<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders...................... 1
Portfolio of Investments.................... 4
Statement of Assets and Liabilities......... 8
Statement of Operations..................... 9
Statement of Changes in Net Assets.......... 9
Financial Highlights........................ 10
Notes to Financial Statements............... 11
</TABLE>
MOSH SAR 8/96
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL]
August 15, 1996
Dear Shareholder,
The economy demonstrated an acceleration in growth during the six-month re-
porting period. After an anemic 0.3 percent growth rate in the fourth quarter
of 1995, GDP (the nation's gross domestic product) rose 2.0 percent in this
year's first quarter. And, as anticipated, the economy grew 4.2 percent in the
second quarter. The strengthening growth was spurred by consumer spending, as
retail sales rose more than 5 percent in the first five months of this year
versus the comparable 1995 period. This brisk activity generated new fears
about inflation, which had been running at about 3 percent for several years.
Investors began to suspect that the Federal Reserve might tighten monetary
policy to ward off inflation. This would cause interest rates to rise and bond
prices to fall.
Although the municipal bond market outperformed the U.S. Treasury market
during the past year, all fixed-income securities were placed under pressure
since February by rising interest rates. As a result, yields rose from 5.6
percent to 6.0 percent during the period, as measured by the Bond Buyer 40 Mu-
nicipal Bond Index.
PORTFOLIO STRATEGY
In order to reflect the Fund's benchmark more closely, the Fund's average
maturity was shortened from approximately 18 years to 14 years. The shorter
average maturity helped preserve the principal value of the Fund during the
first half of 1996. We felt that municipal bonds with intermediate-term matu-
rities held the best risk and return prospects for the Fund, so we adjusted
the Fund's holdings accordingly. At the same time, we continued to focus on
minimizing our exposure to the risk that bond issuers will redeem their secu-
rities in the near future by limiting our investment in callable bonds.
In terms of investment quality, we increased the Fund's holdings in bonds
rated single-A or better and reduced our holdings in BBB-rated and non-rated
securities. In addition, more than 30 percent of the portfolio's assets are
invested in AAA-rated bonds, the highest credit rating assigned to bonds by
Standard & Poor's Ratings Group.
We continued to focus on essential service revenue bonds, such as
water/sewer and municipal airport projects. Revenue bonds should perform fa-
vorably over the long-term and should be less impacted than general obligation
bonds by the state and political climate. Revenue bonds are issued for essen-
tial municipal projects and typically generate a steady stream of income.
1 Continued on page two
<PAGE>
Portfolio Composition by Credit Quality
as of June 30, 1996
<TABLE>
<S> <C>
Municipal Variable Rate Demand Note 6%
Non-Rated 15%
A 12%
AA 11%
AAA 32%
BB 4%
BBB 20%
</TABLE>
as of December 31, 1995
<TABLE>
<S> <C>
Non-Rated 20%
A 18%
AA 15%
AAA 20%
BB 1%
BBB 26%
</TABLE>
Based upon credit quality ratings issued by Standard & Poor's. For securities
not rated by Standard & Poor's the Moody's rating is used.
PERFORMANCE SUMMARY
Municipal bonds provided attractive returns in the last half of 1995 but
struggled through the first half of 1996. The Fund produced a six-month total
return at net asset value of -0.25 percent. Longer term, the Fund's one-year
total return at net asset value was 5.94 percent. By comparison, the municipal
market return was less favorable, as represented by the Lehman Brothers Munic-
ipal Bond Index, which returned -0.45 percent for the six-month period. Howev-
er, as mentioned earlier, municipals outperformed the general fixed-income
market--by 1.43 percentage points--according to the Lehman Brothers Govern-
ment/Corporate Index for the same period ended June 30, 1996. The Lehman mu-
nicipal index is a broad-based, unmanaged index of municipal bonds and does
not reflect any commissions or fees that would be paid by the investor pur-
chasing the securities it represents.
Many closed-end municipal bond funds are currently offering higher after-tax
yields than taxable income alternatives, and your Fund is no exception. Based
on the ending net asset value of $19.11 on June 30, 1996, the Fund had a tax-
exempt distribution rate of 6.28 percent. By comparison, investors in the 36
percent federal income tax bracket would need to invest in a taxable invest-
ment yielding 9.81 percent in order to achieve the same after-tax rate as the
Fund.
