<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Letter to Shareholders ................ 1
Performance Results ................... 3
Portfolio of Investments ............. 4
Statement of Assets and Liabilities ... 7
Statement of Operations ............... 8
Statement of Changes in Net Assets .... 9
Financial Highlights ................. 10
Notes to Financial Statements ......... 11
Independent Auditors' Report .......... 16
Dividend Reinvestment Plan ............ 17
</TABLE>
Letter to Shareholders
November 22, 1995
Dear Shareholder:
The first ten months of 1995 have been very positive for most investors. Both
the fixed-income and equity markets have made considerable gains during the
period ended October 31, 1995.
This year serves as a reminder of just how quickly markets can move and how
difficult it can be to predict the timing of those movements. Moreover, this
year reinforces the importance of maintaining a long-term perspective and
reaffirms the principle that it is time---not timing---that leads to
investment success.
[PHOTO]
Dennis J. McDonnell and Don G. Powell
Economic Overview
Although the third quarter posted a stronger-than-expected annual gross
domestic product growth rate of 4.2 percent, the economy has slowed
significantly this year. This slowdown is due in large part to the Federal
Reserve Board's efforts to tighten monetary supply in 1994 -- a measure that
proved successful, as economic growth during the first half of 1995 was
substantially lower than its fourth quarter 1994 rate of 5.1 percent.
And, while other key economic data have shown mixed signs during recent months,
the general economic trends for the year continue to support a "soft landing"
scenario.
Comfortable with the economy's rate of growth and level of inflation, the Fed
reversed its trend of raising interest rates and lowered short-term rates by a
quarter percent on July 6. With slowing growth, interest rates declined and the
value of many fixed-income investments rose (bond yields and prices move in
opposite directions).
Performance Summary
The Trust produced a tax-exempt distribution of 6.70 percent <F3>, based
on the closing stock price of $10.75 per common share on October 31, 1995.
Because income from the Trust is exempt from federal income tax, it is
important to compare the Trust's distribution rate to an equivalent taxable
rate. For example, for investors in the 36 percent federal income tax
bracket, the Trust's distribution rate represents a yield equivalent to a
taxable investment earning 10.47 percent <F4>. In fact, many closed-end
municipal bond funds, such as your investment, are currently offering higher
yields (after taxes) over many income alternatives.
As the graph on the following page shows, the Trust's net asset value and
market price have made significant gains over the one-year period. The Trust's
closing stock price, for example, gained 11.5 percent from October 1994 to
October 1995. Moreover, we are pleased to report the Trust generated a one-year
total return at market price of 19.87 percent <F1>, which includes reinvestment
of dividends for the period ended October 31, 1995.
1 (Continued on page two)
Economic Outlook
We believe the Fed will move cautiously before it continues to lower
short-term rates, waiting for key indicators to show that the economy has truly
settled into a slow growth pattern. Although current economic data continues to
send mixed signals, we anticipate the economy will grow at an annual rate of 3
percent in the fourth quarter and inflation will run under 3 percent.
Based upon a generally modest growth and low inflation outlook, we believe the
outlook for fixed-income markets is positive. As interest rates fall in response
to a slowing economy, we believe yields on short term municipal bonds will
continue to move significantly lower than long-term municipal bonds. Lower
short-term rates typically translate into lower leveraging costs for the Trust,
which provides increased opportunities for higher earnings over time.
Additionally, a steepening of the municipal yield curve would likely increase
investor demand for long-term municipal bonds and help to boost market prices.
Long-term municipal bond prices will also benefit from the combination of low
supply of new municipal bond issues and increased demand driven by scheduled
bond maturities.
