<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
Report of Independent Accountants................ 18
Dividend Reinvestment Plan....................... 19
</TABLE>
VKL ANR 12/97
<PAGE> 2
LETTER TO SHAREHOLDERS
December 4, 1997
Dear Shareholder,
In the past year, we have been
participants in and witnesses to two
mergers that we believe have positioned
our company at the forefront of the
financial industry's evolution. Our
latest announcement continues our [PHOTO]
forward progress. I am pleased to
announce that Philip N. Duff, formerly
the chief financial officer of Morgan
Stanley, has joined Van Kampen American
Capital as president and chief DENNIS J. MCDONNELL AND DON G. POWELL
executive officer. I will continue as
chairman of the firm. Together, we will continue to work to the benefit of our
fund shareholders as Van Kampen American Capital advances toward the next
century.
ECONOMIC REVIEW
The last quarter of 1996 brought renewed strength and rumblings of
inflation, which continued to feed investors' uncertainties about the direction
of interest rates. This was reflected in the volatility of taxable yields, with
the 30-year Treasury ranging from a high of 6.70 percent to a low of 6.35
percent, and ending the period at 6.64 percent.
The economy grew at a brisk 3.9 percent annual rate during the first three
quarters of 1997. At the same time, the federal budget deficit fell to its
lowest level in 23 years, while consumer prices rose less than 2.0 percent on an
annual basis and producer prices declined 1.4 percent.
The bond market advanced in price during the first 10 months of 1997, but
its ascension was not a smooth ride. Bond prices fell early in the period as
economic growth soared, fueling concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed did raise interest
rates by a modest 0.25 percent in late March, bond prices fell further, sending
the yield of the 30-year U.S. Treasury bond above 7.0 percent for the first time
in six months. By mid-April, however, the market's mood had changed, reflecting
few signs of price pressures despite the economy's strength. Bonds also
benefited from continued heavy purchases by foreign investors and concerns that
the stock market rally was nearing an end. The 7.0 percent slump in the Dow
Jones Industrial Average on October 27 reinforced the benefit of owning bonds
for diversification. By the end of October, the yield on the 30-year Treasury
bond was near its lowest level in 20 months, at 6.15 percent.
Throughout 1997, municipal bond prices moved in the same direction as the
Treasury bond market, but gained less when Treasury prices rallied and lost less
when Treasuries fell. Between December 31, 1996 and October 31, 1997, the yield
on the long-term municipal revenue bond index fell 36 basis points as the yield
on the 30-year Treasury
Continued on page two
1
<PAGE> 3
bond fell 48 basis points. Because yields move in the opposite direction of
prices, the smaller yield decline of municipal bonds indicates that their prices
did not rise as much as Treasuries.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality*
As of October 31, 1997
<TABLE>
<S> <C>
AAA............ 53.5%
AA............. 12.0%
A.............. 16.0%
BBB............ 11.5%
BB............. 2.4%
B.............. 3.2%
Non-Rated...... 1.4%
</TABLE>
*As a Percentage of Long-Term Investments
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's
TRUST STRATEGY
In managing the Trust, we used the following strategies:
We moderately increased the Trust's concentration in high-quality bonds and
decreased its holdings in lower-quality issues. The increase in AAA-rated
securities in the portfolio reflects the proliferation of insured bonds, which
currently comprise well over half of new issues in the municipal bond market.
AAA-rated bonds are extremely liquid and carry minimal credit risk. When
interest rates fall, as they did for most of the second half of the fiscal year,
AAA-rated bonds tend to outperform lower-rated securities. Bonds rated BBB or
below tend to perform better when rates are rising, and have the potential to
provide additional income. The percentage of noninvestment-grade bonds in the
portfolio is well below the 20 percent allowable under the Trust's prospectus.
Portfolio turnover during the fiscal year was moderate due to market
conditions that afforded few opportunities to add value to existing holdings.
The average yield of bonds in the Trust's portfolio was higher than average
market yields. As a result, there was little incentive to replace bonds in the
Trust, because such trades would have reduced the Trust's dividend-paying
ability.
