<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 5
Portfolio of Investments......................... 6
Statement of Assets and Liabilities.............. 9
Statement of Operations.......................... 10
Statement of Changes in Net Assets............... 11
Financial Highlights............................. 12
Notes to Financial Statements.................... 13
Dividend Reinvestment Plan....................... 18
</TABLE>
VKL SAR 6/97
<PAGE> 2
LETTER TO SHAREHOLDERS
June 5, 1997
Dear Shareholder,
As mentioned in your previous
report, VK/AC Holding, Inc., the parent
company of Van Kampen American Capital,
Inc., was acquired by Morgan Stanley
Group Inc., a world leader in asset [PHOTO]
management. More recently, on February
5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced
their agreement to merge, and you DENNIS J. MCDONNELL AND DON G. POWELL
received a proxy in April. The merger
was completed on May 31, 1997, creating
the combined company of Morgan Stanley, Dean Witter, Discover & Co. This
preeminent global financial services firm boasts a market capitalization of $21
billion and leading market positions in securities, asset management, and credit
services. As the financial industry continues to witness unprecedented
consolidations and new partnerships, we believe that those firms that are
leaders in all facets of their business will be able to offer investors the
greatest opportunities and services as we move into the next century. We are
confident that this merger will provide investors with those benefits.
ECONOMIC REVIEW
Bond prices were volatile during the six months ended April 30, 1997. Prices
initially rose as the economy slowed, erasing fears of an interest rate hike by
the Federal Reserve Board. The November election of a Democratic president and
Republican Congress was positive for bonds because the split government was
viewed as a restraint on spending increases that could potentially swell the
budget deficit. In addition, support diminished for radical tax reform that
could threaten the tax-free status of municipal bonds.
By the beginning of 1997, the situation changed. Bond prices began to fall
as the economy picked up speed, culminating in a 5.60 percent annualized growth
rate in the first quarter. This strength, coupled with warnings by Fed Chairman
Alan Greenspan that tighter monetary policy might be appropriate, reignited
fears of a rate hike. On March 25, the Fed raised short-term rates by a modest
0.25 percent, which sent the 30-year Treasury bond yield above 7.00 percent for
the first time in six months. By the end of April, the 30-year Treasury bond
yield slipped back below 7.00 percent as the market turned its attention to
positive news about inflation, and bonds recovered some of their earlier losses.
Throughout most of the six months ended April 30, municipal bonds generally
outperformed Treasuries. Between October 31 and April 30, yields on long-term
municipal revenue bonds rose 21 basis points, while yields on 30-year Treasury
bonds jumped 31 basis points. Because bond yields move in the opposite direction
of prices, the smaller
Continued on page two
1
<PAGE> 3
increase in municipal yields meant that municipal bond prices did not fall as
sharply as Treasury bond prices did. A relatively stable supply of new issues,
combined with an increase in retail demand, contributed to improved performance
of municipal bonds.
FUND STRATEGY
In managing the Trust, we maintained a concentration in high-quality bonds.
As of April 30, approximately 57 percent of the Trust's long-term investments
were rated AAA, the highest credit rating assigned to bonds by the Standard &
Poor's Ratings Group. Most of the AAA-rated bonds are insured securities, which
are extremely liquid and provide the potential for safety of principal. These
bonds have tended to perform better when interest rates are falling, which was
not the case for most of the period. In addition, approximately 23 percent of
long-term investments were rated AA or A, and approximately 20 percent were
rated BBB or below or were non-rated. BBB is the lowest credit rating Standard &
Poor's assigns to bonds in the investment-grade category.
[PIE CHART]
PORTFOLIO COMPOSITION BY CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM
INVESTMENTS AS OF APRIL 30, 1997
<TABLE>
<S> <C>
B ....................... 5.1%
BBB ..................... 13.7%
A ....................... 14.5%
AA ...................... 8.4%
AAA ..................... 56.9%
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.
Portfolio turnover was moderate during the reporting period because market
conditions offered few opportunities to add value over existing holdings. The
average yield of bonds in the portfolio was higher than yields available in the
market during the period. Activity was also limited by the tight spreads between
yields of AAA-rated bonds and lower-rated bonds. As a result, there was often
not enough yield reward to justify the additional credit risk of purchasing
lower-rated securities.
Despite tight credit spreads in the municipal market, the Trust was able to
purchase two attractively priced uninsured issues--New York State Dormitory
Authority and Houston Airport bonds. As a result of these acquisitions, the
percentage of bonds rated BBB and below increased slightly. Water and sewer
revenue bonds, which had been purchased earlier in the period, were sold in
order to finance these acquisitions.
