
------- ------- -------- -------
.79 .88 .94 .55
.31 .34 .24 .14
-0- -0- .03 -0-
-0- -0- .01 -0-
------- ------- -------- -------
1.10 1.22 1.22 .69
------- ------- -------- -------
$ 13.67 $ 13.72 $ 12.28 $ 15.25
======= ======= ======== =======
$11.750 $11.875 $ 10.750 $14.625
5.69% 18.79% -20.83% 8.26%*
5.58% 19.39% -13.59% 12.82%*
$ 242.7 $ 243.3 $ 227.7 $ 259.8
1.67% 1.77% 1.61% 1.49%
5.91% 6.14% 6.76% 5.97%
24% 75% 165% 114%*
1.01% 1.06% .99% 1.02%
</TABLE>
See Notes to Financial Statements
25
<PAGE> 27
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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 seek 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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services are valued at fair value
using 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, which approximates market value.
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 is amortized and original issue discount is accreted over the expected
life of each applicable security.
26
<PAGE> 28
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
D. 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, 2000, the Trust had an accumulated capital loss
carryforward for tax purposes of $16,303,897 which will expire between October
31, 2002 and October 31, 2008.
At October 31, 2000, for federal income tax purposes the cost of long- and
short-term investments is $223,988,049, the aggregate gross unrealized
appreciation is $16,759,890 and the aggregate gross unrealized depreciation is
$1,971,450, resulting in net unrealized appreciation on long- and short-term
investments of $14,788,440.
E. 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
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, between November 1, 1999 and August 31,
2000, the Trust paid a monthly administrative fee to Van Kampen Funds Inc. or
its affiliates' (collectively "Van Kampen"), the Trust's Administrator, at an
annual rate of .15% of the average net assets of the Trust. Effective September
1, 2000, the Trust reduced its monthly administrative fee from an annual rate of
.15% to .10% 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 year ended October 31, 2000, the Trust recognized expenses of
approximately $3,900, 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.
27
<PAGE> 29
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each Trust. For the year ended October
31, 2000, the Trust recognized expenses of approximately $26,800 representing
Van Kampen's cost of providing accounting and legal services to the Trust, which
are reported as part of other and legal expenses, respectively, in the statement
of operations.
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 $51,756,708 and $60,320,168,
respectively.
4. PREFERRED SHARES
The Trust has outstanding 3,800 Auction Preferred Shares ("APS") in two series.
Series A contains 2,000 shares while Series B contains 1,800 shares. Dividends
are cumulative and the dividend rate for both Series is currently reset every 28
days through an auction process. At October 31, 2000, the average rate in effect
was 4.052%. During the year ended October 31, 2000, the rates ranged from 3.380%
to 4.950%.
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 $25,000 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.
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<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
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, 2000, and the related statements of
operations, changes in net assets and the financial highlights for the year then
ended. 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
audit. The Trust's financial statements and financial highlights for the periods
ended prior to October 31, 2000 were audited by other auditors whose report,
dated December 6, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the Trust's
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
audit provides 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, 2000, the results of
its operations, the changes in its net assets and the financial highlights for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 6, 2000
29
<PAGE> 31
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
30
<PAGE> 32
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
31
<PAGE> 33
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN STRATEGIC SECTOR
MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Trust during its taxable year ended
October 31, 2000. The Trust designated 100% of the income distributions as a
tax-exempt income distribution. In January, 2001, the Trust will provide tax
information to shareholders for the 2000 calendar year.
(1) Independent auditors for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche
LLP to be the Trust's independent auditors.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"),
ceased being the Trust's independent accountants effective April 14, 2000.
The cessation of the client- auditor relationship between the Trust and KPMG
was based solely on a possible future business relationship by KPMG with an
affiliate of the Trust's investment adviser.
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
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<PAGE> 34
RESULTS OF
SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on June 21, 2000, where
shareholders voted on the election of trustees and the ratification of Deloitte
& Touche LLP as the independent auditors.
1) With regards to the election of the following trustees by the common
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
-----------------------------
IN FAVOR WITHHELD
<S> <C> <C>
David C. Arch.......................................... 9,623,011 233,419
Howard J Kerr.......................................... 9,625,303 231,127
</TABLE>
The other trustees of the Trust whose terms did not expire in 2000 were Rod
Dammeyer, Theodore A. Myers, Richard F. Powers, III, Hugo F. Sonnenschein and
Wayne W. Whalen.
2) With regards to the ratification of Deloitte & Touche LLP as independent
auditors for the Trust, 9,638,091 shares voted in favor of the proposal, 39,715
shares voted against, and 178,624 shares abstained.
33