Trading was also restrained by tight spreads between yields of AAA-rated
bonds and lower-rated securities. These spreads compressed to historically
narrow levels due to the increasing number of insured bonds in the municipal
market. For example, when a new long-term California transportation issue was
sold in September, its BBB-rated portion yielded only 20 basis points more than
the AAA-rated insured component in the same maturity. As a result of the narrow
yield spreads, there was often not enough incentive to purchase lower-rated
securities and assume the additional credit risk.
Acquisitions focused on enhancing the Trust's call protection as well as its
dividend-paying ability. Because we hoped to limit the number of bonds that
could be "called" at any one time, we purchased long-term, high-quality par
bonds that will not be callable for many years. Housing, airport, general
obligation, and water and sewer bonds were
Continued on page three
2
<PAGE> 4
purchased when their yields reached attractive levels. In addition, purchases
included long-term discount securities with the potential to appreciate in
price.
The Trust remains well-diversified by sector, but maintains its heaviest
weightings in health-care, education, and transportation bonds. The health-care
sector continues to benefit from industry consolidation and an emphasis by
facilities to stabilize expenses. Education bonds, which pay relatively high
yields, have been underpinned by strong retail demand, and transportation bonds,
especially airport bonds, have benefited from a strong national economy.
When searching for new securities for the Trust's portfolio, we try to
identify 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.
During the second half of the fiscal year, we lengthened the duration of the
portfolio in order to enhance the Trust's price appreciation potential.
Duration, which is expressed in years, is a measure of a portfolio's sensitivity
to interest rate movements. Portfolios with long durations tend to perform
better when interest rates are falling, while portfolios with short durations
tend to do better when rates are rising. As of October 31, the Trust's duration
stood at 7.95 years, compared to 7.34 years for the Lehman Brothers Municipal
Bond Index. Because of the longer-term nature of the Trust, the calculation of
this index's duration has been adjusted to eliminate bonds with maturities of
five years or less.
TOP FIVE PORTFOLIO INDUSTRY HOLDINGS BY SECTOR AS OF OCTOBER 31, 1997*
Health Care....................... 18.7%
Transportation.................... 18.0%
Education......................... 16.1%
Housing........................... 14.9%
Utilities......................... 13.6%
*As a Percentage of Long-Term Investments
PERFORMANCE SUMMARY
For the one-year period ended October 31, 1997, the Van Kampen American
Capital Select Sector Municipal Trust generated a total return at market price
of 17.46 percent(1). The Trust offered a tax-exempt distribution rate of 5.87
percent(3), based on the closing common stock price on October 31, 1997. At the
end of the reporting period, the closing share price of the Trust traded at
$11.75, a 13.67 percent discount to its net asset value of $13.61. Because
income from the Trust is exempt from federal income taxes, this distribution
rate represents a yield equivalent to a taxable investment earning 9.17
percent(4) (for investors in the federal income tax bracket of 36 percent).
Continued on page four
3
<PAGE> 5
Twelve-month Dividend History
For the Period Ended October 31, 1997
Distribution per Common Share
<TABLE>
<CAPTION>
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
1996 1996 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575 $.0575
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
OUTLOOK
We expect the economy to remain strong in the coming months, although the
growth rate might slow to a more moderate pace. The weakness in the Far East,
which was the impetus for the recent volatility in world stock markets, will
most likely reduce U.S. exports to the region. In turn, this could trim U.S.
economic growth as well as the earnings of many U.S. companies. As a result, we
believe there is little chance that the Fed will raise interest rates in the
coming months. A rate hike reemerges as a possibility if inflation picks up, or
if growth continues at its current brisk pace.
As a result of this outlook, we expect that the yield on the 30-year
Treasury bond will trade within a range of 5.75 percent and 6.50 percent for the
next six months, possibly falling further in mid-1998. A decline in rates would
not only boost the prices of long-term investments in the portfolio, but could
also positively affect the Trust as a result of its leveraged structure. That
structure, which involves borrowing short-term funds to purchase long-term
municipal bonds, provides common shareholders with above-market levels of
dividend income. It should be noted, however, that if short-term rates rise,
borrowing costs would increase; this would negatively impact the income and
performance of common shares.