[GRAPH]
Trust Participates in Market Gains of '95
Market
Date NAV Price
31-Oct-94 11.51 9.625
30-Nov-94 11.01 10.000
31-Dec-94 11.44 9.875
31-Jan-95 11.86 10.500
28-Feb-95 12.36 11.250
31-Mar-95 12.42 11.125
30-Apr-95 12.29 11.125
31-May-95 12.76 10.625
30-Jun-95 12.37 10.750
31-Jul-95 12.47 10.625
31-Aug-95 12.61 10.750
30-Sep-95 12.61 10.500
31-Oct-95 12.83 10.750
Based on month-end prices
While there has been varied speculation about the impact of tax reform, no one
is certain about what will finally happen. Consequently, in the near term, the
municipal market may continue to experience periodic market fluctuations as
various proposals come to the forefront. However, in the long term, we believe
the municipal market will remain an attractive investment choice for investors
seeking high current income. We will continue to keep a close watch over any new
developments and evaluate the potential impact they may have on your investment
in the Trust.
Once again, thank you for your continued confidence in your investment with
Van Kampen American Capital and for the privilege of working with you in seeking
to reach your financial goals.
Sincerely,
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
2
<TABLE>
<CAPTION>
Performance Results for the Period Ended October 31, 1995
Van Kampen Merritt Select Sector Municipal Trust
(AMEX Ticker Symbol-VKL)
<S> <C>
Total Returns
One-year total return based on market price<F1>........................................ 19.87%
One-year total return based on NAV<F2>................................................. 18.75%
Distribution Rates
Distribution rate as a % of initial offer common stock price<F3>....................... 4.80%
Taxable-equivalent distribution rate as a % of initial offer common stock price<F4>.... 7.50%
Distribution rate as a % of closing common stock price<F3>............................. 6.70%
Taxable-equivalent distribution rate as a % of closing common stock price<F4>.......... 10.47%
Share Valuations
Net asset value........................................................................ $ 12.83
Closing common stock price............................................................. $ 10.750
One-year high common stock price (04/05/95)............................................ $ 11.625
One-year low common stock price (11/14/94)............................................. $ 9.000
Preferred share (Series A) rate<F5>.................................................... 3.900%
Preferred share (Series B) rate<F5>.................................................... 3.800%
<FN>
<F1> Total return based on market price assumes an investment at the market price at
the beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale of
all shares at the closing stock price at the end of the period indicated.
<F2> Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
<F3> Distribution rate represents the monthly annualized distributions of the Trust
at the end of the period and not the earnings of the Trust.
<F4> The taxable-equivalent distribution rate is calculated assuming a 36% federal
tax bracket.
<F5> See "Notes to Financial Statements" footnote #6, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject
to the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
</TABLE>
3
<TABLE>
<CAPTION>
Portfolio of Investments
October 31, 1995
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bonds
Alabama 2.1%
$ 2,000 Birmingham - Carraway, AL Spl Care Fac Fin Auth Rev
Carraway Methodist Hlth Sys Ser A (Connie Lee Insd)<F2>....... $ 5.875% 08/15/25 $1,985,880
----------
Alaska 1.4%
1,500 Alaska St Hsg Fin Corp Ser A Rfdg............................ 5.000 12/01/18 1,313,790
----------
California 13.5%
3,000 California Pollutn Ctl Fin Auth Pollutn Ctl Rev Pacific Gas &
Elec Co Ser B (MBIA Insd)<F3>................................. 5.850 12/01/23 2,961,120
1,500 California St Pub Wks Brd Lease Rev Dept Correction CA
St Prison Ser B Coalinga (MBIA Insd).......................... 5.375 12/01/19 1,435,545
4,500 Los Angeles Cnty, CA Metro Tran Auth Sales Tax Rev Ser A
Rfdg (FGIC Insd).............................................. 5.000 07/01/21 4,080,420
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease Rev Los Angeles
Intl Arpt (FSA Insd).......................................... 6.700 01/01/22 3,160,410
1,000 San Francisco, CA City & Cnty Arpts Comm Intl Arpt Rev 2nd
Ser Issue 8A (FGIC Insd)...................................... 6.250 05/01/20 1,032,880
----------
12,670,375
----------
Colorado 7.4%
2,920 Colorado Hsg FIn Auth Single Family Prog Sr Ser E............. 8.125 12/01/24 3,281,846
1,000 Denver, CO City & Cnty Arpt Rev Ser B (MBIA Insd)............. 5.750 11/15/17 976,190
2,500 Meridian Metro Dist CO Rfdg................................... 7.000 12/01/01 2,708,950
----------
6,966,986
----------
Hawaii 1.2%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd)........................... 7.000 07/01/10 1,106,130
----------
Illinois 1.1%
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med Cent Ser A Rfdg 8.800 06/01/06 1,077,660
