<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 3
PORTFOLIO AT A GLANCE
CREDIT QUALITY 4
SIX-MONTH DIVIDEND HISTORY 4
TOP FIVE INDUSTRIES 5
NET ASSET VALUE AND MARKET PRICE 5
Q&A WITH YOUR PORTFOLIO MANAGERS 6
GLOSSARY OF TERMS 10
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 11
FINANCIAL STATEMENTS 17
NOTES TO FINANCIAL STATEMENTS 22
TRUST OFFICERS AND IMPORTANT ADDRESSES 25
</TABLE>
It is times like these when money- management experience may make a difference.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
May 19, 2000
Dear Shareholder,
Whether you have held your Trust for years or just joined the Van Kampen family
of shareholders in the last few months, you are likely to have questions and
even some concerns about how recent market volatility has affected your
investment. I encourage you to review the following Q&A in which your portfolio
manager provides an update on how your Trust is being managed in this
environment.
It is times like these when money-management experience may make a difference.
Toward that end, you should know that Van Kampen is one of the nation's oldest
investment-management firms, with a history of money management dating back to
1926. Our portfolio managers have invested in all types of market
conditions--during bull and bear markets, periods of inflation and rising
interest rates, and now a technology revolution. We have managed money long
enough to understand short-term market volatility and the value of investing for
the long term.
As we head into the second half of 2000, count on us to
continue to draw on the wisdom of our 76 years of experience.
Along those lines, Van Kampen's "Generations of Experience" is
the theme of a national advertising campaign that kicked off
this spring. The message emphasizes our depth of
investment-management history, as well as our firm belief that with the right
investments, anyone can realize life's true wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH REMAINED STRONG, PRIMARILY DUE TO ACTIVE CONSUMER AND BUSINESS
SPENDING. GROSS DOMESTIC PRODUCT, THE PRIMARY MEASURE OF ECONOMIC GROWTH,
INCREASED AT AN ANNUALIZED RATE OF 5.4 PERCENT IN THE FIRST QUARTER OF 2000.
WHILE THIS FIGURE INDICATES A MODEST SLOWDOWN FROM THE PREVIOUS TWO QUARTERS, IT
NEVERTHELESS REPRESENTS A HIGH RATE OF ECONOMIC GROWTH.
CONSUMER SPENDING AND EMPLOYMENT
INFLATION FEARS CONTINUED TO MOUNT BECAUSE OF STRONG CONSUMER SPENDING AND THE
TIGHT LABOR MARKET. FOR MOST OF THE REPORTING PERIOD, RISING INTEREST RATES DID
LITTLE TO REIN IN ROBUST CONSUMER SPENDING. ALTHOUGH RETAIL SALES GROWTH
MODERATED IN APRIL, THE FACTORS UNDERPINNING CONSUMER ACTIVITY REMAINED LARGELY
UNCHANGED--RISING WAGES, LOW UNEMPLOYMENT, AND A GENERALLY FAVORABLE (THOUGH
VOLATILE) STOCK MARKET.
IN ADDITION, THE JOBLESS RATE HOVERED NEAR ITS LOWEST LEVEL IN THREE DECADES.
THE EMPLOYMENT COST INDEX ACCELERATED SHARPLY IN THE FIRST QUARTER OF 2000,
REFLECTING RISING WAGES AS EMPLOYERS VIE TO ATTRACT AND RETAIN SKILLED WORKERS.
THESE WAGE PRESSURES, IN TURN, BEGAN TO AFFECT PRICES, AS COMPANIES STARTED TO
RAISE THE COST OF GOODS AND SERVICES TO COMPENSATE FOR HIGHER LABOR COSTS.
INTEREST RATES AND INFLATION
STRONG GDP DATA, CONSUMER SPENDING, AND EMPLOYMENT PROMPTED THE FEDERAL RESERVE
BOARD TO SEEK TO SLOW THE PACE OF ECONOMIC GROWTH AND WARD OFF INFLATION. THE
FED INCREASED THE FEDERAL FUNDS RATE BY 0.25 PERCENT FIVE TIMES BETWEEN JUNE
1999 AND APRIL 2000. [EDITOR'S NOTE: THE FED RAISED RATES BY 0.50 PERCENT ON MAY
16.] DESPITE THE FED'S CONCERNS, THE CONSUMER PRICE INDEX, A MEASURE OF
INFLATION, ROSE A MODERATE 3.0 PERCENT DURING THE 12 MONTHS ENDED APRIL 30,
2000.