We continued to maintain the Trust's largest industry concentrations in
health care, single-family housing, and transportation. Over the reporting
period, portfolio exposure to health care rose slightly while its exposure to
higher education declined. The health-care sector continues to improve
financially as facilities focus on keeping expenses under control, serving the
requirements of managed care organizations, and competing with one
Continued on page three
2
<PAGE> 4
another in order to expand their market share. When buying new securities for
the portfolio, we attempt to identify those bonds that we believe will
outperform within a particular sector and that can be purchased at an attractive
price. We believe this "bottom-up" approach, supported by our research, provides
significant added value to the portfolio.
We maintained a relatively short duration in order to potentially reduce the
Trust's volatility to rate increases. Duration, which is expressed in years, is
a measure of a portfolio's sensitivity to interest rate movements. Portfolios
with long durations have tended to perform better when rates are falling, and
portfolios with short durations have tended to perform better when rates are
rising. At the end of the period, the Trust's duration stood at 7.03 years
compared to 8.10 years for the Lehman Brothers Municipal Bond Index benchmark.
Earlier in the year, the duration of the Trust was substantially longer, a
factor that had a negative impact on performance when interest rates rose.
[BAR CHART]
Six-month Dividend History
For the Period Ended April 30, 1997
Distribution per Share
<TABLE>
<S> <C>
Nov 1996 .............................. $.0575
Dec 1996 .............................. $.0575
Jan 1997 .............................. $.0575
Feb 1997 .............................. $.0575
Mar 1997 .............................. $.0575
Apr 1997 .............................. $.0575
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
PERFORMANCE SUMMARY
We are pleased to report that the Van Kampen American Capital Select Sector
Municipal Trust continued its positive performance over the first half of its
fiscal year. For the six-month period ended April 30, 1997, the Trust generated
a total return at market price of 5.62 percent(1). The Trust offered a
tax-exempt distribution rate of 6.34 percent(3), based on the closing common
stock price of $10.875 per share on April 30, 1997. Because income from the
Trust is exempt from federal income tax, this distribution rate represents a
yield equivalent to a taxable investment earning 9.91 percent(4) (for investors
in the 36 percent federal income tax bracket). At the end of the reporting
period, the closing share price of the Trust traded at a 14.7 percent discount
to its net asset value of $12.75.
Continued on page four
3
<PAGE> 5
Top Five Portfolio Industry Holdings by Sector as of April 30, 1997*
Health Care....................... 21.3%
Transportation.................... 18.2%
Housing........................... 15.9%
Utilities......................... 12.6%
Education......................... 12.5%
*As a Percentage of Long-Term
Investments
MUNICIPAL MARKET OUTLOOK
We continue to see signs of a strong economy, although we do not expect the
unusually brisk growth rate of the first quarter to be sustained throughout the
year. As a result, we believe the Fed will monitor the economy closely and take
aggressive action to control growth if inflation picks up or the high growth
rate is sustained. However, if growth slows, we believe the Fed will leave rates
unchanged. Given this outlook, we expect that yields on the 30-year Treasury
bond will range between 6.75 and 7.40 percent for the remainder of the year,
with higher levels occurring early and lower yields dominating the second half
of 1997. Although short-term interest rates have risen, this has not had a
significant impact on the leveraged structure of the Trust.
We believe the Trust is positioned to perform well in the coming months, and
we do not anticipate major structural changes in the portfolio. In light of our
expectations for interest rates, we will continue to maintain a slightly
defensive posture by keeping a relatively short duration for the portfolio and
adjusting the duration when prudent. We will also continue to seek a balance
between the Trust's total return and its dividend income, as well as to add
value through security selection. Thank you for your continued confidence in Van
Kampen American Capital and your Trust's team of managers.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
Please see footnotes on page five
4
<PAGE> 6
PERFORMANCE RESULTS FOR THE PERIOD ENDED APRIL 30, 1997
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)............ 5.62%
Six-month total return based on NAV(2)..................... 1.34%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 6.34%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 9.91%
SHARE VALUATIONS
Net asset value............................................ $ 12.75
Closing common stock price................................. $10.875
Six-month high common stock price (03/11/97)............... $11.000
Six-month low common stock price (04/11/97)................ $10.375
Preferred share (Series A) rate(5)......................... 4.200%
Preferred share (Series B) rate(5)......................... 3.570%
</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.
Market forecasts provided in this report may not necessarily come to pass.
