<PAGE> 1
- ---------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio of Investments......................... 5
Statement of Assets and Liabilities.............. 8
Statement of Operations.......................... 9
Statement of Changes in Net Assets............... 10
Financial Highlights............................. 11
Notes to Financial Statements.................... 12
Report of Independent Accountants................ 16
Dividend Reinvestment Plan....................... 17
</TABLE>
VKL ANR 12/96
<PAGE> 2
LETTER TO SHAREHOLDERS
December 10, 1996
Dear Shareholder,
The first ten months of 1996 have
been a mixed experience for most
municipal bond fund investors. The
continuation of the 1995 rally at the
beginning of this year was thwarted
early on as the economy gained
momentum, causing the bond market to [photo]
sell off. But by the second half of the
year, the pattern reversed. Growth
slowed and bonds recovered much of
their earlier losses. DENNIS J. MCDONNELL AND DON G. POWELL
This kind of volatility is not
unusual, but it is difficult to predict and serves as a reminder to investors to
maintain their long-term outlook. Bailing out during price declines and
re-entering after market rebounds is often a losing strategy. We believe it is
time in the market, not timing the market, that potentially maximizes long-term
investment gains.
Additionally, we believe our recent acquisition by Morgan Stanley Group Inc.
will further help investors achieve their long-term goals. Morgan Stanley's
strong global presence and commitment to superior investment performance
complement our broad range of investment products, money management
capabilities, and high level of service that we currently offer.
ECONOMIC OVERVIEW
The economy has grown at a moderate pace this year, despite the second
quarter's 4.7 percent surge. By the third quarter, growth slowed to 2.0 percent,
near the level that prevailed early in the year. This moderation of economic
activity, coupled with continued low inflation, eased fears of an interest rate
hike by the Federal Reserve Board--fears that had dominated the market in early
summer and pushed long-term bond yields above 7.0 percent.
Once the market realized that the economy's pace had slowed, bond prices
rose from their 1996 lows and yields fell as they moved in the opposite
direction of bond prices. By the end of October, the 30-year Treasury bond yield
was near 6.5 percent.
During this recovery, municipal bonds rebounded even more than Treasuries,
due to a steady demand that outpaced supply. It is expected that on a nationwide
basis there will be little or no increase in the total number of municipal bonds
outstanding this year. The volume of new issues is expected to almost equal the
volume of bonds that were redeemed or called.
Continued on page two
1
<PAGE> 3
[pie chart]
PORTFOLIO COMPOSITION BY CREDIT QUALITY AS OF OCTOBER 31, 1996
<TABLE>
<S> <C>
AAA.......... 59.7%
AA........... 8.9%
A............ 16.8%
BBB.......... 11.4%
B............ 1.9%
Non-rated.... 1.3%
</TABLE>
Based upon credit ratings issued by Standard & Poor's. For securities not rated
by Standard & Poor's, the Moody's rating is used.
PERFORMANCE SUMMARY
Many closed-end municipal bond funds, such as this one, are currently
offering higher after-tax yields than taxable income alternatives. The Trust
generated a tax-exempt distribution of 6.49 percent(3), based on the closing
stock price of $10.625 per common share as of October 31, 1996. For shareholders
in the federal income tax bracket of 36 percent, this distribution rate is
equivalent to a yield of 10.14 percent(4) on a taxable investment.
The Trust's one-year total return was 5.35 percent(1), including
reinvestment of all dividends, reflecting a 1.2 percent decrease in market price
for the period ended October 31, 1996.
Top Five Portfolio Holdings by Industry as of October
31, 1996
Health Care....................... 19.1%
Housing........................... 16.3%
Education......................... 15.8%
Transportation.................... 15.6%
Utilities......................... 13.2%
ECONOMIC OUTLOOK
We believe Fed policy will remain unchanged through the end of the year. We
look for the long Treasury bond to trade within a range of 6.25 and 6.75 percent
and the 5-year Treasury to trade between 5.75 percent and 6.25 percent for the
remainder of 1996. After that, interest rates could rise moderately if the
economy rebounds to a 3.0 percent annual growth rate and inflation edges higher.
Based upon this view of moderate growth and slightly higher inflation, we
believe the outlook for fixed-income markets remains positive.
Relatively stable interest rates early next year would be favorable for the
leveraged structure of our closed-end funds, which involves borrowing short-term
funds to purchase long-term municipal securities. Depending on the difference
between long-term and short-term market rates, this structure provides
opportunities for additional earnings over time.