MARKET OUTLOOK
We anticipate that reasonably strong economic growth will continue during
the balance of 1996, albeit at more moderate rates than the second quarter's
swift pace. While we expect rates of inflation to remain near current levels,
the Fed may begin to lean toward greater restraint in its monetary policy in
the coming months. That suggests an upward bias for short-term interest rates
and for yields on long-term bonds to remain in a trading range around current
levels. In particular, we look for long-term municipal bond yields to trade
within their current range of 5.7 and 6.3 percent.
2 Continued on page three
<PAGE>
CORPORATE NEWS
As you may be aware, an agreement was reached in late June for VK/AC Holding,
Inc., the parent company of Van Kampen American Capital, Inc., to be acquired
by Morgan Stanley Group Inc. While this announcement may appear commonplace in
an ever-changing financial industry, we believe it represents an exciting op-
portunity for investors.
With Morgan Stanley's global leadership in investment banking and asset man-
agement and Van Kampen American Capital's reputation for competitive long-term
performance and superior investor services, together we will offer a broader
range of investment opportunities. The new ownership will not affect our com-
mitment to pursuing excellence in all aspects of our business. And, we expect
very little change in the way your closed-end fund account is maintained and
serviced.
A proxy will be mailed to you shortly explaining the acquisition and asking
for your vote of approval. Please read it carefully and return your response
for inclusion in the shareholder vote. We value our relationship with you and
look forward to communicating more details of this transaction, which is antic-
ipated to be completed in November.
Sincerely,
/S/ Don G. Powell /S/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
3
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 96.0%
EDUCATION 9.1%
$ 1,000 Columbus, Indiana, Four Star School
Building Corp., 1st Mtg. Rev., MBIA.... 6.000% 01/15/06 $ 1,046,550
500 Connecticut, Health & Educational
Facilities Rev. (University of
Hartford) Series D..................... 6.750 07/01/12 490,425
100 New Hampshire, Higher Education &
Health Rev. ........................... 7.625 07/01/16 99,593
150 New York City, New York, Industrial
Development Agency, Civil Facility Rev.
(Marymount Manhattan College Project).. 7.000 07/01/23 155,880
500 New York, State Dormitory Authority
Rev. (City University System) Series C. 6.000 07/01/16 488,620
1,000 New York, State Dormitory Rev (State
University Educational Facilities)
Series A............................... 6.500 05/15/06 1,047,410
------------
3,328,478
------------
GENERAL OBLIGATION 19.9%
1,000 Bridgeport, Connecticut, Refunding,
Series A, AMBAC........................ 6.000 09/01/06 1,042,430
1,000 Campbell County, Wyoming, School
District #001.......................... 5.350 06/01/04 1,000,000
1,000 Centennial, Utah, Independent School
District 12, Series A, MBIA............ 5.600 02/01/05 1,032,980
500 Detroit, Michigan, Series 87-A......... 8.625 04/01/07 527,515
500 Highlands Ranch Metropolitan District,
Colorado, No. 1,
Refunding and Improvement, Series A.... 7.300 09/01/12 574,350
1,000 Kane County, Illinois, School District
131 (Aurora East Side) FSA............. 5.350 01/01/04 1,016,050
500 Mountain Village Metropolitan District,
San Miguel County, Colorado............ 7.950 12/01/03 515,450
500 New York, New York, Series B........... 7.375 08/15/13 535,285
100 Southtech Metropolitan District,
Colorado, Refunding
(Prerefunded at 12/01/97).............. 9.500 12/01/11 108,776
860 Washington County, Utah, School
District, FGIC......................... 6.000 03/01/04 910,258
------------
7,263,094
------------
HOSPITAL 8.7%
250 Delaware, State Economic Development
Authority Rev.
(Osteopathic Hospital Association)
Series A............................... 6.750 01/01/13 275,857
150 Doylestown, Pennsylvania, Hospital
Authority Rev. (Pine Run) Series A..... 7.200 07/01/23 152,578
500 Fayette County, Pennsylvania, Hospital
Authority Rev. (Uniontown Hospital)
Series 1985............................ 7.625 07/01/15 513,325
200 Illinois Health Facilities Authority
Rev. (Elmhurst Memorial Hospital)
Series B............................... 7.250 05/01/22 203,796
250 Laramie County, Wyoming, Hospital Rev.
(Memorial Hospital Project) AMBAC...... 6.700 05/01/12 265,538
250 Newton, Kansas, Hospital Rev., (Newton
Healthcare Corp.)