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<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 $ 1,331,310
------------
CALIFORNIA 8.8%
3,900 Los Angeles Cnty, CA Metro Tran Auth Sales Tax
Rev Ser A Rfdg (FGIC Insd)...................... 5.000 07/01/21 3,471,351
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease Rev
Los Angeles Intl Arpt (FSA Insd)................ 6.700 01/01/22 3,181,920
1,500 Orange County, CA Recovery Ctfs Partn Ser A
(MBIA Insd)..................................... 6.000 07/01/07 1,597,380
------------
8,250,651
------------
COLORADO 6.5%
1,000 Castle Rock, CO Multi-Family Rev Hsg Pines at
Castle Rock Ser A (FSA Insd).................... 6.100 12/01/16 1,004,580
2,195 Colorado Hsg Fin Auth Single Family Prog Sr Ser
E............................................... 8.125 12/01/24 2,403,415
2,500 Meridian Metro Dist CO Rfdg..................... 7.000 12/01/01 2,647,950
------------
6,055,945
------------
CONNECTICUT 1.1%
1,000 Connecticut St Dev Auth Wtr Fac Rev Bridgeport
Hydraulic....................................... 6.150 04/01/35 1,001,610
------------
HAWAII 1.1%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd)............. 7.000 07/01/10 1,084,120
------------
ILLINOIS 1.1%
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent Ser A Rfdg................................. 8.800 06/01/06 1,022,590
------------
INDIANA 4.0%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Comm Hosp of
IN (MBIA Insd).................................. 6.850 07/01/22 3,738,903
------------
KENTUCKY 5.4%
1,280 Kenton Cnty, KY Arpt Brd Arpt Rev
Cincinnati/Nrthn KY Intl Ser A Rfdg (MBIA
Insd)........................................... 6.100 03/01/07 1,306,624
4,000 Louisville & Jefferson Cnty, KY Metro Swr Dist
Drainage Rev Rfdg (MBIA Insd)................... 5.300 05/15/19 3,736,360
------------
5,042,984
------------
LOUISIANA 6.1%
1,750 Saint Charles Parish, LA Environmental Impt Rev
LA Pwr & Lt Co Proj A (AMBAC Insd).............. 6.875 07/01/24 1,907,448
3,500 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj A (FSA Insd)....................... 7.500 06/01/21 3,829,770
------------
5,737,218
------------
MAINE 4.3%
4,000 Maine Muni Bond Bk Ser A Rfdg................... 5.375 11/01/08 4,025,840
------------
MASSACHUSETTS 3.4%
2,195 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000 10/01/23 1,932,193
1,235 Massachusetts St Indl Fin Agy Rev (c)........... 6.750 12/01/20 1,285,314
------------
3,217,507
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MICHIGAN 4.7%
$1,580 Michigan Higher Edl Fac Auth Ltd Oblig Rev Hope
College Rfdg (Connie Lee Insd).................. 7.000% 10/01/13 $ 1,742,898
2,500 Michigan St Strategic Fund Ltd Oblig Rev Detroit
Edison Co College Rfdg (FGIC Insd).............. 6.950 09/01/21 2,700,075
------------
4,442,973
------------
MISSOURI 5.6%
3,855 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM
Hlthcare Ser AA Rfdg (MBIA Insd)................ 6.400 06/01/10 4,234,139
1,000 Saint Charles Cnty, MO Indl Dev Auth Indl Rev
Dev Westchester Vlg Apts Ser A Rfdg (FNMA
Collateralized)................................. 6.150 02/01/27 1,002,220
------------
5,236,359
------------
NEVADA 2.0%
1,780 Nevada Hsg Div Single Family Prog Ser E (FHA
Gtd)............................................ 6.900 10/01/14 1,860,545
------------
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 1,360,837
2,000 New Jersey HlthCare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/14 2,058,740
------------
3,419,577
------------
NEW YORK 17.0%
2,000 New York City, NY Hsg Dev Corp Mtg Rev
Multi-Family Ser A Rfdg (FHA Gtd)............... 6.550 10/01/15 2,079,900
1,000 New York City Adj Subser A1 (Embedded Swap)..... 5.570 08/01/12 940,000
1,000 New York City Ser H (FSA Insd).................. 7.000 02/01/21 1,087,680
4,000 New York St Dorm Auth Rev City Univ Ser F....... 5.000 07/01/14 3,525,720
2,500 New York St Dorm Auth Rev Mental Hlth Svcs Facs
Ser B........................................... 5.750 08/15/11 2,463,875
2,500 New York St Dorm Auth Rev St Univ Edl Fac Ser B
Rfdg............................................ 5.250 05/15/09 2,421,900
3,100 New York St Med Care Fac Fin Agy Rev NY Hosp Ser
A (AMBAC Insd).................................. 6.800 08/15/24 3,379,465
------------
15,898,540
------------
OHIO 1.2%
1,500 Akron, Ohio Ctfs Partn Akron Muni Baseball
Stadium Proj (b)................................ 0/6.900 12/01/16 1,132,575
------------
OKLAHOMA 2.3%
2,000 Oklahoma Hsg Fin Agy Single Family Mtg Rev
Homeownership Ln Prog Ser A (GNMA
Collateralized)................................. 7.050 09/01/26 2,156,920
------------
TEXAS 9.4%
3,000 Houston, TX Apts Sys Rev Spl Facs Continental
Airline Ser B................................... 6.125 07/15/27 2,873,760
1,425 Tarrant Cnty, TX Jr College Dist................ 5.050 02/15/10 1,373,500
2,935 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized)........................... 8.400 01/01/21 3,065,696
1,435 Texas St Higher Edl Coordinating Brd College
Student Ln Rev Sr Lien.......................... 7.700 10/01/25 1,512,188
------------
8,825,144
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VIRGINIA 4.6%
$2,885 Fairfax Cnty, VA Econ Dev Auth Res Recovery Rev
Ogden Martin Sys Ser A.......................... 7.750% 02/01/11 $ 3,086,633
1,250 Fairfax Cnty, VA Indl Dev Auth Rev Inova Hlth