Continued on page three
2
<PAGE> 4
The leveraged capital structure of the Trust continues to provide common
shareholders with above-market levels of dividend income. It should be noted,
however, that the rise in short-term rates would have an unfavorable effect on
common share performance.
The bond market should find continued support from the results of the recent
national elections. With a Democratic president and a Republican Congress, there
should be checks on potential spending increases and tax cuts so the budget
deficit does not balloon out of control. This split government should also help
minimize chances of major tax reform, which would likely affect investment
markets, including municipal bonds.
The stock market is another factor that could influence the performance of
the bond market in the coming year. If stocks suffer a protracted setback, the
demand for bonds, including municipals, could increase.
We will closely monitor any new developments in Washington and in the
financial markets in order to evaluate their potential impact on the Trust. We
believe that in the coming year, the municipal market will continue to be an
attractive investment choice for investors seeking high current income. Thank
you for your continued confidence in your investment with Van Kampen American
Capital and for the privilege of working with you to help you achieve your
financial goals.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 5
PERFORMANCE RESULTS FOR THE PERIOD ENDED OCTOBER 31, 1996
VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
(AMEX TICKER SYMBOL--VKL)
COMMON SHARE TOTAL RETURNS
<TABLE>
<S> <C>
One-year total return based on market price(1)............. 5.35%
One-year total return based on NAV(2)...................... 6.29%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 6.49%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 10.14%
SHARE VALUATIONS
Net asset value............................................ $ 12.92
Closing common stock price................................. $10.625
One-year high common stock price (02/12/96)................ $11.375
One-year low common stock price (06/24/96)................. $ 9.875
Preferred share (Series A) rate(5)......................... 3.400%
Preferred share (Series B) rate(5)......................... 3.460%
</TABLE>
(1) Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common stock price at the end of the period
indicated.
(2) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3) Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4) The taxable-equivalent distribution rate is calculated assuming a 36%
federal income tax bracket.
(5) See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
ALASKA 1.4%
$1,500 Alaska St Hsg Fin Corp Ser A Rfdg............... 5.000% 12/01/18 $ 1,341,270
-----------
CALIFORNIA 9.4%
4,500 Los Angeles Cnty, CA Metro Tran Auth Sales Tax
Rev Ser A Rfdg (FGIC Insd) (d).................. 5.000 07/01/21 4,087,935
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease Rev
Los Angeles Intl Arpt (FSA Insd)................ 6.700 01/01/22 3,207,150
1,500 Orange County, CA Recovery Ctfs Partn Ser A
(MBIA Insd)..................................... 6.000 07/01/07 1,623,375
-----------
8,918,460
-----------
COLORADO 5.7%
2,435 Colorado Hsg Fin Auth Single Family Prog Sr Ser
E............................................... 8.125 12/01/24 2,732,460
2,500 Meridian Metro Dist CO Rfdg..................... 7.000 12/01/01 2,675,600
-----------
5,408,060
-----------
HAWAII 1.2%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd)............. 7.000 07/01/10 1,100,980
-----------
ILLINOIS 1.1%
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent Ser A Rfdg................................. 8.800 06/01/06 1,037,740
-----------
INDIANA 4.0%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Comm Hosp of
IN (MBIA Insd).................................. 6.850 07/01/22 3,799,933
-----------
KENTUCKY 4.0%
4,000 Louisville & Jefferson Cnty, KY Metro Swr Dist
Drainage Rev Rfdg (MBIA Insd)................... 5.300 05/15/19 3,825,160
-----------
LOUISIANA 8.5%
2,145 Louisiana Pub Fac Auth Rev (Embedded Cap) (FGIC
Insd)........................................... 5.875 02/15/11 2,198,475
1,750 Saint Charles Parish, LA Environmental Impt Rev
LA Pwr & Lt Co Proj A (AMBAC Insd).............. 6.875 07/01/24 1,936,305