Series A............................... 7.375 11/15/14 259,330
250 Scranton-Lackawanna, Pennsylvania,
Health & Welfare Authority Rev. (Moses
Taylor Hospital Project) Series B...... 8.500 07/01/20 271,140
100 South Dakota, State Health Authority
Rev. .................................. 7.250 04/01/20 100,608
</TABLE>
See Notes to Financial Statements
4
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HOSPITAL (CONTINUED)
$ 500 Tulsa, Oklahoma, Industrial Authority,
Hospital Rev. (Tulsa Regional Medical
Center)............................... 7.200% 06/01/17 $ 572,380
500 Wisconsin, State Health & Educational
Facilities Authority, Rev. (Wheaton
Franciscan Services, Inc.) Series 1988
(Prerefunded at 08/15/98)............. 8.200 08/15/18 548,930
-----------
3,163,482
-----------
HOUSING 5.9%
100 Iowa, Finance Authority, Multi-family
Rev., Refunding (Park West Project)... 8.000 10/01/23 100,799
100 Minneapolis, Minnesota, Health Care
Facility (Ebenezer Society Project)
Series A.............................. 7.000 07/01/12 97,931
250 Ridgeland, Mississippi, Urban Renewal
Rev. (The Orchard, Ltd. Project)
Series A.............................. 7.750 12/01/15 252,465
895 Tennessee, Housing Development Agency
Rev. (Home Ownership Program)......... 6.800 07/01/17 928,491
250 Virginia, State Housing Development
Rev. (Commonwealth Mortgage) Series A. 7.100 01/01/17 258,800
500 Wisconsin, Housing and Economic
Development Authority, Home Ownership
Rev. ................................. 7.350 01/01/17 525,215
-----------
2,163,701
-----------
INDUSTRIAL DEVELOPMENT REVENUE
(IDR)/POLLUTION CONTROL REVENUE
(PCR) 13.1%
1,000 Gila County, Arizona, Industrial
Development Authority, Refunding, PCR
(Asarco, Inc.)........................ 8.900 07/01/06 1,064,780
1,000 Independence County, Arkansas, PCR
(Mississippi Power & Light Company
Project).............................. 9.500 07/01/14 1,094,450
250 Massachusetts, Industrial Finance
Agency, IDR, Refunding (Beverly
Enterprises, Inc./Gloucester and
Lexington Projects) Series 1992....... 8.000 05/01/02 264,600
100 Montgomery County, Pennsylvania, IDR
(Pennsburg Nursing & Rehabilitation
Center)............................... 7.625 07/01/18 95,994
1,000 New York, State Urban Development
Corp, Series A, MBIA.................. 6.250 04/01/07 1,064,370
1,000 Parish of West Feliciana, Louisiana,
PCR................................... 7.500 05/01/15 1,061,490
105 St. Charles, Illinois, Rev., IDR (Tri-
City Center Project).................. 7.500 11/01/13 107,890
-----------
4,753,574
-----------
LIFE CARE 1.7%
100 Montgomery County, Pennsylvania,
Industrial Development Authority, 1st
Mtg. Rev. (Meadowood Corp Project).... 10.250 12/01/20 123,790
250 Plantation, Florida, Health Facilities
Authority Rev. (Covenant Retirement
Communities, Inc.).................... 7.750 12/01/22 265,680
200 Scottsdale, Arizona, Industrial
Development Authority, 1st Mtg. Rev.