We will continue to seek a balance between the Trust's total return and its
dividend income, and to add value through our investment strategies and bond
selection. Thank you for your continued confidence in Van Kampen American
Capital and your Trust's portfolio manager.
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 OCTOBER 31, 1997
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)............. 17.46%
One-year total return based on NAV(2)...................... 11.01%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 5.87%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 9.17%
SHARE VALUATIONS
Net asset value............................................ $ 13.61
Closing common stock price................................. $11.750
One-year high common stock price (07/30/97)................ $12.500
One-year low common stock price (04/11/97)................. $10.375
Preferred share (Series A) rate(5)......................... 3.590%
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.
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 102.8%
ALASKA 1.4%
$1,500 Alaska St Hsg Fin Corp Ser A Rfdg............... 5.000% 12/01/18 $ 1,405,230
------------
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 3,707,652
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease Rev
Los Angeles Intl Arpt (FSA Insd)................ 6.700 01/01/22 3,252,450
1,500 Orange Cnty, CA Recovery Ctfs Partn Ser A (MBIA
Insd)........................................... 6.000 07/01/07 1,663,515
------------
8,623,617
------------
COLORADO 6.1%
1,000 Castle Rock, CO Multi-Family Rev Hsg Pines at
Castle Rock Ser A (FSA Insd).................... 6.100 12/01/16 1,039,630
2,034 Colorado Hsg Fin Auth Single Family Prog Sr Ser
E............................................... 8.125 12/01/24 2,251,801
2,500 Meridian Metro Dist CO Rfdg..................... 7.000 12/01/01 2,717,050
------------
6,008,481
------------
CONNECTICUT 1.1%
1,000 Connecticut St Dev Auth Wtr Fac Rev Bridgeport
Hydraulic....................................... 6.150 04/01/35 1,059,220
------------
HAWAII 1.1%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd)............. 7.000 07/01/10 1,090,940
------------
ILLINOIS 2.0%
1,000 Illinois Hlth Fac Auth Rev Ravenswood Hosp Med
Cent Ser A Rfdg................................. 8.800 06/01/06 1,022,890
2,500 Will Cnty, Ill Cmnty Unit Sch Dist No 365U Vly
View Ser B (FSA Insd) (a)....................... * 11/01/16 893,375
------------
1,916,265
------------
INDIANA 6.4%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Comm Hosp of
IN (MBIA Insd).................................. 6.850 07/01/22 3,805,212
2,500 Indiana Hlth Fac Fin Auth Rev Ancilla Sys Inc
Oblig Grp (MBIA Insd) (a)....................... 5.250 07/01/22 2,422,525
------------
6,227,737
------------
KENTUCKY 5.5%
1,280 Kenton Cnty, KY Arpt Brd Arpt Rev
Cincinnati/Nrthn KY Intl Ser A Rfdg (MBIA Insd)
(a)............................................. 6.100 03/01/07 1,402,701
4,000 Louisville & Jefferson Cnty, KY Metro Swr Dist
Drainage Rev Rfdg (MBIA Insd)................... 5.300 05/15/19 3,939,320
------------
5,342,021
------------
LOUISIANA 6.0%
1,750 Saint Charles Parish, LA Environmental Impt Rev
LA Pwr & Lt Co Proj A (AMBAC Insd).............. 6.875 07/01/24 1,958,057
3,500 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr
& Lt Co Proj A (FSA Insd)....................... 7.500 06/01/21 3,870,230
------------
5,828,287
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MAINE 4.3%
$4,000 Maine Muni Bond Bk Ser A Rfdg................... 5.375% 11/01/08 $ 4,152,320
------------
MASSACHUSETTS 2.8%
1,495 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 6.000 10/01/23 1,443,527
1,235 Massachusetts St Indl Fin Agy Rev (b)........... 6.750 12/01/20 1,339,777
------------
2,783,304
------------
MICHIGAN 4.6%
1,580 Michigan Higher Edl Fac Auth Ltd Oblig Rev Hope