3,500 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj A (FSA Insd)....................... 7.500 06/01/21 3,918,495
-----------
8,053,275
-----------
MAINE 4.3%
4,000 Maine Muni Bond Bk Ser A Rfdg................... 5.375 11/01/08 4,029,880
-----------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS 3.3%
$2,195 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000% 10/01/23 $ 1,823,979
1,235 Massachusetts St Indl Fin Agy Rev............... 6.750 12/01/20 1,259,231
-----------
3,083,210
-----------
MICHIGAN 4.8%
1,580 Michigan Higher Edl Fac Auth Ltd Oblig Rev Hope
College Rfdg (Connie Lee Insd).................. 7.000 10/01/13 1,761,637
2,500 Michigan St Strategic Fund Ltd Oblig Rev Detroit
Edison Co College Rfdg (FGIC Insd).............. 6.950 09/01/21 2,737,700
-----------
4,499,337
-----------
MISSOURI 4.5%
3,855 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM
Hlthcare Ser AA Rfdg (MBIA Insd)................ 6.400 06/01/10 4,271,610
-----------
NEVADA 2.0%
1,780 Nevada Hsg Div Single Family Prog Ser E (FHA
Gtd)............................................ 6.900 10/01/14 1,871,634
-----------
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 1,360,529
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/14 2,041,700
-----------
3,402,229
-----------
NEW YORK 16.4%
2,000 New York City, NY Hsg Dev Corp Mtg Rev
Multi-Family Ser A Rfdg (FHA Gtd)............... 6.550 10/01/15 2,091,880
3,000 New York City, NY Muni Wtr Fin Auth Wtr & Swr
Sys Rev Ser A................................... 5.625 06/15/19 2,935,950
1,000 New York City, NY Ser H (FSA Insd).............. 7.000 02/01/21 1,115,830
4,000 New York St Dorm Auth Rev City Univ Ser F....... 5.000 07/01/14 3,549,640
2,500 New York St Dorm Auth Rev St Univ Edl Fac Ser B
Rfdg............................................ 5.250 05/15/09 2,410,950
3,100 New York St Med Care Fac Fin Agy Rev NY Hosp Ser
A (AMBAC Insd).................................. 6.800 08/15/24 3,427,577
-----------
15,531,827
-----------
OHIO 1.1%
1,500 Akron, OH Ctfs Partn Akron Muni Baseball Stadium
Proj (b) (c).................................... 0/6.900 12/01/16 1,079,805
-----------
OKLAHOMA 2.3%
2,000 Oklahoma Hsg Fin Agy Single Family Mtg Rev
Homeownership Ln Pgm Ser A (GNMA
Collateralized)................................. 7.050 09/01/26 2,172,460
OREGON 2.2%
1,750 Emerald Peoples Util Dist OR Rfdg (FGIC Insd)... 7.350 11/01/07 2,087,855
-----------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS 6.5%
$1,425 Tarrant Cnty, TX Jr College Dist................ 5.050% 02/15/10 $ 1,381,039
3,015 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized)........................... 8.400 01/01/21 3,168,554
1,530 Texas St Higher Edl Coordinating Brd College
Student Ln Rev Sr Lien.......................... 7.700 10/01/25 1,582,295
-----------
6,131,888
-----------
VIRGINIA 4.6%
2,885 Fairfax Cnty, VA Econ Dev Auth Res Recovery Rev
Ogden Martin Sys Ser A.......................... 7.750 02/01/11 3,121,541
1,250 Fairfax Cnty, VA Indl Dev Auth Rev Inova Hlth
Sys Hosp Proj Rfdg (FSA Insd)................... 5.000 08/15/13 1,190,512
-----------
4,312,053
-----------
WISCONSIN 1.1%
940 Wisconsin Hsg & Econ Dev Auth Homeownership Rev
Ser F........................................... 7.550 07/01/26 1,007,069
-----------
PUERTO RICO 6.8%
4,800 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser
Y (Embedded Cap) (FSA Insd)..................... 5.730 07/01/21 5,258,448
1,100 Puerto Rico Elec Pwr Auth Pwr Rev Ser N......... 7.000 07/01/07 1,188,858
-----------
6,447,306
-----------
TOTAL LONG-TERM INVESTMENTS 98.8%
(Cost $88,136,549) (a)..................................................... 93,413,041
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%.................................. 1,092,053
-----------
NET ASSETS 100.0%........................................................... $94,505,094
===========
</TABLE>
(a) At October 31, 1996, the cost for federal income tax purposes is
$88,136,549; the aggregate gross unrealized appreciation is $5,452,332 and
the aggregate gross unrealized depreciation is $175,840, resulting in net
unrealized appreciation of $5,276,492.
(b) Security purchased on a when issued or delayed delivery basis.
(c) Security is currently a zero coupon bond which will convert to a coupon
paying bond at a predetermined date.
(d) Asset segregated as collateral for when issued or delayed delivery purchase
commitments.