(Westminister Village) (Prerefunded at
06/01/97)............................. 10.000 06/01/17 216,950
-----------
606,420
-----------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MISCELLANEOUS 4.6%
$ 500 Dade County, Florida, Special
Obligation, Rev. ....................... 5.900% 04/01/10 $ 504,305
500 Parish of St. John the Baptist,
Louisiana, Public Improvement,
Series 1987............................. 7.600 01/01/08 587,265
500 Parish of St. John the Baptist,
Louisiana, Public Improvement, Series
1987.................................... 7.600 01/01/09 587,605
-----------
1,679,175
-----------
NURSING HOMES 1.3%
100 Carmel, Indiana, Retirement Rent Housing
Rev., Refunding
(Beverly Enterprises, Inc.) Series 1992. 8.750 12/01/08 112,125
75 Covington-Alleghany County, Virginia,
Refunding (Beverly Enterprises, Inc.)... 9.375 09/01/01 83,209
250 Fairfield, Ohio, Economic Development
Rev., Refunding (Beverly Enterprises,
Inc.)................................... 8.500 01/01/03 268,370
-----------
463,704
-----------
SALES TAX REVENUE 6.6%
100 Crestwood, Illinois, Tax Increment Rev.,
Refunding............................... 7.250 12/01/08 99,346
1,000 Michigan, State Underground Storage
Tank, Authority Rev,
Series I, AMBAC......................... 6.000 05/01/05 1,045,230
1,185 Reno, Nevada, Redevelopment Agency Tax
Allocation Rev.,
Series A................................ 6.000 06/01/10 1,140,610
100 Round Lake Beach, Illinois, Tax
Increment Rev., Series 1993............. 7.200 12/01/04 102,526
-----------
2,387,712
-----------
TRANSPORTATION 3.8%
500 Cleveland, Ohio, Parking Facilities
Improvement Rev. ....................... 8.000 09/15/12 520,625
500 Indiana, Finance Authority, Airport
Facilities Lease Rev.,
Series A................................ 6.250 11/01/16 496,535
400 Foothill Eastern Transportation Corridor
Agency (California Toll Road) Sr. Lien,
Series A................................ 6.000 01/01/16 384,460
-----------
1,401,620
-----------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES 21.3%
$ 400 Chicago, Illinois, Emergency Telephone
System, FGIC............................ 5.600% 01/01/10 $ 398,500
500 Indiana, Municipal Power Agency, Supply
Systems Rev.,
Series A, BIG........................... 5.750 01/01/18 470,640
1,550 Intermountain Power Agency, Utah,
Special Obligation, 1st Crossover
Series.................................. 5.000 07/01/16 1,377,423
950 Intermountain Power Agency, Utah,
Special Obligation, 2nd Crossover Series
C....................................... 5.000 07/01/18 833,711
500 Irvine Ranch, California, Water District
Rev. ................................... 8.250 08/15/23 531,680
1,000 Marion County, Oregon, Solid Waste &
Electric Rev., Refunding, AMBAC......... 5.500 10/01/06 1,020,340
1,350 New York City, Municipal Water Finance
Authority, New York, Water & Sewer Rev.,
Series A................................ 5.000 06/15/17 1,196,006
1,500 Piedmont Municipal Power Agency, South
Carolina, Electric Rev., Refunding,
Series A................................ 5.750 01/01/24 1,381,830
500 West Richland, Washington, Water & Sewer
Rev., MBIA.............................. 7.000 12/01/14 539,515
-----------
7,749,645
-----------
TOTAL MUNICIPAL BONDS (Cost
$33,112,873)............................ 34,960,605
-----------
MUNICIPAL VARIABLE RATE DEMAND NOTES 5.8%
600 Burke County, Georgia, Pollution Control
Development............................. 2.850 07/01/24 600,000
100 Cuyahoga County, Ohio, Hospital Rev..... 3.100 01/01/16 100,000
1,000 Louisiana, State Recovery District...... 2.900 07/01/97 1,000,000
400 New York, State Energy Rev., Series C... 2.650 06/01/29 400,000
-----------
TOTAL MUNICIPAL VARIABLE RATE DEMAND
NOTES
(Cost $2,100,000).................... 2,100,000
-----------
TOTAL INVESTMENTS (Cost $35,212,873) 101.8%..................... 37,060,605
OTHER ASSETS AND LIABILITIES, NET (1.8%)........................ (647,378)
-----------
NET ASSETS 100%................................................. $36,413,227
-----------
</TABLE>
Rev.--revenue bond
Insurers:
AMBAC--AMBAC Indemnity Corp.
BIG--Bond Investors Guaranty Insurance Co.
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investor's Assurance Corp.