----------
Indiana 3.9%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Comm Hosp of IN (MBIA Insd). 6.850 07/01/22 3,709,613
----------
Kentucky 4.1%
4,000 Louisville & Jefferson Cnty, KY Metro Swr Dist Drainage Rev
Rfdg (MBIA Insd)............................................... 5.300 05/15/19 3,866,840
----------
Louisiana 9.5%
1,000 Lafourche Parish, LA Hosp Svc Dist No 003 Hosp Rev............. 6.000 10/01/23 921,480
2,145 Louisiana Pub Fac Auth Rev (Embedded Cap) (FGIC Insd).......... 5.875 02/15/11 2,193,498
3,500 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr & Lt Co Proj A
(FSA Insd)..................................................... 7.500 06/01/21 3,942,645
1,750 Saint Charles Parish, LA Environmental Impt Rev LA Pwr & Lt
Co Proj A (AMBAC Insd)......................................... 6.875 07/01/24 1,912,312
----------
8,969,935
----------
Maine 4.3%
4,000 Maine Muni Bond Bk Ser A Rfdg.................................. 5.375 11/01/08 4,041,880
----------
Massachusetts 3.2%
2,195 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A.......................................................... 6.000 10/01/23 1,733,721
1,235 Massachusetts St Indl Fin Agy Rev.............................. 6.750 12/01/20 1,257,378
----------
2,991,099
----------
</TABLE>
4 See Notes to Financial Statements
<TABLE>
<CAPTION>
Portfolio of Investments
October 31, 1995 (Continued)
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michigan 4.8%
$ 1,580 Michigan Higher Edl Fac Auth Ltd Oblig Rev Hope College Rfdg
(Connie Lee Insd)........................................... 7.000% 10/01/13 $ 1,761,416
2,500 Michigan St Strategic Fund Ltd Oblig Rev Detroit Edison Co
College Rfdg (FGIC Insd).................................... 6.950 09/01/21 2,723,500
-----------
4,484,916
-----------
Missouri 4.5%
3,855 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlth Care
Ser AA Rfdg (MBIA Insd)..................................... 6.400 06/01/10 4,230,207
-----------
Nevada 2.1%
1,855 Nevada Hsg Div Single Family Prog Ser E (FHA Gtd)........... 6.900 10/01/14 1,970,993
-----------
New Jersey 3.6%
1,340 New Jersey Econ Dev Auth Dist Heating & Cooling Rev Trigen
Trenton Proj Ser A.......................................... 6.200 12/01/10 1,358,961
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent at
Passaic (FSA Insd).......................................... 6.000 07/01/14 2,049,680
-----------
3,408,641
-----------
New York 14.4%
2,500 New York St Dorm Auth Rev St Univ Edl Fac Ser B Rfdg........ 5.250 05/15/09 2,384,575
4,000 New York St Dorm Auth Rev City Univ Ser F................... 5.000 07/01/14 3,547,960
3,100 New York St Med Care Fac Fin Agy Rev NY Hosp Ser A (AMBAC
Insd)....................................................... 6.800 08/15/24 3,390,346
1,000 New York City, NY Ser H (Cap Guar Insd)..................... 7.000 02/01/21 1,112,290
2,000 New York City, NY Hsg Dev Corp Mtg Rev Multi Family Ser A
Rfdg (FHA Gtd).............................................. 6.550 10/01/15 2,083,980
1,000 New York City, NY Ser B..................................... 6.375 08/15/12 1,027,000
-----------
13,546,151
-----------
Texas 5.3%
1,425 Tarrant Cnty, TX Jr College Dist............................ 5.050 02/15/10 1,368,941
3,375 Texas Hsg Agy Residential Dev Rev Mtg Ser D (GNMA
Collateralized)............................................. 8.400 01/01/21 3,590,933
-----------
4,959,874
-----------
Virginia 4.6%
2,885 Fairfax Cnty, VA Econ Dev Auth Res Recovery Rev Ogden Martin
Sys Ser A................................................... 7.750 02/01/11 3,161,584
1,250 Fairfax Cnty, VA Indl Dev Auth Rev Inova Hlth Sys Hosp Proj
Rfdg (FSA Insd)............................................. 5.000 08/15/13 1,170,788
-----------
4,332,372
-----------
Wisconsin 1.1%
940 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Ser F...... 7.550 07/01/26 1,010,105
-----------
Puerto Rico 3.5%
1,900 Puerto Rico Elec Pwr Auth Pwr Rev Ser N Rfdg (Prerefunded @
07/01/99)................................................... 7.000 07/01/07 2,102,692
1,100 Puerto Rico Elec Pwr Auth Pwr Rev Ser N Rfdg................ 7.000 07/01/07 1,195,986
-----------
3,298,678
-----------
</TABLE>
5 See Notes to Financial Statements
<TABLE>
<CAPTION>
Portfolio of Investments
October 31, 1995 (Continued)
- --------------------------------------------------------------------------------------
Par
Amount
(000) Description Market Value
- --------------------------------------------------------------------------------------
<S> <C>
Total Long-Term Investments 95.6%
(Cost $84,761,062)<F1>............................................... $89,942,125
Short-Term Investments at Amortized Cost 4.7%......................... 4,400,000
Liabilities in Excess of Other Assets (0.3%).......................... (278,721)
-----------
Net Assets 100%....................................................... $94,063,404
===========
<FN>
<F1> At October 31, 1995, the cost for federal income tax purposes is $84,761,062; the