INTEREST RATES AND INFLATION
(April 30, 1998 - April 30, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Apr 98 5.50 1.40
5.50 1.70
5.50 1.70
Jul 98 5.50 1.70
5.50 1.60
5.25 1.50
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
</TABLE>
Interest rates are represented by the closing midline federal funds target rate
on the last
day of each month. Inflation is indicated by the annual percent change of the
Consumer Price Index for all urban consumers at the end of each month.
2
<PAGE> 4
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of April 30, 2000)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C>
AMEX Ticker Symbol VKL
-----------------------------------------------------------------------
Six-month total return based on market price(1) 1.06%
-----------------------------------------------------------------------
Six-month total return based on NAV(2) 1.56%
-----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 6.90%
-----------------------------------------------------------------------
Taxable-equivalent distribution rate as a % of closing
common stock price(4) 10.78%
-----------------------------------------------------------------------
Net asset value $12.37
-----------------------------------------------------------------------
Closing common stock price $10.4375
-----------------------------------------------------------------------
Six-month high common stock price (01/24/00) $11.8750
-----------------------------------------------------------------------
Six-month low common stock price (03/10/00) $10.0000
-----------------------------------------------------------------------
Preferred share (Series A) rate(5) 4.700%
-----------------------------------------------------------------------
Preferred share (Series B) rate(5) 4.000%
-----------------------------------------------------------------------
</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 #4, 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 is no guarantee of 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.
3
<PAGE> 5
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
<TABLE>
<CAPTION>
As of April 30, 2000
<S> <C> <C>
- AAA/Aaa............ 56.5%
- AA/Aa.............. 13.0%
- A/A................ 14.3%
- BBB/Baa............ 7.5%
- BB/Ba.............. 7.3%
- Non-Rated.......... 1.4%
[PIE CHART]
<CAPTION>
As of October 31, 1999
<S> <C> <C>
- AAA/Aaa............ 62.6%
- AA/Aa.............. 10.1%
- A/A................ 9.1%
- BBB/Baa............ 10.0%
- BB/Ba.............. 6.9%
- Non-Rated.......... 1.3%
[PIE CHART]
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
SIX-MONTH DIVIDEND HISTORY
(for the six months ending April 30, 2000, for common shares)
[BAR GRAPH]
<TABLE>
<CAPTION>
DIVIDENDS
---------
<S> <C>
11/99 0.06
12/99 0.06
1/00 0.06
2/00 0.06
3/00 0.06
4/00 0.06
</TABLE>
The dividend history represents past performance of the Trust and is no
guarantee of the Trust's future dividends.
4
<PAGE> 6
TOP FIVE INDUSTRIES
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
APRIL 30, 2000 OCTOBER 31, 1999
-------------- ----------------
<S> <C> <C>
Health Care 15.60 16.70
Higher Education 14.30 11.50
Transportation 13.60 12.70
Single-Family Housing 10.70 6.20
Industrial Revenue 9.30 9.90
</TABLE>
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--November 1993 through April 2000)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICE
--------------- ------------
<S> <C> <C>
11/93 13.9500 15.0000
14.2100 14.7500
12.3900 11.3750
12.2500 11.3750
12.0000 10.1250
12/94 11.4400 9.8750
12.4200 11.1250
12.3700 10.7500
12.6100 10.5000
12/95 13.3000 11.0000
12.6100 10.6250
12.4600 10.2500
12.8000 10.8750
12/96 13.0200 10.7500
12.7400 10.6250
13.0800 11.1870
13.5400 12.0630
12/97 13.8500 12.2500
13.8600 12.1875
13.8900 12.3750
14.2700 13.0000
12/98 14.0900 13.3125
13.9500 12.7500
13.7000 12.2500
12.8100 11.0625
12/99 12.3200 10.3125
12.5400 10.2500
4/00 12.3700 10.4375
</TABLE>
The solid line above represents the Trust's net asset value (NAV), which
indicates overall changes in value among the Trust's underlying securities. The
Trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the Trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
5
<PAGE> 7
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH REPRESENTATIVES OF THE ADVISER OF THE VAN KAMPEN SELECT
SECTOR MUNICIPAL TRUST ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE
MARKETS DURING THE PAST SIX MONTHS. THE REPRESENTATIVES INCLUDE DENNIS S.