See Notes to Financial Statements
7
<PAGE>
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $35,212,873)................... $37,060,605
Cash.............................................................. 16,950
Interest receivable............................................... 723,663
Receivable for investments sold................................... 40,000
Other receivables................................................. 637
-----------
Total Assets..................................................... 37,841,855
-----------
LIABILITIES
Payable for investments purchased................................. 1,002,526
Dividend payable.................................................. 400,109
Due to Adviser.................................................... 10,617
Accrued expenses.................................................. 15,376
-----------
Total Liabilities................................................ 1,428,628
-----------
NET ASSETS, equivalent to $19.11 per share on 1,905,282 shares
outstanding...................................................... $36,413,227
-----------
NET ASSETS WERE COMPRISED OF:
Common stock, at par value $1 per share; 5 million shares
authorized; 1,910,907 shares issued of which 5,625 shares are
held in treasury................................................. $ 1,910,907
Capital surplus................................................... 32,007,341
Less cost of treasury stock....................................... (23,357)
Undistributed net realized gain on securities..................... 169,446
Net unrealized appreciation of securities......................... 1,847,732
Undistributed net investment income............................... 501,158
-----------
NET ASSETS........................................................ $36,413,227
-----------
</TABLE>
8
<PAGE>
See Notes to Financial Statements
FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1996
----------
<S> <C>
INVESTMENT INCOME
Interest........................................................... $1,190,432
----------
EXPENSES
Management fees.................................................... 83,565
Director's fees and expenses....................................... 24,272
Audit fees......................................................... 6,360
Custodian fees..................................................... 1,120
Legal fees......................................................... 4,323
Reports to shareholders............................................ 5,520
Miscellaneous...................................................... 745
Expense waiver (see Note 2)........................................ (18,570)
----------
Total expenses.................................................... 107,335
----------
NET INVESTMENT INCOME.............................................. 1,083,097
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities.................................... 180,825
Net unrealized depreciation of securities during the period........ (1,350,836)
----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES..................... (1,170,011)
----------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $ (86,914)
----------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December 31,
June 30, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.................. $37,852,892 $35,346,181
----------- -----------
OPERATIONS
Net investment income........................... 1,083,097 2,418,199
Net realized gain on securities................. 180,825 585,047
Net unrealized appreciation (depreciation) of
securities during the period................... (1,350,836) 1,980,331
----------- -----------
Increase (decrease) in net assets resulting from
operations...................................... (86,914) 4,983,577
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income........................... (952,641) (2,476,866)
Net realized gain on securities................. (400,110) --
----------- -----------
Total distributions............................. (1,352,751) (2,476,866)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS................ (1,439,665) 2,506,711
----------- -----------
NET ASSETS, end of period (including
undistributed net investment income of $501,158
and $370,702, respectively)..................... $36,413,227 $37,852,892
----------- -----------
</TABLE>
9
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each of the
periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six
Months
Ended Year Ended December 31
June 30, --------------------------------------
1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period........................ $19.87 $18.55 $20.36 $19.88 $19.45 $18.83
------ ------ ------ ------ ------ ------
INCOME FROM OPERATIONS
Investment income............ .63 1.39 1.51 1.56 1.53 1.60
Expenses..................... (.06) (.12) (.15) (.15) (.17) (.145)
------ ------ ------ ------ ------ ------
Net investment income......... .57 1.27 1.36 1.41 1.36 1.455
Net realized and unrealized
gain (loss) on securities.... (.62) 1.35 (1.80) .47 .47 .665
------ ------ ------ ------ ------ ------
Total from investment
operations.................... (.05) 2.62 (.44) 1.88 1.83 2.12
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income........ (.50) (1.30) (1.37) (1.40) (1.40) (1.50)
Net realized gain on
securities................... (.21) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total from distributions...... (.71) (1.30) (1.37) (1.40) (1.40) (1.50)
------ ------ ------ ------ ------ ------
Net asset value, end of
period........................ $19.11 $19.87 $18.55 $20.36 $19.88 $19.45
------ ------ ------ ------ ------ ------
TOTAL RETURN.................. (.25%) 14.12% (2.16%) 9.46% 9.41% 11.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).................... $36.4 $37.9 $35.3 $38.8 $37.9 $37.1
Average net assets (millions). $37.1 $37.0 $37.0 $38.8 $37.5 $36.5
Ratios to average net assets
(annualized)(/1/)
Expenses..................... .58% .64% .74% .73% .85% .77%
Expenses, without waiver..... .68% .69% .76% .78% -- --
Net investment income........ 5.83% 6.54% 7.03% 6.93% 6.91% 7.59%
Net investment income,
without waiver.............. 5.73% 6.49% 7.01% 6.88% -- --
Portfolio turnover rate....... 29% 21% 18% 5% 15% 2%
</TABLE>
(1) See Note 2
See Notes to Financial Statements
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Mosher, Inc. (the "Fund") is registered under the Investment Company Act of
1940, as amended, as a diversified, closed-end management investment company.