aggregate gross unrealized appreciation is $5,488,236 and the aggregate gross
unrealized depreciation is $307,173, resulting in net unrealized appreciation of
$5,181,063.
<F2> Securities purchased on a when issued or delayed delivery basis.
<F3> Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
</TABLE>
The following schedule shows the breakdown of the Trust's long-term
investments by municipal securities market sector as of October 31, 1995.
Municipal Securities Market Sector
Utilities........ 22.8%
Healthcare....... 22.5
Housing.......... 16.4
Education........ 12.5
Transportation... 11.5
Other............ 14.3
------
100.0%
======
The following table summarizes the portfolio composition at October 31, 1995,
based upon quality ratings issued by Standard & Poor's. For securities not rated
by Standard & Poor's, the Moody's rating is used.
Portfolio Composition by Credit Quality
AAA................................ 58.8%
AA................................. 6.3
A.................................. 20.1
BBB................................ 11.5
B.................................. 1.9
NR................................. 1.4
------
100.0%
======
6 See Notes to Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $84,761,062) (Note 1)...................................... $89,942,125
Short-Term Investments (Note 1)............................................................... 4,400,000
Cash.......................................................................................... 76,339
Receivables:
Interest.................................................................................... 1,794,008
Investments Sold............................................................................ 46,406
Unamortized Organizational Expenses (Note 1).................................................. 24,554
-----------
Total Assets.............................................................................. 96,283,432
-----------
Liabilities:
Payables:
Investments Purchased....................................................................... 1,953,145
Income Distributions -- Common and Preferred Shares......................................... 99,059
Investment Advisory and Administrative Fees (Note 2)........................................ 55,675
Accrued Expenses.............................................................................. 112,149
-----------
Total Liabilities............................................................................. 2,220,028
-----------
Net Assets ................................................................................... $94,063,404
===========
Net Assets Consist of:
Preferred Shares ($.01 par value, authorized 100,000,000 shares, 1,360 issued with
liquidation preference of $25,000 per share) (Note 6)....................................... $34,000,000
-----------
Common Shares ($.01 par value with an unlimited number of shares authorized,
4,682,128 shares issued and outstanding) (Note 3)........................................... 46,821
Paid in Surplus............................................................................... 64,532,602
Net Unrealized Appreciation on Investments.................................................... 5,181,063
Accumulated Undistributed Net Investment Income............................................... 144,996
Accumulated Net Realized Loss on Investments.................................................. (9,842,078)
-----------
Net Assets Applicable to Common Shares.................................................... 60,063,404
-----------
Net Assets.................................................................................... $94,063,404
===========
Net Asset Value Per Common Share ($60,063,404 divided by 4,682,128 shares outstanding) ....... $ 12.83
===========
</TABLE>
7 See Notes to Financial Statements
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest.................................................................................. $ 5,603,081
-----------
Expenses:
Investment Advisory and Administrative Fees (Note 2)...................................... 637,343
Preferred Share Maintenance (Note 6)...................................................... 122,660
Trustees Fees and Expenses (Note 2)....................................................... 22,509
Legal (Note 2)............................................................................ 12,282
Amortization of Organizational Expenses (Note 1).......................................... 7,997
Other..................................................................................... 155,715
-----------
Total Expenses............................................................................ 958,506
-----------
Net Investment Income..................................................................... $ 4,644,575
===========
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales..................................................................... $74,140,440