PIETRZAK, PORTFOLIO MANAGER, WHO HAS MANAGED THE TRUST SINCE 1996 AND WORKED IN
THE INVESTMENT INDUSTRY SINCE 1968. THE FOLLOWING COMMENTS REFLECT THE
REPRESENTATIVES' VIEWS ON THE TRUST'S PERFORMANCE DURING THE SIX MONTHS ENDED
APRIL 30, 2000.
Q WHAT WERE THE MOST IMPORTANT
DEVELOPMENTS IN THE FIXED-INCOME MARKETS DURING THE REPORTING PERIOD?
A Generally higher interest rates,
sparked by inflation worries, set the tone for the fixed-income markets during
the past six months. As the economy continued its strong advance, the markets
reacted warily to signs of potential inflationary pressures--such as rising
employment costs, healthy job growth, strong consumer spending, and spikes in
commodities prices, especially oil. These concerns fueled a steady sell-off
through the fourth quarter of 1999 and into January 2000.
To slow the economy and keep prices from rising, the Federal Reserve Board
gradually pushed short-term interest rates higher, raising the fed funds rate (a
key short-term lending rate) three times between November 1999 and April 2000.
(Editor's note: On May 16, 2000, after the reporting period ended, the Fed
raised rates a fourth time.)
In times of rising interest rates, bond prices trend downward. Add to that
the lingering effects of the Year 2000 (Y2K) computer scare early in the first
quarter of 2000, and you can see why this was a challenging period for many
fixed-income investors.
Q HOW DID THE MUNICIPAL
BOND MARKET REACT TO THESE CONDITIONS?
A Not surprisingly, higher interest
rates hurt municipal bond prices, but we believe there's always opportunity in
the market. In the past few months, we've actually seen some fairly significant
price swings--both up and down--as investors tried to anticipate the Fed's next
move and the direction of interest rates. The market was weak in late 1999 and
early 2000, but we had a nice rally in February and March, which tapered off in
April.
The strong economy has bolstered the financial condition of many
municipalities across the country, so the pace of new municipal bond issuance
dropped sharply (about 40 percent) from a year ago. With their coffers full,
municipalities haven't needed to turn to the bond market for financing. Also,
6
<PAGE> 8
higher interest rates made it more difficult for issuers to refund outstanding
bond issues, which has been a source of new investment opportunities in the
past.
Q WHAT STRATEGIES DID YOU FOLLOW
IN MANAGING THE TRUST?
A Strategically, we've been moving in
a new direction since early this year. We made the decision to manage the Trust
relative to a new benchmark, rather than the Lipper peer group, which meant that
we needed to make some adjustments to the Trust's structure. The Trust's
benchmark is now the Lehman Brothers Municipal Bond Index with maturities
greater than five years. Specifically, we increased the duration of the
portfolio (a measure of its sensitivity to changes in interest rates) to more
closely track the performance of the new benchmark index. The benchmark provides
the shareholder with general municipal market returns, and the leveraged
structure provides the opportunity for enhanced dividends.
Fortunately, the municipal bond market played into our hands and gave us
some excellent opportunities to implement this new strategy. Beginning in late
January, we began purchasing deeply discounted bonds. These were securities that
had been issued a year or so ago with coupons of 4.75, 5.00, or 5.25 percent. As
interest rates went up over time, these bonds began selling at a deep discount,
with some as low as 85 cents on the dollar.
At the same time, the Trust held a number of older, prerefunded issues with
higher coupons in the 6.00 to 7.50 percent range. Such prerefunded issues tend
to decrease the duration of a portfolio because they have shorter lives than
their stated maturities. But because of their attractive coupons, these bonds
were trading at a premium to par, presenting us with an opportunity to capture
some solid capital gains. Because these bonds were scheduled to be called or
refunded within the next year or two, we chose to sell them while the demand for
them--and therefore their market price--was high.
This combination of buying deep-discount bonds and selling prerefunded
issues enabled us to lengthen the duration of the portfolio without drastically
altering the income stream that the Trust will be earning over time. While we
may see a slight decline in portfolio income in the months ahead, buying the
deeply discounted bonds enabled us to purchase more par value per dollar
invested. In some cases, for example, we were able to pick up $1 million worth
of bond par value for just $850,000.