College Rfdg (Connie Lee Insd).................. 7.000 10/01/13 1,782,888
2,500 Michigan St Strategic Fund Ltd Oblig Rev Detroit
Edison Co College Rfdg (FGIC Insd).............. 6.950 09/01/21 2,739,625
------------
4,522,513
------------
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 4,412,703
1,000 St Charles Cnty, Mo Indl Dev Auth Indl Rev Dev
Westchester Vlg Apts Ser A Rfdg (FNMA Insd)..... 6.150 02/01/27 1,039,980
------------
5,452,683
------------
NEVADA 1.9%
1,770 Nevada Hsg Div Single Family Prog Ser E (FHA
Gtd)............................................ 6.900 10/01/14 1,897,493
------------
NEW JERSEY 3.7%
1,340 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Proj Ser A................... 6.200 12/01/10 1,406,705
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)...................... 6.000 07/01/14 2,188,720
------------
3,595,425
------------
NEW YORK 19.0%
2,000 New York City, NY Hsg Dev Corp Mtg Rev
Multi-Family Ser A Rfdg (FHA Gtd)............... 6.550 10/01/15 2,129,820
515 New York City, NY Ser H (Prerefunded @ 02/01/02)
(FSA Insd)...................................... 7.000 02/01/21 577,129
485 New York City, NY Ser H (FSA Insd).............. 7.000 02/01/21 538,001
1,000 New York, NY Adj Subser A1 (Embedded Swap)...... 5.915 08/01/12 1,023,720
1,500 New York, NY City Muni Wtr Fin Auth Wtr & Swr
Sys Rev Ser B................................... 5.250 06/15/29 1,459,320
4,000 New York St Dorm Auth Rev City Univ Ser F....... 5.000 07/01/14 3,812,640
3,000 New York St Dorm Auth Rev City Univ Sys Cons Ser
1(a)............................................ 5.375 07/01/24 2,923,050
2,500 New York St Dorm Auth Rev St Univ Edl Fac Ser B
Rfdg............................................ 5.250 05/15/09 2,564,175
3,100 New York St Med Care Fac Fin Agy Rev NY Hosp Ser
A (AMBAC Insd).................................. 6.800 08/15/24 3,496,552
------------
18,524,407
------------
OHIO 1.3%
1,500 Akron, Ohio Ctfs Partn Akron Muni Baseball Stad
Proj (c)........................................ 0/6.900 12/01/16 1,267,305
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
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 $ 2,222,420
------------
TEXAS 9.1%
3,000 Houston, TX Apts Sys Rev Spl Facs Continental
Airls Ser B..................................... 6.125 07/15/27 3,096,000
1,425 Tarrant Cnty, TX Jr College Dist................ 5.050 02/15/10 1,436,457
2,820 Texas Hsg Agy Residential Dev Rev Mtg Ser D
(GNMA Collateralized)........................... 8.400 01/01/21 2,958,744
1,345 Texas St Higher Edl Coordinating Brd College
Student Ln Rev Sr Lien.......................... 7.700 10/01/25 1,447,933
------------
8,939,134
------------
VIRGINIA 3.2%
2,885 Fairfax Cnty, VA Econ Dev Auth Res Recovery Rev
Ogden Martin Sys Ser A.......................... 7.750 02/01/11 3,079,305
------------
WISCONSIN 1.0%
940 Wisconsin Hsg & Econ Dev Auth Homeownership Rev
Ser F........................................... 7.550 07/01/26 1,012,305
------------
PUERTO RICO 5.6%
4,800 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser
Y (Embedded Cap) (FSA Insd)..................... 5.730 07/01/21 5,513,760
------------
TOTAL LONG-TERM INVESTMENTS 102.8%
(Cost $92,409,748).......................................................... 100,464,172
SHORT-TERM INVESTMENTS 3.2%
(Cost $3,100,000)........................................................... 3,100,000
------------
TOTAL INVESTMENTS 106.0%
(Cost $95,509,748).......................................................... 103,564,172
LIABILITIES IN EXCESS OF OTHER ASSETS (6.0%)................................. (5,863,259)
------------
NET ASSETS 100.0%............................................................ $ 97,700,913
============
</TABLE>
* Zero coupon bond
(a) Security purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
(c) Security is currently a zero coupon bond which will convert to a coupon
paying bond at a predetermined date.