Cost of Securities Sold................................................................. (79,618,420)
-----------
Net Realized Loss on Investments (Including realized loss on closed and expired option
and futures transactions of $2,667 and $3,523,577, respectively)........................ (5,477,980)
-----------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................................................. (6,762,850)
End of the Period....................................................................... 5,181,063
-----------
Net Unrealized Appreciation on Investments During the Period.............................. 11,943,913
-----------
Net Realized and Unrealized Gain on Investments........................................... $ 6,465,933
===========
Net Increase in Net Assets from Operations................................................ $11,110,508
===========
</TABLE>
8 See Notes to Financial Statements
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year Ended October 31, 1995 and the Period November 26, 1993
(Commencement of Investment Operations) through October 31, 1994
- ------------------------------------------------------------------------------------------
Year Ended Period Ended
October 31, 1995 October 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................. $ 4,644,575 $ 4,184,940
Net Realized Loss on Investments...................... (5,477,980) (4,364,098)
Net Unrealized Appreciation/Depreciation on
Investments During the Period....................... 11,943,913 (6,762,850)
-------------- --------------
Change in Net Assets from Operations.................. 11,110,508 (6,942,008)
-------------- --------------
Distributions from Net Investment Income:
Common Shares....................................... (3,623,929) (2,907,599)
Preferred Shares.................................... (1,348,208) (804,783)
-------------- --------------
Total Distributions................................... (4,972,137) (3,712,382)
-------------- --------------
Net Change in Net Assets from Investment Activities... 6,138,371 (10,654,390)
-------------- --------------
From Capital Transactions (Notes 3 and 6):
Proceeds from Common Shares Sold...................... -0- 65,142,500
Proceeds from Preferred Shares Sold................... -0- 33,290,000
Recapture of Excess Offering Costs.................... 46,423 -0-
-------------- --------------
Net Change in Net Assets from Capital Transactions.... 46,423 98,432,500
-------------- --------------
Total Increase in Net Assets.......................... 6,184,794 87,778,110
Net Assets:
Beginning of the Period............................... 87,878,610 100,500
-------------- --------------
End of the Period (Including undistributed net
investment income of $144,996 and $472,558,
respectively)....................................... $ 94,063,404 $ 87,878,610
============== ==============
</TABLE>
9 See Notes to Financial Statements
<TABLE>
<CAPTION>
Financial Highlights
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
November 26, 1993
(Commencement
Year Ended of Investment
October 31, Operations) through
1995 October 31, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period<F1>............................. $ 11.507 $ 13.783
------------- -------------
Net Investment Income.................................................... .992 .894
Net Realized and Unrealized Gain/Loss on Investments..................... 1.391 (2.377)
------------- -------------
Total from Investment Operations......................................... 2.383 (1.483)
------------- -------------
Less Distributions from Net Investment Income:
Paid to Common Shareholders............................................ .774 .621
Common Share Equivalent of Distributions Paid to
Preferred Shareholders................................................. .288 .172
------------- -------------
Total Distributions...................................................... 1.062 .793
------------- -------------
Net Asset Value, End of the Period....................................... $ 12.828 $ 11.507
============= =============
Market Price Per Share at End of the Period.............................. $ 10.750 $ 9.625
Total Investment Return at Market Price (Non-Annualized)<F2>............. 19.87% (27.90%)
Total Return at Net Asset Value (Non-Annualized)<F3>..................... 18.75% (14.18%)
Net Assets at End of the Period (In millions)............................ $ 94.1 $ 87.9
Ratio of Expenses to Average Net Assets Applicable to Common Shares
(Annualized)........................................................... 1.68% 1.58%
Ratio of Expenses to Average Net Assets (Annualized)..................... 1.05% 1.04%
Ratio of Net Investment Income to Average Net Assets Applicable
to Common Shares (Annualized)<F4>........................................ 5.77% 6.06%
Portfolio Turnover....................................................... 83.56% 224.04%
<FN>
<F1> Net asset value at November 26, 1993, is adjusted for common and preferred
share offering costs of $.317 per common share.