Q WHAT AREAS OF THE MUNICIPAL
MARKET WERE MOST ATTRACTIVE TO YOU?
A Our philosophy is to seek bonds
that we feel represent the best values compared with similar offerings in the
marketplace. During the past six months, we did not specifically target one area
of the market over another. We did maintain significant concentrations in
certain sectors, including health-care, higher education, transportation, and
single-family housing bonds, each of which represented more than
7
<PAGE> 9
10 percent of the portfolio's long-term investments.
Many of our portfolio-management decisions were based on pricing issues,
such as the availability of deep discounts, or structural issues, such as
extending duration or maintaining adequate call protection and diversification
for the portfolio. For additional portfolio highlights, please refer to page 4.
Q HOW DID THE TRUST PERFORM
DURING THE PERIOD?
A For the six-month period ended
April 30, 2000, the Trust returned 1.06 percent based on market price. At the
same time, the Trust's market price decreased from $10.6875 per share on October
31, 1999, to $10.4375 per share on April 30, 2000. By comparison, the total
return of the Trust's peer group (as represented by the Lehman Brothers
Municipal Bond Index) was 2.63 percent for the same period.
The Trust's dividend remained unchanged during the past six months. The
monthly tax-exempt dividend of $0.06 per share translates to a distribution rate
of 6.90 percent based on the Trust's closing common stock price on April 30,
2000.
Because the Trust is exempt from federal income taxes, this distribution
rate is equivalent to a yield of 10.78 percent for an investor in the 36 percent
federal income-tax bracket. Please refer to the chart and footnotes on page 3
for additional performance results. Past performance is no guarantee of future
results.
Q WHAT DO YOU SEE AHEAD FOR
THE ECONOMY AND THE MUNICIPAL MARKET?
A All eyes will be on the key
economic statistics, such as GDP growth, employment costs, and the unemployment
rate. These figures measure the economy's strength and rate of growth and may
influence whether the Fed will continue to raise short-term interest rates. We
expect that the inflation rate may increase, but it's likely to remain in a
moderate range for the near term. It's anticipated that the Fed will continue to
increase short-term rates by the end of the summer, perhaps by more than 0.50
percent. Higher interest rates will, in turn, put pressure on the municipal
market in the short run.
Increased stock-price volatility in April has increased investor skepticism,
but investors continue to see price pullbacks as opportunities to buy
aggressive-growth stocks. It may take a much deeper, more sustained decline in
these stocks to convince investors to rethink their asset allocation decisions.
If the stock market does fall sharply, we could see a flight to quality, as
investors pursue investments that typically carry less risk. Such conditions
might benefit investment-grade municipal bonds.
Low municipal-bond supply could continue throughout 2000, especially if
interest rates trend higher, as expected, throughout the first half of the year.
Overall, the lower supply of bonds should help to shore up prices, as demand
remains strong. Investors can tolerate periodic price swings if they keep
long-term perspectives and
8
<PAGE> 10
continue to value the steady stream of tax-exempt income that municipal bonds
provide. As always, we will rely on our strong research efforts to evaluate
opportunities in the marketplace and identify securities that may offer superior
investment potential and value over time.
9
<PAGE> 11
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are two
companies that assign bond ratings. Standard & Poor's ratings range from a high
of AAA to a low of D, while Moody's ratings range from a high of Aaa to a low of
C.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising rate environments, while funds with longer durations perform better
when rates decline.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic indicator
that measures the change in the cost of purchased goods and services.
MATURITY DATE: The date a bond expires, usually at face value.
MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1999
and maturing in 2009 is a 10-year bond.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding
municipal bond issue prior to its maturity or call date. The proceeds from the
new bonds are generally invested in U.S. government securities. Prerefunding
typically occurs when interest rates decline and an issuer replaces its
higher-yielding bonds with current lower-yielding issues.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower ratings. The
spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and lower-
quality bonds.
