<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders...................... 1
Portfolio of Investments.................... 4
Statement of Assets and Liabilities......... 7
Statement of Operations..................... 8
Statement of Changes in Net Assets.......... 9
Financial Highlights........................ 10
Notes to Financial Statements............... 12
Report of Independent Accountants........... 14
</TABLE>
MOSH ANR 2/97
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL]
DENNIS J. MCDONNELL AND DON G. POWELL
February 10, 1997
Dear Shareholder,
Bond prices appreciated during the second half of 1996, recovering much of
the ground they had lost in the first half of the year. Slower economic growth
and moderate inflation eased fears that the Federal Reserve Board would raise
interest rates. Specifically, economic growth (real gross domestic product,
adjusted for inflation) slowed to 2.0 percent in the third quarter, signifi-
cantly lower than the 4.7 percent recorded in the second quarter. Employment
costs fell, and the Fed refrained from tightening credit. By year end, the yield
on the 30-year Treasury bond retreated from above 7.0 percent in July and
September to approximately 6.6 percent. A strong dollar encouraged heavy buying
of U.S. Treasuries by foreign investors, which also supported the market.
During much of the second half of the year, municipal bonds outperformed
Treasuries, due to supply-and-demand fundamentals. According to early esti-
mates, the net outstanding issues of municipal bonds (new issues minus maturi-
ties and calls) increased by a small amount in 1996. This relatively small
increase helped to maintain good value in tax-exempt investments. Also, con-
cerns over tax reform abated, which strengthened the demand for municipal se-
curities.
PORTFOLIO STRATEGY
We continue to manage the Fund in a relatively conservative manner in order
to seek to preserve shareholders' capital. The Fund's average maturity was
shortened from 18 years during the first six months of 1996 to near 14 years
because of rising interest rates, and the Fund's duration has remained stable
at seven years. Maturity is the date on which a bond is scheduled to repay the
principal (par value) to the bondholders. Duration, which is expressed in
years, is a measure of a bond's price sensitivity to changes in interest
rates. The longer the Fund's duration, the greater the effect of changes in
interest rate movements on net asset value. The stable duration allows the
Fund the potential to appreciate in value when interest rates fall, while the
shorter maturity may help preserve the Fund's principal value in rising inter-
est rate environments.
In terms of credit quality, approximately 82 percent of the Fund's net as-
sets are rated investment grade (BBB-rated and above). About 35 percent of the
Fund's portfolio is comprised of AAA-rated securities, the highest credit rat-
ing assigned to bonds by Standard & Poor's Ratings Group. Nearly 14 percent of
the bonds have been pre-refunded and are fully backed by U.S. Treasuries,
which have the highest credit worthiness in the bond market. These bonds in-
volve very little credit risk, are highly liquid, and typically respond quickly
to interest rate changes. Among the remaining assets, BBB-rated and A-rated
categories of bonds pay higher yields than AAA-rated debt and tend to be less
sensitive to interest rate fluctuations.
1
Continued on page two
<PAGE>
We continued to hold a diverse portfolio of bonds that includes essential
service revenue bonds as well as general-obligation debt. The Fund's largest
revenue service sectors are electric utilities, health care, water and sewage,
and transportation.
[PIE CHART APPEARS HERE]
Portfolio Composition by Credit Quality
as a Percentage of Long-Term Investments
as of December 31, 1996
<TABLE>
<S> <C>
AAA 34.5%
AA 4.9%
A 17.1%
BBB 25.6%
BB 3.3%
Non-Rated 14.6%
</TABLE>
[PIE CHART APPEARS HERE]
as of June 30, 1996
<TABLE>
<S> <C>
AAA 34.4%
AA 11.2%
A 13.1%
BBB 21.7%
BB 4.1%
Non-Rated 15.5%
</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
The Fund's one-year total return at net asset value was 4.59 percent, includ-
ing reinvestment of all dividends. Many closed-end municipal bond funds, such
as this one, currently offer higher after-tax yields than taxable income alter-
natives. The Fund generated a tax-exempt distribution rate of 6.20 percent,
based on the ending net asset value of $19.34 per share as of December 31,
1996. For shareholders in the federal income tax bracket of 36 percent, this
distribution rate is equivalent to a yield of 9.69 percent on a taxable invest-
ment.
OUTLOOK
We believe that the economy will grow at a modest pace this year, near 2.5
percent. Although economic growth could be accompanied by some short-term mar-
ket fluctuation, we do not believe it will be strong enough to reignite price
pressures. The results of the November elections reinforce this view--the com-
bination of a Democratic president and a Republican Congress should help re-
strain potential spending increases and large tax cuts, and therefore keep the
budget deficit under control.