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $95,509,748)........................ $103,564,172
Cash........................................................ 30,300
Receivables:
Interest.................................................. 1,764,431
Investments Sold.......................................... 93,934
Unamortized Organizational Costs............................ 8,537
------------
Total Assets.......................................... 105,461,374
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 7,468,743
Income Distributions -- Common and Preferred Shares....... 68,616
Investment Advisory and Administrative Fees............... 57,716
Affiliates................................................ 7,244
Accrued Expenses............................................ 88,304
Trustees' Deferred Compensation and Retirement Plans........ 69,838
------------
Total Liabilities..................................... 7,760,461
------------
NET ASSETS.................................................. $ 97,700,913
============
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)........................................ $ 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................................. 8,054,424
Accumulated Undistributed Net Investment Income............. 410,935
Accumulated Net Realized Loss............................... (9,343,869)
------------
Net Assets Applicable to Common Shares................ 63,700,913
------------
NET ASSETS.................................................. $ 97,700,913
============
NET ASSET VALUE PER COMMON SHARE ($63,700,913 divided by
4,682,128 shares outstanding)............................. $ 13.61
============
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 5,532,828
-----------
EXPENSES:
Investment Advisory and Administrative Fees................. 667,121
Preferred Share Maintenance................................. 111,070
Trustees' Fees and Expenses................................. 26,326
Legal....................................................... 11,680
Custody..................................................... 9,140
Amortization of Organizational Costs........................ 7,997
Other....................................................... 107,590
-----------
Total Expenses.......................................... 940,924
-----------
NET INVESTMENT INCOME....................................... $ 4,591,904
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 549,168
Futures................................................... (270,012)
-----------
Net Realized Gain........................................... 279,156
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 5,276,492
End of the Period:
Investments............................................. 8,054,424
-----------
Net Unrealized Appreciation During the Period............... 2,777,932
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 3,057,088
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 7,648,992
===========
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended October 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................. $ 4,591,904 $ 4,601,328
Net Realized Gain...................................... 279,156 219,053
Net Unrealized Appreciation During the Period.......... 2,777,932 95,429
----------- -----------
Change in Net Assets from Operations................... 7,648,992 4,915,810
----------- -----------
Distributions from Net Investment Income:
Common Shares........................................ (3,230,569) (3,242,307)
Preferred Shares..................................... (1,222,604) (1,231,813)
----------- -----------
Total Distributions.................................... (4,453,173) (4,474,120)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.... 3,195,819 441,690
NET ASSETS:
Beginning of the Period................................ 94,505,094 94,063,404
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of $410,935 and $272,204,
respectively)........................................ $97,700,913 $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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 26, 1993
(Commencement
Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, Operations) to
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............... .981 .983 .992 .894
Net Realized and Unrealized
Gain/Loss......................... .652 .068 1.391 (2.377)
------- ------- ------- -------
Total from Investment Operations.... 1.633 1.051 2.383 (1.483)
------- ------- ------- -------
Less Distributions from Net
Investment Income:
Paid to Common Shareholders....... .690 .693 .774 .621
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders.................... .261 .263 .288 .172
------- ------- ------- -------
Total Distributions................. .951 .956 1.062 .793
------- ------- ------- -------
Net Asset Value, End of the
Period............................ $13.605 $12.923 $12.828 $11.507
======= ======= ======= =======
Market Price Per Share at End of the
Period............................ $11.750 $10.625 $10.750 $9.625
Total Investment Return at Market
Price (b)......................... 17.46% 5.35% 19.87% (27.90%)*
Total Return at Net Asset Value
(c)............................... 11.01% 6.29% 18.75% (14.18%)*
Net Assets at End of the Period (In
millions)......................... $97.7 $94.5 $94.1 $87.9
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares............................ 1.53% 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)................. 5.50% 5.62% 5.77% 6.06%
Portfolio Turnover.................. 39% 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
October 31, 1997
- --------------------------------------------------------------------------------
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 COSTS--The Trust has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
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, 1997, the Trust had an accumulated capital loss
carryforward for tax purposes of $9,343,869 which will expire between October
31, 2002 and October 31, 2003.