10
<PAGE> 12
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
THE FOLLOWING PAGES DETAIL THE SPECIFIC HOLDINGS OF YOUR TRUST AT THE END OF THE
REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.2%
ALASKA 1.5%
$1,500 Alaska Hsg Fin Corp Ser A Rfdg............ 5.000% 12/01/18 $ 1,344,045
-----------
ARIZONA 1.1%
1,000 Maricopa Cnty, AZ Indl Dev Auth Edl Rev AZ
Charter Schs Proj Ser A................... 6.750 07/01/29 967,750
-----------
CALIFORNIA 7.7%
1,000 Foothill/Eastern Corridor Agy CA Toll Rd
Rev Con Cap Apprec Rfdg (c)............... 0/5.800 01/15/20 528,960
3,900 Los Angeles Cnty, CA Metro Tran Auth Sales
Tax Rev Ser A Rfdg (FGIC Insd)............ 5.000 07/01/21 3,459,066
3,000 Los Angeles, CA Regl Arpts Impt Corp Lease
Rev Los Angeles Intl Arpt (FSA Insd)
(b)....................................... 6.700 01/01/22 3,124,500
-----------
7,112,526
-----------
COLORADO 0.7%
616 Colorado Hsg Fin Auth Single Family Proj
Sr Ser E.................................. 8.125 12/01/24 650,314
-----------
CONNECTICUT 1.1%
1,000 Connecticut St Spl Oblig Parking Rev
Bradley Intl Arpt Ser A................... 6.600 07/01/24 996,290
-----------
HAWAII 1.1%
1,000 Hawaii St Arpts Sys Rev (FGIC Insd) (b)... 7.000 07/01/10 1,041,560
-----------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
ILLINOIS 3.1%
$1,000 Chicago, IL Wastewtr Transmission Rev
Second Lien............................... 6.000% 01/01/30 $ 1,000,290
1,000 Metropolitan Pier & Expo Auth IL Dedicated
St Tax McCormick Pl Expn Proj (FGIC
Insd)..................................... 5.500 12/15/24 946,460
2,500 Will Cnty, IL Cmnty Unit Sch Dist # 365U
Vly View Ser B (FSA Insd)................. * 11/01/16 951,200
-----------
2,897,950
-----------
INDIANA 3.9%
3,450 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty
Hosp of IN (MBIA Insd) (b)................ 6.850 07/01/22 3,625,915
-----------
KENTUCKY 6.6%
1,000 Georgetown, KY College Rev Georgetown
College Proj Ser A........................ 6.125 11/15/29 955,390
1,280 Kenton Cnty, KY Arpt Brd Arpt Rev
Cincinnati/Nrthn KY Intl Ser A Rfdg (MBIA
Insd)..................................... 6.100 03/01/07 1,336,294
4,000 Louisville & Jefferson Cnty, KY Metro Swr
Dist Drainage Rev Rfdg (MBIA Insd)........ 5.300 05/15/19 3,748,760
-----------
6,040,444
-----------
LOUISIANA 6.0%
1,750 St. Charles Parish, LA Environmental Impt
Rev LA Pwr & Lt Co Proj A (AMBAC Insd).... 6.875 07/01/24 1,865,395
3,500 St. Charles Parish, LA Pollutn Ctl Rev LA
Pwr & Lt Co Proj A (FSA Insd)............. 7.500 06/01/21 3,655,400
-----------
5,520,795
-----------
MAINE 4.4%
4,000 Maine Muni Bond Bk Ser A Rfdg............. 5.375 11/01/08 4,031,640
-----------
MARYLAND 2.0%
1,000 Maryland St Econ Dev Corp Student Hsg Rev
Collegiate Hsg Salisbury Ser A............ 6.000 06/01/19 946,210
1,000 Maryland St Econ Dev Corp Student Hsg Rev
Collegiate Hsg Towson Ser A............... 5.750 06/01/29 879,560
-----------
1,825,770
-----------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MASSACHUSETTS 1.4%
$1,235 Massachusetts St Indl Fin Agy Rev......... 6.750% 12/01/20 $ 1,253,686
-----------
MICHIGAN 4.7%
1,580 Michigan Higher Edl Fac Auth Ltd Oblig Rev
Hope College Rfdg (Connie Lee Insd)....... 7.000 10/01/13 1,694,266
2,500 Michigan St Strategic Fund Ltd Oblig Rev
Detroit Edison Co College Rfdg (FGIC
Insd)..................................... 6.950 09/01/21 2,607,250
-----------
4,301,516
-----------
MISSOURI 5.6%
1,000 Missouri St Hlth & Edl Fac Auth Edl Facs
Rev William Jewell College................ 6.000 08/01/29 960,660
3,855 Missouri St Hlth & Edl Fac Auth Hlth Fac
Rev SSM Hlthcare Ser AA Rfdg (MBIA
Insd)..................................... 6.400 06/01/10 4,168,836
-----------
5,129,496
-----------
NEVADA 1.6%
1,395 Nevada Hsg Div Single Family Pgm Ser E.... 6.900 10/01/14 1,449,712