Sys Hosp Proj Rfdg (FSA Insd)................... 5.000 08/15/13 1,178,713
------------
4,265,346
------------
WISCONSIN 1.1%
940 Wisconsin Hsg & Econ Dev Auth Homeownership Rev
Ser F........................................... 7.550 07/01/26 1,004,681
------------
PUERTO RICO 5.5%
4,800 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser
Y (Embedded Cap) (FSA Insd)..................... 5.730 7/01/21 5,166,048
------------
TOTAL LONG-TERM INVESTMENTS 100.2%
(Cost $89,562,697) (a)...................................................... 93,917,386
LIABILITIES IN EXCESS OF OTHER ASSETS (0.2)%................................. (202,137)
------------
NET ASSETS 100.0%............................................................ $93,715,249
===========
</TABLE>
(a) At April 30, 1997, for federal income tax purposes, cost is $89,562,697; the
aggregate gross unrealized appreciation is $4,462,324 and the aggregate
gross unrealized depreciation is $320,942, resulting in net unrealized
appreciation including open futures transactions of $4,141,382.
(b) Security is currently a zero coupon bond which will convert to a coupon
paying bond at a predetermined date.
(c) Asset segregated as collateral for open futures transactions.
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $89,562,697)
(Note 1).................................................. $93,917,386
Receivables:
Interest.................................................. 1,736,128
Securities Sold........................................... 46,494
Unamortized Organizational Costs (Note 1)................... 12,569
-----------
Total Assets.......................................... 95,712,577
-----------
LIABILITIES:
Payables:
Securities Purchased...................................... 1,315,876
Custodian Bank............................................ 368,988
Income Distributions -- Common and Preferred Shares....... 89,408
Investment Advisory and Administrative Fees (Note 2)...... 53,749
Variation Margin on Futures (Note 4)...................... 34,375
Affiliates (Note 2)....................................... 3,793
Accrued Expenses............................................ 74,381
Deferred Compensation and Retirement Plans (Note 2)......... 56,758
-----------
Total Liabilities..................................... 1,997,328
-----------
NET ASSETS.................................................. $93,715,249
-----------
NET ASSETS CONSIST OF:
Preferred Shares ($.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................... 4,141,382
Accumulated Undistributed Net Investment Income............. 337,270
Accumulated Net Realized Loss on Securities................. (9,342,826)
-----------
Net Assets Applicable to Common Shares................ 59,715,249
-----------
NET ASSETS.................................................. $93,715,249
===========
NET ASSET VALUE PER COMMON SHARE ($59,715,249 divided by
4,682,128 shares outstanding)............................. $ 12.75
===========
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 2,735,031
-----------
EXPENSES:
Investment Advisory and Administrative Fees (Note 2)........ 328,112
Preferred Share Maintenance (Note 5)........................ 58,302
Trustees Fees and Expenses (Note 2)......................... 11,222
Custody..................................................... 6,516
Legal (Note 2).............................................. 5,792
Amortization of Organizational Costs (Note 1)............... 3,966
Other....................................................... 48,146
-----------
Total Expenses.......................................... 462,056
-----------
NET INVESTMENT INCOME....................................... $ 2,272,975
===========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................... $ 276,722
Futures................................................... 3,477
-----------
Net Realized Gain on Securities............................. 280,199
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 5,276,492
-----------
End of the Period:
Investments............................................. 4,354,689
Futures................................................. (213,307)
-----------
4,141,382
-----------
Net Unrealized Depreciation on Securities During the
Period.................................................... (1,135,110)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $ (854,911)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 1,418,064
===========
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1997 and
the Year Ended October 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 1997 October 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................. $ 2,272,975 $ 4,601,328
Net Realized Gain on Securities........................ 280,199 219,053
Net Unrealized Appreciation/Depreciation on
Securities During the Period......................... (1,135,110) 95,429
----------- -----------
Change in Net Assets from Operations................... 1,418,064 4,915,810
----------- -----------
Distributions from Net Investment Income:
Common Shares........................................ (1,615,288) (3,242,307)
Preferred Shares..................................... (592,621) (1,231,813)
----------- -----------
Total Distributions.................................... (2,207,909) (4,474,120)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.... (789,845) 441,690
NET ASSETS:
Beginning of the Period................................ 94,505,094 94,063,404