See Notes to Financial Statements
7
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $88,136,549) (Note 1)................. $93,413,041
Cash..................................................................... 570,337
Receivables:
Interest............................................................... 1,724,478
Securities Sold........................................................ 92,865
Unamortized Organizational Expenses (Note 1)............................. 16,535
-----------
Total Assets....................................................... 95,817,256
-----------
LIABILITIES:
Payables:
Securities Purchased................................................... 1,063,695
Income Distributions -- Common and Preferred Shares.................... 79,426
Investment Advisory and Administrative Fees (Note 2)................... 55,784
Affiliates (Note 2).................................................... 1,265
Accrued Expenses......................................................... 64,465
Deferred Compensation and Retirement Plans (Note 2)...................... 47,527
-----------
Total Liabilities.................................................. 1,312,162
-----------
NET ASSETS............................................................... $94,505,094
===========
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000 shares, 1,360
issued with liquidation preference of $25,000 per share) (Note 5)...... $34,000,000
-----------
Common Shares ($.01 par value with an unlimited number of shares
authorized, 4,682,128 shares issued and outstanding)................... 46,821
Paid in Surplus.......................................................... 64,532,602
Net Unrealized Appreciation on Securities................................ 5,276,492
Accumulated Undistributed Net Investment Income.......................... 272,204
Accumulated Net Realized Loss on Securities.............................. (9,623,025)
-----------
Net Assets Applicable to Common Shares............................. 60,505,094
-----------
NET ASSETS............................................................... $94,505,094
===========
NET ASSET VALUE PER COMMON SHARE ($60,505,094 divided by 4,682,128
shares outstanding).................................................... $ 12.92
===========
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................................. $5,529,195
----------
EXPENSES:
Investment Advisory and Administrative Fees (Note 2)...................... 656,202
Preferred Share Maintenance (Note 5)...................................... 117,940
Trustees Fees and Expenses (Note 2)....................................... 22,692
Legal (Note 2)............................................................ 11,583
Amortization of Organizational Expenses (Note 1).......................... 8,019
Other..................................................................... 111,431
----------
Total Expenses........................................................ 927,867
----------
NET INVESTMENT INCOME..................................................... $4,601,328
==========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................................. $ 278,349
Options................................................................. (73,281)
Futures................................................................. 13,985
----------
Net Realized Gain on Securities........................................... 219,053
----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................................. 5,181,063
End of the Period:
Investments........................................................... 5,276,492
----------
Net Unrealized Appreciation on Securities During the Period............... 95,429
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............................ $ 314,482
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS................................ $4,915,810
==========
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended October 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income......................... $ 4,601,328 $ 4,644,575
Net Realized Gain/Loss on Securities.......... 219,053 (5,477,980)
Net Unrealized Appreciation on
Securities During the Period................ 95,429 11,943,913
----------- -----------
Change in Net Assets from Operations.......... 4,915,810 11,110,508
----------- -----------
Distributions from Net Investment Income:
Common Shares............................... (3,242,307) (3,623,929)
Preferred Shares............................ (1,231,813) (1,348,208)
----------- -----------
Total Distributions........................... (4,474,120) (4,972,137)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.................................. 441,690 6,138,371
----------- -----------
FROM CAPITAL TRANSACTIONS:
Recapture of Excess Offering Costs............ -0- 46,423
----------- -----------
TOTAL INCREASE IN NET ASSETS.................. 441,690 6,184,794
NET ASSETS:
Beginning of the Period....................... 94,063,404 87,878,610
----------- -----------
End of the Period (Including undistributed net
investment income of $272,204 and $144,996,
respectively)............................... $94,505,094 $94,063,404
=========== ===========
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 26, 1993
(Commencement
Year Ended October 31, of Investment
------------------------ Operations) to
1996 1995 October 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period (a).... $12.828 $11.507 $13.783
------- ------ ------
Net Investment Income........................... .983 .992 .894
Net Realized and Unrealized Gain/Loss on
Securities.................................... .068 1.391 (2.377)
------- ------ ------
Total from Investment Operations................ 1.051 2.383 (1.483)
------- ------ ------
Less Distributions from Net Investment Income:
Paid to Common Shareholders................... .693 .774 .621
Common Share Equivalent of Distributions Paid
to Preferred Shareholders................... .263 .288 .172
------- ------ ------
Total Distributions............................. .956 1.062 .793
------- ------ ------
Net Asset Value, End of the Period.............. $12.923 $12.828 $11.507
======= ======= =======
Market Price Per Share at End of the Period..... $10.625 $10.750 $9.625
Total Investment Return at Market Price (b)..... 5.35% 19.87% (27.90%)*
Total Return at Net Asset Value (c)............. 6.29% 18.75% (14.18%)*
Net Assets at End of the Period (In millions)... $94.5 $94.1 $87.9
Ratio of Expenses to Average Net Assets
Applicable to Common Shares................... 1.55% 1.68% 1.58%
Ratio of Expenses to Average Net Assets......... .99% 1.05% 1.04%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d)........ 5.62% 5.77% 6.06%
Portfolio Turnover.............................. 47% 84% 224%*
</TABLE>
(a) Net asset value at November 26, 1993, is adjusted for common and preferred
share offering costs of $.317 per common share.