-----------
NEW JERSEY 6.2%
1,340 New Jersey Econ Dev Auth Dist Heating &
Cooling Rev Trigen Trenton Proj Ser A..... 6.200 12/01/10 1,307,465
2,500 New Jersey Econ Dev Auth Spl Fac Rev
Continental Airls Inc..................... 6.250 09/15/29 2,281,800
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl
Hosp Cent at Passaic (FSA Insd)........... 6.000 07/01/14 2,109,380
-----------
5,698,645
-----------
NEW MEXICO 0.8%
1,000 New Mexico St Hosp Equip Ln Council Hosp
Rev Mem Med Ctr Inc Proj.................. 5.500 06/01/28 785,760
-----------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
NEW YORK 15.9%
$1,000 New York City, NY Adj Subser A-1 (Embedded
Swap) (d)(e).............................. 4.67/5.75% 08/01/12 $ 1,000,790
1,000 New York City, NY Indl Dev Agy Civic Fac
Rev Touro College Proj Ser A.............. 6.350 06/01/29 922,510
4,000 New York St Dorm Auth Rev City Univ Ser
F......................................... 5.000 07/01/14 3,648,120
2,500 New York St Dorm Auth Rev St Univ Edl Fac
Ser B..................................... 5.250 05/15/09 2,470,725
3,100 New York St Med Care Fac Fin Agy Rev NY
Hosp Ser A (Prerefunded @ 02/15/05) (AMBAC
Insd)..................................... 6.800 08/15/24 3,377,760
1,500 New York St Mtg Agy Rev Ser 73 (a)........ 5.300 10/01/28 1,350,765
2,000 New York St Mtg Agy Rev Ser 82............ 5.650 04/01/30 1,858,940
-----------
14,629,610
-----------
OHIO 2.3%
1,500 Akron, OH Ctfs Partn Akron Muni Baseball
Stad Proj (c)............................. 0/6.900 12/01/16 1,359,780
1,000 Cleveland, OH Arpt Spl Rev Continental
Airls, Inc Rfdg........................... 5.375 09/15/27 787,930
-----------
2,147,710
-----------
OKLAHOMA 3.2%
1,850 Oklahoma Hsg Fin Agy Single Family Mtg Rev
Homeownership Ln Pgm Ser A (GNMA
Collateralized)........................... 7.050 09/01/26 1,947,994
1,000 Tulsa Cnty, OK Pub Facs Auth Cap Impt
Rev....................................... 6.250 11/01/22 975,260
-----------
2,923,254
-----------
PENNSYLVANIA 1.0%
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg
Ser 61A................................... 5.500 04/01/29 913,840
-----------
SOUTH DAKOTA 1.3%
1,250 South Dakota St Hlth & Edl Facs Auth Rev
Childrens Care Hosp Rfdg.................. 6.125 11/01/29 1,158,812
-----------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TEXAS 7.0%
$2,000 Houston, TX Arpt Sys Rev Spl Facs
Continental Airls Ser B................... 5.000% 07/01/25 $ 1,692,580
3,000 Houston, TX Arpt Sys Rev Spl Facs
Continental Airls Ser B................... 6.125 07/15/27 2,626,650
1,425 Tarrant Cnty, TX Jr College Dist.......... 5.050 02/15/10 1,392,296
685 Texas St Higher Edl Coordinating Brd
College Student Ln Rev Sr Lien............ 7.700 10/01/25 705,728
-----------
6,417,254
-----------
VIRGINIA 2.2%
2,115 Richmond, VA (FSA Insd) (a)............... 5.500 01/15/16 2,043,111
-----------
WISCONSIN 0.2%
160 Wisconsin Hsg & Econ Dev Auth
Homeownership Rev Ser F................... 7.550 07/01/26 161,293
-----------
PUERTO RICO 5.6%
4,800 Puerto Rico Comwlth Hwy & Trans Auth Hwy
Rev Ser Y (FSA Insd)...................... 6.250 07/01/21 5,168,112
-----------
TOTAL LONG-TERM INVESTMENTS 98.2%
(Cost $87,459,888)..................................................... 90,236,810
SHORT-TERM INVESTMENTS 0.6%
(Cost $600,000)........................................................ 600,000
-----------
TOTAL INVESTMENTS 98.8%
(Cost $88,059,888)..................................................... 90,836,810
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%.............................. 1,074,797
-----------
NET ASSETS 100.0%....................................................... $91,911,607
===========
</TABLE>
* Zero Coupon bond
(a) Securities purchased on a when-issued or delayed delivery basis.
