<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
</TABLE>
VKL SAR 6/96
<PAGE> 2
LETTER TO SHAREHOLDERS
May 15, 1996
Dear Shareholder,
While interest rates drifted
downward during the fourth quarter of
last year, such was not the case in the
first quarter of 1996. Early in the
quarter, municipal bond prices [PHOTO]
demonstrated increased volatility in
conjunction with February's economic
announcements, which revealed a revival
in economic growth, impressive
employment levels, and moderate
inflation. This positive economic
environment, however, did not translate
into positive movement for the bond markets. Instead, the markets became wary,
because inflation often accompanies economic growth.
Other factors influencing the municipal bond market early in the year
included:
- Intense weather conditions, which hindered distribution and manufacturing,
were experienced by much of the United States and affected certain
municipal bond sectors.
- The expectation that a federal budget agreement was forthcoming helped
bolster municipal bonds, especially at the longer end of the spectrum.
- The proposal of tax reform--and the threat of municipal bonds having
diminished tax-exempt status--continued to dampen demand for municipals,
resulting in lower bond prices.
We believe the beginning of 1996 reflected the market's reaction to the
possibility of a return to long-term economic growth. This, coupled with
continued low inflationary conditions, has served to put the Federal Reserve
Board in a neutral policy mode, bringing relative calm to the market--although
currently at higher interest rate levels.
PERFORMANCE SUMMARY
The Van Kampen American Capital Select Sector Municipal Trust's (ticker
symbol VKL) common stock price declined 3.5 percent during the six-month period,
closing at $10.375, while the general municipal bond market was down 4 percent
for the same period, according to the Bond Buyer's 40 Municipal Bond Index.
For the six months ended April 30, 1996, the Trust posted a total return of
- -0.40 percent(1), based on market price. Longer term, the Trust's one-year total
return was -0.55 percent(1), based on market price for the period ended April
30, 1996, including reinvestment of dividends.
Continued on page two
1
<PAGE> 3
The Trust sustained a reduction on its monthly dividend from $0.0600 to
$0.0575 per common share which was effective December 1, 1995 and first payable
December 31, 1995. Although short-term municipal rates have recently notched
lower, due to a series of Fed easings beginning in 1995, short-term rates in
general are significantly higher than two years ago. This short-term rate
pressure, combined with efforts to manage the Trust's callable bonds, has
impacted the Trust's earning potential and necessitated the dividend adjustment.
Despite the decline in income, many closed-end municipal bond funds are
currently offering higher after-tax yields than taxable income alternatives, and
your Trust is no exception. Based on the closing common stock price on April 30,
1996, the Select Sector Municipal Trust had a tax-exempt distribution rate of
6.65 percent (3). In other words, investors in the 36 percent federal income tax
bracket would have to earn a yield of 10.39 percent(4) on a taxable investment
to equal your Trust's tax-exempt distribution rate.
MARKET OUTLOOK
The economy rebounded in the first quarter of 1996, despite poor weather in
the East and the remnants of a slow fourth quarter of 1995, which was hindered
by weak construction activity, two government shutdowns, and a strike at Boeing.
We believe the momentum of the first quarter can carry into the second, due in
part to renewed auto production in the aftermath of the General Motors strike
and an end to the budget stalemate between the White House and Congress. We
expect a modest slowdown in the summer months, as higher interest rates could
slow activity in interest-sensitive sectors of the economy, such as housing.
Portfolio Holdings by Industry as of April 30, 1996
Health Care ...................... 19.1%
Housing .......................... 16.3%
Education ........................ 15.8%
Transportation ................... 15.6%
Utilities ........................ 13.2%
General Purpose .................. 4.9%
Industrial Revenue ............... 4.4%
Bond Bank ........................ 4.4%
Other ............................ 6.3%
The Fed's protracted period of easing, and relatively neutral stance, favors
the growth we are currently experiencing. Given the strong employment situation
and commodity price increases, we think the Fed will await further economic
evidence before adjusting interest rates again--probably summertime at the
earliest. So far, guides such as the Consumer Price Index continue to indicate
modest levels of inflation. More importantly, we continue to see few signs of
emerging inflation in either unit labor costs, hourly earnings or the employment
cost index.
- --------------------------------------------------------------------------------
INVESTMENT TERM: REVENUE BONDS
Revenue bonds are one of the three most common types of municipal bonds--the
other two are general obligation bonds and municipal notes. Revenue bonds
are issued to finance income-generating projects such as turnpikes, toll
bridges and airports. The revenues these projects bring in are used to pay
interest and principal to bondholders.