We believe there is a possibility that the Fed will grow more concerned about
the economy's strength and nudge interest rates higher in 1997, though not be-
fore March. The stock market is another factor that may influence the perfor-
mance of bonds this year. Also, if the stock market suffers a protracted
setback, the demand for bonds, including municipal securities, could increase.
Overall, our expectation is that most fixed-income products will have rela-
tively uneventful performance during the year. While we expect the Fund to pro-
vide regular dividend income, we do not look for significant fluctuations in
share price. Finally, we will continue to monitor any new developments in the
financial markets and in Washington in order to evaluate their potential impact
on the Fund.
2
Continued on page three
<PAGE>
CORPORATE NEWS
As you may be aware, shareholders approved the acquisition of VK/AC Holding,
Inc. by Morgan Stanley Group Inc. We believe this acquisition will further help
investors achieve their long-term goals. Morgan Stanley's strong global pres-
ence and commitment to superior investment performance complement our broad
range of investment products, money management capability, and high level of
service. Thank you for your continued confidence in your investment with Van
Kampen American Capital.
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
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
ARIZONA 3.4%
$1,000 Gila Cnty, AZ Indl Dev Auth Rev Pollutn
Ctl Asarco Inc Rfdg.................... 8.900% 07/01/06 $ 1,051,320
200 Scottsdale, AZ Indl Dev Auth Rev First
Mtg Westminster Vlg Proj (Prerefunded @
06/01/97).............................. 10.000 06/01/17 211,036
-----------
1,262,356
-----------
ARKANSAS 2.9%
1,000 Independence Cnty, AR Pollutn Ctl Rev
MS Pwr & Light Co Proj Ser C........... 9.500 07/01/14 1,085,210
-----------
CALIFORNIA 2.5%
400 Foothill/Eastern Tran Corridor Agy CA
Toll Road Rev Sr Lien Ser A............ 6.000 01/01/16 404,684
500 Irvine Ranch, CA Wtr Dist Jt Pwrs Agy
Local Pool Rev Issue II................ 8.250 08/15/23 529,780
-----------
934,464
-----------
COLORADO 3.3%
500 Highlands Ranch Metro Dist No 1 CO Rfdg
& Impt Ser A (Prerefunded @ 09/01/02).. 7.300 09/01/12 579,040
500 Mountain Vlg Metro Dist CO San Miguel
Cnty Rfdg.............................. 7.950 12/01/03 521,760
100 Southtech Metro Dist CO Rfdg
(Prerefunded @ 12/01/97)............... 9.500 12/01/11 106,123
-----------
1,206,923
-----------
CONNECTICUT 4.3%
1,000 Bridgeport, CT Ser A Rfdg (AMBAC Insd). 6.000 09/01/06 1,074,250
500 Connecticut St Hlth & Edl Fac Auth Rev
Univ Hartford Ser D Rfdg............... 6.750 07/01/12 507,920
-----------
1,582,170
-----------
DELAWARE 0.8%
250 Delaware St Econ Dev Auth Rev
Osteopathic Hosp Assoc DE Ser A........ 6.750 01/01/13 282,398
-----------
FLORIDA 2.1%
500 Dade Cnty, FL Spl Oblig Courthouse Cent
Proj................................... 5.900 04/01/10 514,280
250 Plantation, FL Hlth Fac Auth Rev
Covenant Retirement Cmnty Inc Rfdg..... 7.750 12/01/22 268,297
-----------
782,577
-----------
ILLINOIS 5.3%
400 Chicago, IL Emergency Tele Sys (FGIC
Insd).................................. 5.600 01/01/10 408,528
100 Crestwood, IL Tax Increment Rev Rfdg... 7.250 12/01/08 101,068
200 Illinois Hlth Fac Auth Rev Mem Hosp.... 7.250 05/01/22 206,382
1,000 Kane Cnty, IL Sch Dist No 131 Aurora
East Side (FSA Insd)................... 5.350 01/01/04 1,034,170
100 Round Lake Beach, IL Tax Increment Rev
Rfdg................................... 7.200 12/01/04 104,020
105 Saint Charles, IL Indl Dev Rev Tri-City
Cent Proj.............................. 7.500 11/01/13 108,890
-----------
1,963,058
-----------
INDIANA 6.5%
100 Carmel, IN Retirement Rent Hsg Rev
Beverly Enterprises Inc Proj Rfdg...... 8.750 12/01/08 113,125
1,000 Columbus, IN Four Star Sch Bldg Corp
First Mtg (MBIA Insd).................. 6.000 01/15/06 1,068,990
500 Indiana Muni Pwr Agy Pwr Supply Sys Rev
Ser A Rfdg............................. 5.750 01/01/18 494,595
195 Indiana St Hsg Fin Auth Single Family
Mtg Rev Ser B-1........................ 6.150 07/01/17 200,119