(b) Total investment return at market price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends
in accordance with the Trust's dividend reinvestment plan.
(c) Total return at net asset value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
(d) Net investment income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
* Non-Annualized
See Notes to Financial Statements
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital 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's primary investment
objective is to provide a high level of current income exempt from federal
income tax, consistent with preservation of capital. The Trust will invest
primarily in a portfolio of municipal securities from those market sectors which
the Adviser feels will best meet the Trust's investment objective. 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. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
D. ORGANIZATIONAL EXPENSES--The Trust has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1996
- --------------------------------------------------------------------------------
connection with the Trust's organization 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.
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, 1996, the Trust had an accumulated capital loss
carryforward for tax purposes of $9,623,025 which will expire between October
31, 2002 and October 31, 2003.
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.
For the year ended October 31, 1996, 100% of the income distributions made
by the Trust were exempt from Federal income taxes. In January, 1997, the Trust
will provide tax information to shareholders for the 1996 calendar year.
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, 1996, the Trust recognized expenses of
approximately $11,400 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.
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<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1996
- --------------------------------------------------------------------------------
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.
At October 31, 1996, VKAC owned 7,128 common shares of the Trust.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, for the year ended October 31, 1996, were
$46,493,577 and $43,236,925, respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio, 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 securities. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Trust.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Trust
to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended October 31, 1996, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 31, 1995................... -0- $ -0-
Options Written and Purchased (Net)............... 125 (73,275)
Options Terminated in Closing Transactions
(Net)........................................... -0- -0-
Options Expired (Net)............................. (125) 73,275
---- --------
Outstanding at October 31, 1996................... -0- $ -0-
==== ========
</TABLE>
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1996
- --------------------------------------------------------------------------------
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, 1996, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1995.............................. -0-
Futures Opened............................................... 100
Futures Closed............................................... (100)
-----
Outstanding at October 31, 1996.............................. -0-
=====
</TABLE>
C. EMBEDDED CAPS--These securities, which are identified in the portfolio of
investments, include a cap strike level such that the coupon payment may be
supplemented by cap payments if the floating rate index upon which the cap is
based rises above the strike level. The price of these securities may be more
volatile than the price of a comparable fixed rate security. The Trust invests
in these instruments as a hedge against a rise in the short-term interest rates
which it pays on its preferred shares.
5. PREFERRED SHARES
The Trust has outstanding 1,360 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. The average rate in effect on October 31,
1996, was 3.430%. During the year ended October 31, 1996, the rates ranged from
3.279% to 5.000%.
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
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen American Capital Select Sector Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Select Sector Municipal Trust (the "Trust"), including
the portfolio of investments, as of October 31, 1996, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, 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 American Capital Select Sector Municipal Trust as of October 31, 1996,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 11, 1996
16
<PAGE> 18
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 American 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
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:
Van Kampen American Capital
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
17
<PAGE> 19
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
Aggressive Growth Fund
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
Intermediate 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
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 1-800-341-2911 weekdays
from 7:00 a.m. to 7:00 p.m. Central time.
18
<PAGE> 20
VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
Vice President
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1996 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
RESULTS OF SHAREHOLDER VOTES
An Annual Meeting of Shareholders of the Trust was held on May 23, 1996, where
shareholders voted on the election of trustees and the selection of independent
public accountants. With regard to the election of Wayne Whalen as elected
trustee by the common shareholders of the Trust, 3,015,431 shares voted in his
favor, 129,592 withheld. With regard to the election of Rod Dammeyer as elected
trustee by the preferred shareholders of the Trust, 1,119 shares voted in his
favor, 0 withheld. With regard to the ratification of KPMG Peat Marwick LLP as
independent public accountants for the Trust, 3,037,891 voted in favor, 50,897
voted against and 57,354 abstained.
A Special Meeting of Shareholders of the Trust was held on October 23, 1996,
where shareholders voted on a new investment advisory agreement and changes to
investment policies. With regard to the approval of a new investment advisory
agreement between Van Kampen American Capital Investment Advisory Corp. and the
Trust, 3,962,077 shares voted for the proposal, 153,494 voted against and
157,469 abstained. With regard to the approval of certain changes to the Trust's
fundamental investment policies with respect to investment in other investment
companies, 1,807,648 shares voted for the proposal, 135,968 voted against and
89,704 abstained.
19
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VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
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