<F2> Total investment return at market price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends
in accordance with the Trust's dividend reinvestment plan.
<F3> Total return at net asset value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
<F4> Net investment income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
</TABLE>
10 See Notes to Financial Statements
Notes to Financial Statements
October 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Select Sector Municipal Trust (the "Trust") is registered as
a non diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Trust commenced investment operations on
November 26, 1993.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. Security Valuation--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an
aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitments until payment is made.
C. Investment Income--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
D. Organizational Expenses--The Trust has reimbursed Van Kampen American
Capital Distributors, Inc. or its affiliates (collectively "VKAC") for costs
incurred in connection with the Trust's organization and initial registration in
the amount of $40,000. These costs are being amortized on a straight line basis
over the 60 month period ending November 25, 1998. Van Kampen American Capital
Investment Advisory Corp. (the "Adviser") has agreed that in the event any of
the initial shares of the Trust originally purchased by VKAC are redeemed during
the amortization period, the Trust will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
11
Notes to Financial Statements (Continued)
October 31, 1995
- --------------------------------------------------------------------------------
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, 1995, the Trust had an accumulated capital loss
carryforward for tax purposes of $9,842,078, of which $4,364,098 and $5,477,980
will expire on October 31, 2002 and 2003, respectively.
F. Distribution of Income and Gains--The Trust declares and pays dividends from
net investment income to common shareholders monthly. Net realized gains, if
any, are distributed annually on a pro rata basis to common and preferred
shareholders.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Trust's Investment Advisory and Administrative Agreement,
the Adviser will provide investment advice, administrative services and
facilities to the Trust for an annual fee payable monthly of .70% of the average
net assets of the Trust.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Trust, of which a trustee of the Trust is an affiliated person.
For the year ended October 31, 1995, the Trust recognized expenses of
approximately $13,600 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors of
VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC. The Trust's liability under the
deferred compensation and retirement plans at October 31, 1995, was
approximately $23,900.
At October 31, 1995, VKAC owned 7,128 common shares of the Trust.
3. Capital Transactions
At October 31, 1995 and 1994, paid in surplus related to common shares
aggregated $64,532,602 and $64,486,179, respectively. During the year ended
October 31, 1995, $46,423 of excess offering costs were recaptured by the Trust.
12
Notes to Financial Statements (Continued)
October 31, 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions in common shares were as follows:
Year Ended Period Ended
October 31, 1995 October 31, 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares................................. 4,682,128 7,128
Shares Sold...................................... -0- 4,675,000
------------ ------------
Ending Shares................................... . 4,682,128 4,682,128
============ ============
</TABLE>
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended October 31, 1995, were $74,321,082 and
$79,618,420, respectively.
5. 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, manage the portfolio's effective yield, maturity and duration.
All of the Trust's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Trust.
A. Option Contracts-- An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Trust
to manage the portfolio's effective maturity and duration.
13
Notes to Financial Statements (Continued)
October 31, 1995
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions in options for the year ended October 31, 1995, were as follows:
Contracts Premium
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1994.................... -0- $ -0-
Options Written and Purchased (Net)................ 800 457,241
Options Terminated in Closing Transactions (Net)... (300) (219,610)
Options Expired (Net).............................. (500) (237,631)
--------- ----------
Outstanding at October 31, 1995.................... -0- $ -0-
========= ==========
</TABLE>
B. Futures Contracts--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Trust generally invests in futures on U.S. Treasury Bonds and the Municipal
Bond Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the contracts
are closed or expire.