- --------------------------------------------------------------------------------
Continued on page three
2
<PAGE> 4
Finally, as the November elections approach, the debate on tax reform may
grow. We believe the outcome in the long run will be positive, or at worst
neutral, for municipal bonds. That's good news for the market, which was
concerned that flat tax proposals could threaten the tax-exempt status of
municipal bonds. While the debate may not be over and legislation may be
forthcoming, the market should be more confident.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of April 30, 1996
<TABLE>
<S> <C>
AAA................... 58.9%
AA.................... 9.6%
A..................... 15.4%
BBB................... 12.7%
BB.................... 2.0%
Non-Rated............. 1.4%
</TABLE>
BASED UPON CREDIT QUALITY RATINGS ISSUED BY STANDARD & POOR'S.
FOR SECURITIES NOT RATED BY STANDARD & POOR'S, THE MOODY'S RATING IS USED.
Indeed, we expect investor demand for municipal securities to exceed supply,
which should add price stability to the general market. And with municipal bond
yields currently at attractive levels relative to Treasuries, investor demand
for tax-exempt securities should increase.
In summary, our view of the general municipal market is positive. From the
decreasing likelihood of tax reform in the near term to specific market
conditions, we believe the market is on solid ground. With our dedication to
comprehensive research and long-term investment perspective, we believe your
Trust is in a position to benefit in the coming months.
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 APRIL 30, 1996
VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
(AMEX TICKER SYMBOL--VKL)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
Six-month total return based on market price(1)............ (.40%)
Six-month total return based on NAV(2)..................... (.65%)
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 6.65%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 10.39%
SHARE VALUATIONS
Net asset value............................................ $ 12.41
Closing common stock price................................. $10.375
Six-month high common stock price (02/12/96)............... $11.375
Six-month low common stock price (04/25/96)................ $10.250
Preferred share (Series A) rate(5)......................... 3.840%
Preferred share (Series B) rate(5)......................... 3.519%
</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
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
ALASKA 1.4%
$1,500 Alaska St Hsg Fin Corp Ser A Rfdg............... 5.000% 12/01/18 $ 1,297,395
------------
CALIFORNIA 7.6%
4,500 Los Angeles Cnty, CA Metro Tran Auth Sales Tax
Rev Ser A Rfdg (FGIC Insd)...................... 5.000 07/01/21 3,900,690
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease Rev
Los Angeles Intl Arpt (FSA Insd)................ 6.700 01/01/22 3,102,120
------------
7,002,810
------------
COLORADO 7.1%
2,640 Colorado Hsg Fin Auth Single Family Prog Sr Ser
E............................................... 8.125 12/01/24 2,931,403
1,000 Denver, CO City & Cnty Arpt Rev Ser B (MBIA
Insd)........................................... 5.750 11/15/17 958,890
2,500 Meridian Metro Dist CO Rfdg..................... 7.000 12/01/01 2,675,625
------------
6,565,918
------------
HAWAII 1.2%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd)............. 7.000 07/01/10 1,078,190
------------
ILLINOIS 1.1%
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent Ser A Rfdg................................. 8.800 06/01/06 1,051,800
------------
INDIANA 4.0%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Comm Hosp of
IN (MBIA Insd).................................. 6.850 07/01/22 3,649,376
------------
KENTUCKY 4.0%
4,000 Louisville & Jefferson Cnty, KY Metro Swr Dist
Drainage Rev Rfdg (MBIA Insd)................... 5.300 05/15/19 3,669,040
------------
LOUISIANA 8.5%
2,145 Louisiana Pub Fac Auth Rev (Embedded Cap) (FGIC
Insd)........................................... 5.875 02/15/11 2,129,084
3,500 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj A (FSA Insd)....................... 7.500 06/01/21 3,854,060
1,750 Saint Charles Parish, LA Environmental Impt Rev
LA Pwr & Lt Co Proj A (AMBAC Insd).............. 6.875 07/01/24 1,843,992
------------
7,827,136
------------
MAINE 4.3%
4,000 Maine Muni Bond Bk Ser A Rfdg................... 5.375 11/01/08 3,991,000
------------
MASSACHUSETTS 3.3%
2,195 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000 10/01/23 1,781,835
1,235 Massachusetts St Indl Fin Agy Rev............... 6.750 12/01/20 1,239,829
------------
3,021,664
------------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <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 $ 1,719,514
2,500 Michigan St Strategic Fund Ltd Oblig Rev Detroit
Edison Co College Rfdg (FGIC Insd).............. 6.950 09/01/21 2,698,625
------------
4,418,139
------------
MISSOURI 4.6%
3,855 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM
Hlthcare Ser AA Rfdg (MBIA Insd)................ 6.400 06/01/10 4,209,660
------------
NEVADA 2.0%
1,795 Nevada Hsg Div Single Family Prog Ser E (FHA
Gtd)............................................ 6.900 10/01/14 1,857,376
------------
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 1,342,117
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/14 2,015,700
------------
3,357,817
------------
NEW YORK 16.9%
2,000 New York City, NY Hsg Dev Corp Mtg Rev Multi
Family Ser A Rfdg (FHA Gtd) (b)................. 6.550 10/01/15 2,068,020
1,000 New York City, NY Ser B......................... 6.375 08/15/12 1,000,280
2,425 New York City, NY Ser D......................... 6.000 02/15/11 2,341,823