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of $337,270 and $272,204,
respectively)........................................ $93,715,249 $94,505,094
=========== ===========
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
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
Year Ended Year Ended of Investment
Six Months Ended October 31, October 31, Operations) to
April 30, 1997 1996 1995 October 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period (a)........................ $12.923 $12.828 $11.507 $13.783
------- ------- ------- -------
Net Investment Income............... .486 .983 .992 .894
Net Realized and Unrealized
Gain/Loss on Securities........... (.183) .068 1.391 (2.377)
------- ------- ------- -------
Total from Investment Operations.... .303 1.051 2.383 (1.483)
------- ------- ------- -------
Less Distributions from Net
Investment Income:
Paid to Common Shareholders....... .345 .693 .774 .621
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders.................... .127 .263 .288 .172
------- ------- ------- -------
Total Distributions................. .472 .956 1.062 .793
------- ------- ------- -------
Net Asset Value, End of the
Period............................ $12.754 $12.923 $12.828 $11.507
======= ======= ======= =======
Market Price Per Share at End of the
Period............................ $10.875 $10.625 $10.750 $9.625
Total Investment Return at Market
Price (b)......................... 5.62%* 5.35% 19.87% (27.90%)*
Total Return at Net Asset Value
(c)............................... 1.34%* 6.29% 18.75% (14.18%)*
Net Assets at End of the Period (In
millions)......................... $93.7 $94.5 $94.1 $87.9
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares............................ 1.55% 1.55% 1.68% 1.58%
Ratio of Expenses to Average Net
Assets............................ .99% .99% 1.05% 1.04%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d)................. 5.65% 5.62% 5.77% 6.06%
Portfolio Turnover.................. 19%* 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
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
April 30, 1997 (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 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. At April 30, 1997, 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.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
D. ORGANIZATIONAL COSTS--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 costs 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.
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
(Illinois), counsel to the Trust, of which a trustee of the Trust is an
affiliated person.
For the six months ended April 30, 1997, the Trust recognized expenses of
approximately $5,600 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.
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit under the plan is equal to the trustee's annual retainer fee, which is
currently $2,500.
At April 30, 1997, 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, were $19,385,411 and $17,752,383,
respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Trust's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on securities. Upon disposition, a realized gain or
loss is recognized accordingly, except when taking delivery of a security
underlying a futures contract. In this instance, the recognition of gain or loss
is postponed until the disposal of the security underlying the futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Trust.
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Trust generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Transactions in futures contracts for the six months ended April 30, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1996............................. -0-
Futures Opened.............................................. 175
Futures Closed.............................................. (75)
----
Outstanding at April 30, 1997............................... 100
====
</TABLE>
The futures contracts outstanding as of April 30, 1997, and the description
and unrealized depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
June 1997--Sells to Open (Current Notional Value
of $109,281 per contract).................... 100 $213,307
=== ========
</TABLE>
B. 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.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. 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,
1997, was 3.885%. During the six months ended April 30, 1997, the rates ranged
from 3.250% 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.
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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.
17
<PAGE> 19
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
18
<PAGE> 20
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
Growth Fund
Pace Fund
Growth & Income
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
MORGAN STANLEY
FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Worldwide High Income 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 weekdays from 7:00 a.m. to 7:00 p.m.
Central time at 1-800-341-2911 for Van Kampen American Capital funds, or
1-800-282-4404 for Morgan Stanley retail funds.
19
<PAGE> 21
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 (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1997 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
20