Transactions in futures contracts for the year ended October 31, 1995, were as
follows:
<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1994................................ 2,515
Futures Opened................................................. 3,930
Futures Closed................................................. (6,445)
--------
Outstanding at October 31, 1995................................ -0-
========
</TABLE>
C. Indexed Securities--These instruments are identified in the portfolio of
investments.
The price of these securities may be more volatile than the price of a
comparable fixed rate security.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short-term interest rates which
it pays on its preferred shares.
6. Preferred Shares
The Trust has outstanding 1,360 Auction Preferred Shares ("APS") in two series
of 680 shares each. Dividends are cumulative and the dividend rate is
periodically reset through an auction process. The dividend period for Series A
is 7 days while Series B is 28 days.
14
Notes to Financial Statements (Continued)
October 31, 1995
- -------------------------------------------------------------------------
The average rate in effect on October 31, 1995, was 3.85%. During the year ended
October 31, 1995, the rates ranged from 3.30% to 5.75%.
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.
15
Independent Auditors' Report
- -------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Select Sector Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Select Sector Municipal Trust (the "Trust"), including the
portfolio of investments, as of October 31, 1995, and the related statement of
operations for the year then ended and the statement of changes in net assets
and the financial highlights for the year then ended and for the period from
November 26, 1993 (commencement of investment operations) through October 31,
1994. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Select Sector Municipal Trust as of October 31, 1995, the
results of its operations for the year then ended and the changes in its net
assets and the financial highlights for the year then ended and for the period
from November 26, 1993 (commencement of operations) through October 31, 1994,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 11, 1995
16
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Trust offers a Dividend Reinvestment Plan (the "Plan")pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
automatically reinvested in Common Shares of the Trust.
If you decide to participate in the Plan, State Street Bank and Trust Company,
as your Plan Agent, will automatically invest your dividends and capital gains
distributions in Common Shares of the Trust for your Account.
How to Participate
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are
held in the name of a brokerage firm, bank, or other nominee, you should
contact your nominee to see if it would participate in the Plan on your
behalf. If you wish to participate in the Plan, but your brokerage firm,
bank or nominee is unable to participate on your behalf, you should request
that your shares be re-registered in your own name which will enable your
participation in the Plan.
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
changes 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 divi-
dends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
Right to Withdraw
Plan participants may withdraw 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:
One Parkview Plaza, Oakbrook Terrace, IL 60181
Attn: Closed-End Funds
17
Funds Distributed by Van Kampen American Capital
- --------------------------------------------------------------------------------
GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Emerging Growth Fund
Enterprise Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Limited Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
Texas Tax Free Income Fund
THE GOVETT FUNDS
Emerging Markets Fund
Global Income Fund
International Equity Fund
Latin America Fund
Pacific Strategy Fund
Smaller Companies Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us direct at 1-800-421-5666 weekdays
from 7:00 a.m. to 7:00 p.m. Central time.
18
Van Kampen Merritt Select Sector Municipal Trust
- --------------------------------------------------------------------------------
Officers and Trustees
Don G. Powell*
Chairman and Trustee
Dennis J. McDonnell*
President and Trustee
David C. Arch
Trustee
Rod Dammeyer
Trustee
Howard J Kerr
Trustee
Theodore A. Myers
Trustee
Hugo F. Sonnenschein
Trustee
Wayne W. Whalen*
Trustee
Peter W. Hegel*
Vice President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Treasurer
Scott E. Martin*
Assistant Secretary
Weston B. Wetherell*
Assistant Secretary
Nicholas Dalmaso*
Assistant Secretary
John L. Sullivan*
Controller
Steven M. Hill*
Assistant Treasurer
Investment Adviser
Van Kampen American Capital Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Custodian and
Transfer Agent
State Street Bank
and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, Illinois 60606
Independent Auditors
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1995
All rights reserved.
(sm) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
19