(b) Assets segregated as collateral for when-issued or delayed delivery purchase
commitments.
(c) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
See Notes to Financial Statements
15
<PAGE> 17
YOUR TRUST'S INVESTMENTS
April 30, 2000 (Unaudited)
(d) 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 security's fixed swap rate and the floating swap index. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. 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. These 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.
(e) Security will convert to a fixed coupon at a predetermined date.
AMBAC--AMBAC Indemnity Corporation
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
16
<PAGE> 18
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
April 30, 2000 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $88,059,888)........................ $90,836,810
Cash........................................................ 74,205
Receivables:
Investments Sold.......................................... 3,138,620
Interest.................................................. 1,613,539
-----------
Total Assets............................................ 95,663,174
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 3,431,897
Income Distributions -- Preferred Shares.................. 61,864
Investment Advisory and Administrative Fees............... 53,143
Affiliates................................................ 8,646
Trustees' Deferred Compensation and Retirement Plans........ 105,194
Accrued Expenses............................................ 90,823
-----------
Total Liabilities....................................... 3,751,567
-----------
NET ASSETS.................................................. $91,911,607
===========
NET ASSETS CONSIST OF:
Preferred Shares ($.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................................. 2,776,922
Accumulated Undistributed Net Investment Income............. 474,928
Accumulated Net Realized Loss............................... (9,919,666)
-----------
Net Assets Applicable to Common Shares.................. 57,911,607
-----------
NET ASSETS.................................................. $91,911,607
===========
NET ASSET VALUE PER COMMON SHARE ($57,911,607 divided by
4,682,128 shares outstanding)............................. $ 12.37
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
Statement of Operations
For the Six Months Ended April 30, 2000 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 2,736,593
-----------
EXPENSES:
Investment Advisory and Administrative Fees................. 320,408
Preferred Share Maintenance................................. 58,624
Trustees' Fees and Related Expenses......................... 8,918
Legal....................................................... 5,824
Custody..................................................... 3,822
Other....................................................... 44,044
-----------
Total Expenses.......................................... 441,640
-----------
NET INVESTMENT INCOME....................................... $ 2,294,953
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (108,475)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 3,162,103
End of the Period......................................... 2,776,922
-----------
Net Unrealized Depreciation During the Period............... (385,181)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $ (493,656)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 1,801,297
===========
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
Statement of Changes in Net Assets
For the Six Months Ended April 30, 2000 and the Year Ended October 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2000 OCTOBER 31, 1999
------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 2,294,953 $ 4,595,662
Net Realized Loss.................................. (108,475) (811,767)
Net Unrealized Depreciation During the Period...... (385,181) (7,038,625)
----------- ------------
Change in Net Assets from Operations............... 1,801,297 (3,254,730)
----------- ------------
Distributions from Net Investment Income:
Common Shares.................................... (1,685,382) (3,371,071)
Preferred Shares................................. (662,250) (1,141,398)
----------- ------------
Total Distributions................................ (2,347,632) (4,512,469)
----------- ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............................ (546,335) (7,767,199)
----------- ------------
NET ASSETS:
Beginning of the Period............................ 92,457,942 100,225,141
----------- ------------
End of the Period (Including accumulated
undistributed net investment income of $474,928
and $527,607, respectively)...................... $91,911,607 $ 92,457,942
=========== ============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED. (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, -------------------
2000 1999 1998
--------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD (A).......... $ 12.485 $ 14.144 $ 13.605
---------- -------- --------
Net Investment Income............................... .490 .982 .987
Net Realized and Unrealized Gain/Loss............... (.105) (1.677) .532
---------- -------- --------
Total from Investment Operations...................... .385 (.695) 1.519
---------- -------- --------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders....................... .360 .720 .718
Common Share Equivalent of Distributions Paid to
Preferred Shareholders.......................... .141 .244 .262
---------- -------- --------
Total Distributions................................... .501 .964 .980
---------- -------- --------
NET ASSET VALUE, END OF THE PERIOD.................... $ 12.369 $ 12.485 $ 14.144
========== ======== ========
Market Price Per Share at End of the Period........... $ 10.4375 $10.6875 $13.3125
Total Investment Return at Market Price (b)........... 1.06%* -14.88% 19.91%
Total Return at Net Asset Value (c)................... 1.56%* -6.93% 9.38%
Net Assets at End of the Period (In millions)......... $ 91.9 $ 92.5 $ 100.2
Ratio of Expenses to Average Net Assets Applicable to
Common Shares**..................................... 1.53% 1.46% 1.47%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (d)..................... 5.66% 5.42% 5.22%
Portfolio Turnover.................................... 18%* 59% 44%
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including
Preferred Shares................................... .97% .95% .97%
</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 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.