1,000 New York City, NY Ser H (FSA Insd).............. 7.000 02/01/21 1,093,040
4,000 New York St Dorm Auth Rev City Univ Ser F....... 5.000 07/01/14 3,420,440
2,500 New York St Dorm Auth Rev St Univ Edl Fac Ser B
Rfdg............................................ 5.250 05/15/09 2,340,575
3,100 New York St Med Care Fac Fin Agy Rev NY Hosp Ser
A (AMBAC Insd).................................. 6.800 08/15/24 3,328,997
------------
15,593,175
------------
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 2,138,960
------------
TEXAS 8.7%
1,000 Keller, TX Indpt Sch Dist Cap Apprec Ser A Rfdg
(PSFG Insd)..................................... * 08/15/17 275,920
2,500 Keller, TX Indpt Sch Dist Cap Apprec Ser A Rfdg
(PSFG Insd)..................................... * 08/15/19 600,275
3,500 Keller, TX Indpt Sch Dist Cap Apprec Ser A Rfdg
(PSFG Insd)..................................... * 08/15/21 743,470
1,425 Tarrant Cnty, TX Jr College Dist................ 5.050 02/15/10 1,351,840
3,240 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized)........................... 8.400 01/01/21 3,405,046
1,615 Texas St Higher Edl Coordinating Brd College
Student Ln Rev Sr Lien.......................... 7.700 10/01/25 1,637,998
------------
8,014,549
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA 4.7%
$2,885 Fairfax Cnty, VA Econ Dev Auth Res Recovery Rev
Ogden Martin Sys Ser A.......................... 7.750% 02/01/11 $ 3,124,311
1,250 Fairfax Cnty, VA Indl Dev Auth Rev Inova Hlth
Sys Hosp Proj Rfdg (FSA Insd)................... 5.000 08/15/13 1,159,012
------------
4,283,323
------------
WISCONSIN 1.1%
940 Wisconsin Hsg & Econ Dev Auth Homeownership Rev
Ser F........................................... 7.550 07/01/26 996,156
------------
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 5,074,848
1,100 Puerto Rico Elec Pwr Auth Pwr Rev Ser N......... 7.000 07/01/07 1,189,705
------------
6,264,553
------------
TOTAL LONG-TERM INVESTMENTS 98.0%
(Cost $87,344,074) (a)..................................................... 90,288,037
OTHER ASSETS IN EXCESS OF LIABILITIES 2.0%.................................. 1,815,065
------------
NET ASSETS 100%............................................................. $92,103,102
===========
*Zero coupon bond
</TABLE>
(a) At April 30, 1996, the cost for federal income tax purposes is $87,344,074;
the aggregate gross unrealized appreciation is $3,523,148 and the aggregate
gross unrealized depreciation is $623,163, resulting in net unrealized
appreciation including open option transactions of $2,899,985.
(b) Assets segregated as collateral for open option transactions.
See Notes to Financial Statements
7
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $87,344,074) (Note 1)................. $90,288,037
Cash..................................................................... 161,446
Receivables:
Interest............................................................... 1,720,682
Investments Sold....................................................... 160,130
Options at Market Value (Net premium paid of $73,275).................... 29,297
Unamortized Organizational Expenses (Note 1)............................. 20,566
-----------
Total Assets....................................................... 92,380,158
-----------
LIABILITIES:
Payables:
Income Distributions -- Common and Preferred Shares.................... 104,327
Investment Advisory and Administrative Fees (Note 2)................... 53,027
Accrued Expenses......................................................... 79,427
Deferred Compensation and Retirement Plans (Note 2)...................... 40,275
-----------
Total Liabilities.................................................. 277,056
-----------
NET ASSETS............................................................... $92,103,102
-----------
NET ASSETS CONSIST OF:
Preferred Shares ($.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 Investments............................... 2,899,985
Accumulated Undistributed Net Investment Income.......................... 165,697
Accumulated Net Realized Loss on Investments............................. (9,542,003)
-----------
Net Assets Applicable to Common Shares............................. 58,103,102
-----------
NET ASSETS............................................................... $92,103,102
===========
NET ASSET VALUE PER COMMON SHARE ($58,103,102 divided by 4,682,128
shares outstanding).................................................... $ 12.41
===========
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest................................................................ $ 2,769,612
------------
EXPENSES:
Investment Advisory and Administrative Fees (Note 2).................... 329,559
Preferred Share Maintenance (Note 5).................................... 61,718
Trustees Fees and Expenses (Note 2)..................................... 11,284
Legal (Note 2).......................................................... 8,554
Amortization of Organizational Expenses (Note 1)........................ 3,988
Other................................................................... 79,904
------------
Total Expenses...................................................... 495,007
------------
NET INVESTMENT INCOME................................................... $ 2,274,605
============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales................................................... $ 19,299,660
Cost of Securities Sold............................................... (18,999,585)
------------
Net Realized Gain on Investments (Including realized gain on futures
transactions of $112,474)............................................. 300,075
------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period............................................... 5,181,063