At October 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $95,509,748; the aggregate gross unrealized
appreciation is $8,054,424 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $8,054,424.
F. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually on a pro rata basis to common and preferred
shareholders.
For the year ended October 31, 1997, 99.97% of the income distributions made
by the Trust were exempt from Federal income taxes. In January, 1998, the Trust
will provide tax information to shareholders for the 1997 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.
For the year ended October 31, 1997, the Trust recognized expenses of
approximately $2,200 representing legal services provided by Skadden, Arps,
Slate,
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of the Trust
is an affiliated person.
For the year ended October 31, 1997, the Trust recognized expenses of
approximately $21,500 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust 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 October 31, 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 $41,473,231 and $37,622,519,
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. 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
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1997
- --------------------------------------------------------------------------------
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).
Transactions in futures contracts for the year ended October 31, 1997, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1996............................. -0-
Futures Opened.............................................. 175
Futures Closed.............................................. (175)
----
Outstanding at October 31, 1997............................. -0-
====
</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 October 31,
1997, was 3.580%. During the year ended October 31, 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)
October 31, 1997
- --------------------------------------------------------------------------------
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
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, 1997, 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, 1997, 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, 1997,
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, 1997
18
<PAGE> 20
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
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
<PAGE> 22
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on May 28, 1997,
where shareholders voted on a new investment advisory agreement, the election of
Trustees whose terms expired in 1997 and independent public accountants.
1) With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Trust,
3,821,444 shares voted for the proposal, 93,483 shares voted against, 146,359
shares abstained and 0 shares represented broker non-votes.
2) With regard to the election of Theodore A. Myers as elected trustee by
the preferred shareholders of the Trust, 1,054 shares voted in his favor, 4
shares withheld.
3) With regard to the election of Hugo Sonnenschein as elected trustee by
the common shareholders of the Trust, 3,918,423 shares voted in his favor,
141,804 shares withheld.
The other trustees of the Trust whose terms did not expire in 1997 are David
C. Arch, Rod Dammeyer, Howard J Kerr, Dennis J. McDonnell and Wayne W. Whalen.
4) With regard to the ratification of KPMG Peat Marwick LLP as independent
public accountants for its current fiscal year, 3,937,079 shares voted for the
proposal, 27,390 shares voted against, 96,816 shares abstained and 0 shares
represented broker non-votes.
21
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 95,509,748
<INVESTMENTS-AT-VALUE> 103,564,172
<RECEIVABLES> 1,858,365
<ASSETS-OTHER> 8,537
<OTHER-ITEMS-ASSETS> 30,300
<TOTAL-ASSETS> 105,461,374
<PAYABLE-FOR-SECURITIES> 7,468,743
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 291,718
<TOTAL-LIABILITIES> 7,760,461
<SENIOR-EQUITY> 34,000,000
<PAID-IN-CAPITAL-COMMON> 64,579,423
<SHARES-COMMON-STOCK> 4,682,128
<SHARES-COMMON-PRIOR> 4,682,128
<ACCUMULATED-NII-CURRENT> 410,935
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,343,869)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,054,424
<NET-ASSETS> 97,700,913
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,532,828
<OTHER-INCOME> 0
<EXPENSES-NET> (940,924)
<NET-INVESTMENT-INCOME> 4,591,904
<REALIZED-GAINS-CURRENT> 279,156
<APPREC-INCREASE-CURRENT> 2,777,932
<NET-CHANGE-FROM-OPS> 7,648,992
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,453,173)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,195,819
<ACCUMULATED-NII-PRIOR> 272,204
<ACCUMULATED-GAINS-PRIOR> (9,623,025)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 517,121
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 940,924
<AVERAGE-NET-ASSETS> 61,302,988
<PER-SHARE-NAV-BEGIN> 12.923
<PER-SHARE-NII> 0.981
<PER-SHARE-GAIN-APPREC> 0.652
<PER-SHARE-DIVIDEND> (0.951)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.605
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