The Fund seeks income that is exempt from federal income tax by investing pri-
marily in municipal debt securities.
The following is a summary of the significant accounting policies consist-
ently followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted ac-
counting principles requires management to make estimates and assumptions that
affect the amounts reported. Actual amounts may differ from the estimates.
A. INVESTMENT VALUATIONS-Investments in municipal bonds are valued at the most
recently quoted bid prices or at bid prices based on a matrix system (which
considers such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service. Short-term invest-
ments are valued at amortized cost, which approximates market value. Municipal
variable rate demand notes are valued at par. Periodic rate changes reflect
current market conditions.
Issuers of certain securities owned by the Fund may have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated and unrated debt securities which may
be more susceptible to adverse economic conditions than investment grade hold-
ings. These securities are often subordinated to the prior claims of other se-
nior lenders and uncertainties exist as to an issuer's ability to meet
principal and interest payments. Securities rated below investment grade and
comparable unrated securities represented approximately 18% of the investment
portfolio at the end of the period.
B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized gains to its shareholders.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Interest income is
accrued weekly.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
The Fund will continue to invest principally in tax-exempt obligations suf-
ficient in amount to qualify the Fund to pay "exempt-interest dividends" as
defined in the Internal Revenue Code.
E. DEBT DISCOUNT OR PREMIUM-The Fund accounts for discounts and premiums on
the same basis as is used for federal income tax reporting. Accordingly, orig-
inal issue debt discounts and all premiums are amortized over the life of the
security. Market discounts are recognized at the time of sale as realized
gains for book purposes and as ordinary income for tax purposes.
F. WHEN-ISSUED SECURITIES-Delivery and payment for securities purchased on a
when- issued basis may take place up to 45 days after the date of the transac-
tion. The securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid securities
equal to the amount that will be due are set aside with the custodian.
NOTE 2--MANAGEMENT FEES
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), serves as
investment manager of the Fund. Management fees are paid monthly based on an
annual rate of .45% of average weekly net assets. As of July 1, 1995, the Ad-
viser voluntarily agreed to waive all management fees in excess of .35% of the
Fund's average weekly net assets.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $10,904,867 and $10,244,615, re-
spectively.
The cost of investments owned at the end of the period was the same for
federal income tax purposes. Net unrealized appreciation of investments aggre-
gated $1,847,732, gross unrealized appreciation of investments aggregated
$1,923,360, and gross unrealized depreciation aggregated $75,628.
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $3,000 plus a fee of $750 per Board meeting and
$200 per Committee meeting attended. During the period, such fees aggregated
$22,900.
12
<PAGE>
MOSHER, INC.
BOARD OF DIRECTORS
DOUGAL A. CAMERON, IV
MILTON E. ELIOT
CHRISTOPHER T. JONES
RICHARD L. KENDALL
JOHN H. LINDSEY
ROBERT C. MCNAIR
CHARLES C. RYRIE
ROBERT STEWART, JR.
OFFICERS
MILTON E. ELIOT
Chairman
CHRISTOPHER T. JONES
President
CHARLES C. RYRIE
Vice President and Treasurer
ARTHUR H. ROGERS
Secretary
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
SHAREHOLDER SERVICE AGENT
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 366
Boston, Massachusetts 02101
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street Boston, Massachusetts 02110
LEGAL COUNSEL
FULBRIGHT & JAWORSKI
1301 McKinney
Houston, Texas 77010
(C) Van Kampen American Capital Distributors, Inc., 1996 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.
Inquiries about an investor's account should be referred
to the Fund's Transfer Agent. Boston Financial Data Services, Inc.
P.O. Box 366
Boston, Massachusetts 02101
Telephone: (800) 821-1238
13