500 Indiana Tran Fin Auth Arpt Fac Lease
Rev United Airls Ser A................. 6.250 11/01/16 511,115
-----------
2,387,944
-----------
IOWA 0.3%
100 Iowa Fin Auth Multi-Family Rev Hsg Park
West Proj Rfdg......................... 8.000 10/01/23 101,328
-----------
KANSAS 0.7%
250 Newton, KS Hosp Rev Newton Hlthcare
Corp Ser A............................. 7.375 11/15/14 268,655
-----------
</TABLE>
4
See Notes to Financial Statements
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LOUISIANA 6.1%
$ 500 Saint John Baptist Parish LA Sales Tax
Dist Pub Impt Ser
ST-1987................................ 7.600% 01/01/08 $ 588,525
500 Saint John Baptist Parish LA Sales Tax
Dist Pub Impt Ser
ST-1987................................ 7.600 01/01/09 589,420
1,000 West Feliciana Parish, LA Pollutn Ctl
Rev Gulf States Util Co Proj Ser A..... 7.500 05/01/15 1,076,960
-----------
2,254,905
-----------
MASSACHUSETTS 3.5%
1,000 Massachusetts St Hlth & Edl Fac Auth
Rev Rfdg Winchester Hosp Ser D (Conn
Insd).................................. 5.800 07/01/09 1,019,010
250 Massachusetts St Indl Fin Agy Indl Rev
Beverly Enterprises Inc/Gloucester &
Lexington Projs Rfdg................... 8.000 05/01/02 268,500
-----------
1,287,510
-----------
MICHIGAN 4.3%
500 Detroit, MI Ser 87A (Prerefunded @
04/01/97).............................. 8.625 04/01/07 515,875
1,000 Michigan St Underground Storage Tank
Finl Assurn Auth Rev Ser I Rfdg (AMBAC
Insd).................................. 6.000 05/01/05 1,079,410
-----------
1,595,285
-----------
MINNESOTA 3.2%
1,000 Centennial Indpt Sch Dist No 12 MN Ser
A (MBIA Insd).......................... 5.600 02/01/05 1,060,590
100 Minneapolis, MN Hlth Care Fac Rev
Ebenezer Society Proj Ser A............ 7.000 07/01/12 100,063
-----------
1,160,653
-----------
MISSISSIPPI 0.7%
250 Ridgeland, MS Urban Renewal Rev The
Orchard Ltd Proj Ser A Rfdg............ 7.750 12/01/15 257,108
-----------
NEVADA 3.2%
1,185 Reno, NV Redev Agy Tax Alloc Sub Tax
Alloc Ser A Rfdg....................... 6.000 06/01/10 1,173,103
-----------
NEW HAMPSHIRE 0.3%
100 New Hampshire Higher Edl & Hlth Fac
Auth Rev Daniel Webster College Issue
Rfdg................................... 7.625 07/01/16 102,923
-----------
NEW YORK 9.5%
500 New York City Ser B1................... 7.375 08/15/13 545,190
150 New York City Indl Dev Agy Civic Fac
Marymount Manhattan College Proj....... 7.000 07/01/23 158,750
1,350 New York City Muni Wtr Fin Auth Wtr &
Swr Sys Rev Ser A...................... 5.000 06/15/17 1,226,083
1,000 New York St Dorm Auth Rev St Univ Edl
Fac Ser A Rfdg......................... 6.500 05/15/06 1,075,420
500 New York St Dorm Auth Rev City Univ Sys
Ser C Rfdg............................. 6.000 07/01/16 500,625
-----------
3,506,068
-----------
OHIO 2.3%
500 Cleveland, OH Pkg Fac Rev Impt
(Prerefunded @ 09/15/02)............... 8.000 09/15/12 594,350
220 Fairfield, OH Econ Dev Rev Beverly
Enterprises Inc Proj Rfdg.............. 8.500 01/01/03 237,787
-----------
832,137
-----------
OKLAHOMA 1.6%
500 Tulsa, OK Indl Auth Hosp Rev Tulsa Regl
Med Cent (Prerefunded @ 06/01/03)...... 7.200 06/01/17 576,855
-----------
OREGON 2.8%
1,000 Marion Cnty, OR Solid Waste & Elec Rev
Ogden Martin
Sys Marion Rfdg (AMBAC Insd)........... 5.500 10/01/06 1,048,360
-----------
</TABLE>
5
See Notes to Financial Statements
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA 3.2%
$ 150 Doylestown, PA Hosp Auth Hosp Rev Pine
Run Ser A.............................. 7.200% 07/01/23 $ 154,802
500 Fayette Cnty, PA Hosp Auth Hosp Rev The
Uniontown Hosp Proj (Prerefunded @
07/01/97).............................. 7.625 07/01/15 519,390
100 Montgomery Cnty, PA Indl Dev Auth Rev
1st Mtg The Meadowood Corp Proj Ser A
Rfdg................................... 10.250 12/01/20 122,638
100 Montgomery Cnty, PA Indl Dev Auth Rev
Pennsburg Nursing & Rehab Cent......... 7.625 07/01/18 98,444
250 Scranton-Lackawanna, PA Hlth & Welfare
Auth Rev Moses Taylor Hosp Proj Ser B.. 8.500 07/01/20 272,172
-----------
1,167,446
-----------
SOUTH CAROLINA 3.0%
1,150 Piedmont Muni Pwr Agy SC Elec Rev Ser A
Rfdg................................... 5.750 01/01/24 1,113,280