End of the Period (Including unrealized depreciation on open option
transactions of $43,978)............................................ 2,899,985
------------
Net Unrealized Depreciation on Investments During the Period............ (2,281,078)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS......................... $ (1,981,003)
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............................. $ 293,602
============
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1996
and the Year Ended October 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1996 October 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 2,274,605 $ 4,644,575
Net Realized Gain/Loss on Investments................... 300,075 (5,477,980)
Net Unrealized Appreciation/Depreciation on
Investments During the Period......................... (2,281,078) 11,943,913
---------- ----------
Change in Net Assets from Operations.................... 293,602 11,110,508
---------- ----------
Distributions from Net Investment Income:
Common Shares......................................... (1,627,010) (3,623,929)
Preferred Shares...................................... (626,894) (1,348,208)
---------- ----------
Total Distributions..................................... (2,253,904) (4,972,137)
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... (1,960,302) 6,138,371
---------- ----------
FROM CAPITAL TRANSACTIONS:
Recapture of Excess Offering Costs...................... -0- 46,423
---------- ----------
TOTAL INCREASE/DECREASE IN NET ASSETS................... (1,960,302) 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 $165,697 and $144,996,
respectively)......................................... $92,103,102 $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. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 26, 1993
(Commencement
Six Months of Investment
Ended Year Ended Operations) to
April 30, 1996 October 31, 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...................... .486 .992 .894
Net Realized and Unrealized Gain/Loss on
Investments.............................. (.422) 1.391 (2.377)
------- ------- -------
Total from Investment Operations........... .064 2.383 (1.483)
------- ------- -------
Less Distributions from Net Investment
Income:
Paid to Common Shareholders.............. .348 .774 .621
Common Share Equivalent of Distributions
Paid to Preferred Shareholders......... .134 .288 .172
------- ------- -------
Total Distributions........................ .482 1.062 .793
------- ------- -------
Net Asset Value, End of the Period......... $12.410 $12.828 $11.507
======= ======= =======
Market Price Per Share at End of the
Period................................... $10.375 $10.750 $9.625
Total Investment Return at Market Price
(b)...................................... (.40%)* 19.87% (27.90%)*
Total Return at Net Asset Value (c)........ (.65%)* 18.75% (14.18%)*
Net Assets at End of the Period (In
millions)................................ $92.1 $94.1 $87.9
Ratio of Expenses to Average Net Assets
Applicable to Common Shares.............. 1.63% 1.68% 1.58%
Ratio of Expenses to Average Net Assets.... 1.05% 1.05% 1.04%
Ratio of Net Investment Income to Average
Net Assets Applicable to Common Shares
(d)...................................... 5.43% 5.77% 6.06%
Portfolio Turnover......................... 20.42%* 83.56% 224.04%*
</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
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 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. At April 30, 1996, there were no
when issued or delayed delivery purchase commitments.
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.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 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, 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 six months ended April 30, 1996, the Trust recognized expenses of
approximately $6,200 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.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 April 30, 1996, VKAC owned 7,128 common shares of the Trust.
3. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended April 30, 1996, were $21,657,962 and
$18,999,585, 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 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.
Transactions in options for the six months ended April 30, 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)............................. -0- -0-
--- --------
Outstanding at April 30, 1996..................... 125 $(73,275)
=== ========
</TABLE>
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
The related futures contract of the outstanding option transaction as of
April 30, 1996, and the description and market value is as follows:
<TABLE>
<CAPTION>
MARKET
EXPIRATION MONTH/ VALUE OF
CONTRACTS EXERCISE PRICE OPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond Future
June 1996 Purchased Put............ 125 June/106 $29,297
===== =======
</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 six months ended April 30, 1996,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1995.............................. -0-
Futures Opened............................................... 50
Futures Closed............................................... (50)
---
Outstanding at April 30, 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 April 30,
1996, was 3.680%. During the six months ended April 30, 1996, the rates ranged
from 3.279% to 5.000%.
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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.
16
<PAGE> 18
VAN KAMPEN AMERICAN CAPITAL 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., 1996
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
17