(c) 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.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
20
<PAGE> 22
<TABLE>
<CAPTION>
NOVEMBER 26, 1993
(COMMENCEMENT
YEAR ENDED OCTOBER 31, OF INVESTMENT
-------------------------------- OPERATIONS) TO
1997 1996 1995 OCTOBER 31, 1994
----------------------------------------------------
<S> <C> <C> <C> <C>
$12.923 $12.828 $11.507 $13.783
------- ------- ------- -------
.981 .983 .992 .894
.652 .068 1.391 (2.377)
------- ------- ------- -------
1.633 1.051 2.383 (1.483)
------- ------- ------- -------
.690 .693 .774 .621
.261 .263 .288 .172
------- ------- ------- -------
.951 .956 1.062 .793
------- ------- ------- -------
$13.605 $12.923 $12.828 $11.507
======= ======= ======= =======
$11.750 $10.625 $10.750 $ 9.625
17.46% 5.35% 19.87% -27.90%*
11.01% 6.29% 18.75% -14.18%*
$ 97.7 $ 94.5 $ 94.1 $ 87.9
1.53% 1.55% 1.68% 1.58%
5.50% 5.62% 5.77% 6.06%
39% 47% 84% 224%*
.99% .99% 1.05% 1.04%
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
NOTES TO
FINANCIAL STATEMENTS
April 30, 2000 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services are valued at fair value
using 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, which approximates market value.
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 is amortized and original issue discount is accreted over the expected
life of each applicable security.
22
<PAGE> 24
NOTES TO
FINANCIAL STATEMENTS
April 30, 2000 (Unaudited)
D. 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, 1999, the Trust had an accumulated capital loss
carryforward for tax purposes of $9,811,191 which will expire between October
31, 2002 and October 31, 2007.
At April 30, 2000, for federal income tax purposes, cost of long- and
short-term investments is $88,059,888; the aggregate gross unrealized
appreciation is $3,981,616 and the aggregate gross unrealized depreciation is
$1,204,694, resulting in net unrealized appreciation on long- and short-term
investments of $2,776,922.
E. 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. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory and Administrative Agreement,
Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment
advice, administrative services and facilities to the Trust for an annual fee
payable monthly of .70% of the average daily net assets of the Trust.
For the six months ended April 30, 2000, the Trust recognized expenses of
approximately $800 representing legal services provided by 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, 2000, the Trust recognized expenses of
approximately $9,200 representing Van Kampen's cost of providing accounting and
legal services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
23
<PAGE> 25
NOTES TO
FINANCIAL STATEMENTS
April 30, 2000 (Unaudited)
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 per trustee under the plan is $2,500.
At April 30, 2000, Van Kampen 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 $16,227,178 and $20,719,500,
respectively.
4. 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,
2000, was 4.350%. During the six months ended April 30, 2000, the rates ranged
from 3.300% to 5.800%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
24
<PAGE> 26
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN SELECT SECTOR
MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
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(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
(1) Independent accountants for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche
LLP to be the Trust's independent accountants.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"),
ceased being the Trust's independent accountants effective April 14, 2000.
The cessation of the client- auditor relationship between the Trust and KPMG
was based solely on a possible future business relationship by KPMG with an
affiliate of the Trust's investment adviser.
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
25