-----------
SOUTH DAKOTA 0.3%
100 South Dakota St Hlth & Edl Fac Auth Rev
Huron Regl Med Cent.................... 7.250 04/01/20 103,107
-----------
TENNESSEE 2.6%
895 Tennessee Hsg Dev Agy Home Ownership
Pgm.................................... 6.800 07/01/17 940,493
-----------
UTAH 6.2%
1,550 Intermountain Pwr Agy UT Pwr Supply Rev
Ser 86 B............................... 5.000 07/01/16 1,411,368
950 Intermountain Pwr Agy UT Pwr Supply Rev
Ser 86 C............................... 5.000 07/01/18 869,278
-----------
2,280,646
-----------
VIRGINIA 0.9%
65 Covington-Alleghany Cnty, VA Indl Dev
Auth Beverly Enterprises Inc Proj Rfdg. 9.375 09/01/01 72,340
250 Virginia St Hsg Dev Auth Comwlth Mtg
Ser A.................................. 7.100 01/01/17 260,323
-----------
332,663
-----------
WASHINGTON 4.3%
1,000 Washington St Pub Pwr Supply Sys
Nuclear Proj No 1 Rev Ser A Rfdg (AMBAC
Insd).................................. 6.000 07/01/07 1,051,700
500 West Richland, WA Wtr & Swr Rev (MBIA
Insd).................................. 7.000 12/01/14 548,590
-----------
1,600,290
-----------
WISCONSIN 2.9%
500 Wisconsin Hsg & Econ Dev Auth Home
Ownership Rev Ser E.................... 7.350 01/01/17 529,545
500 Wisconsin St Hlth & Edl Fac Auth Rev
Wheaton Franciscan Svcs Inc Rfdg
(Prerefunded @ 08/15/98)............... 8.200 08/15/18 541,845
-----------
1,071,390
-----------
WYOMING 3.5%
1,000 Campbell Cnty, WY Sch Dist No 1........ 5.350 06/01/04 1,032,680
250 Laramie Cnty, WY Hosp Rev Mem Hosp Proj
(AMBAC Insd)........................... 6.700 05/01/12 268,417
-----------
1,301,097
-----------
</TABLE>
<TABLE>
<S> <C>
TOTAL LONG-TERM INVESTMENTS 96.5%
(Cost $33,009,803) (a)............................................ 35,562,402
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.6%...................... 600,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.9%......................... 685,760
-----------
NET ASSETS 100.0%.................................................. $36,848,162
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $33,009,803,
the aggregate gross unrealized appreciation is $2,555,435 and the aggregate
gross unrealized depreciation is $2,836, resulting in net unrealized
appreciation of $2,552,599.
Insurers:
AMBAC--AMBAC Indemnity Corp. FSA--Financial Security Assurance Inc.
Conn--Connie Lee MBIA--Municipal Bond Investor's Assurance
Corp.
FGIC--Financial Guaranty Insurance Corp.
6
See Notes to Financial Statements
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $33,009,803) (Note
1)................................................................ $35,562,402
Short-Term Investments (Note 1)................................... 600,000
Cash.............................................................. 92,333
Receivables:
Interest......................................................... 787,318
Investments Sold................................................. 35,000
Other............................................................. 637
-----------
Total Assets..................................................... 37,077,690
-----------
LIABILITIES:
Payables:
Income Distributions............................................. 190,528
Investment Advisory Fee (Note 2)................................. 10,770
Accrued Expenses.................................................. 28,230
-----------
Total Liabilities................................................ 229,528
-----------
NET ASSETS........................................................ $36,848,162
-----------
NET ASSETS CONSIST OF:
Common Shares ($1.00 par value, authorized 5,000,000 shares,
1,910,907 shares issued, of which 5,625 are held in treasury and
1,905,282 shares are outstanding)................................. $ 1,905,282
Paid in Surplus................................................... 31,989,609
Net Unrealized Appreciation on Investments........................ 2,552,599
Accumulated Undistributed Net Investment Income................... 400,672
-----------
NET ASSETS........................................................ $36,848,162
-----------
NET ASSET VALUE PER SHARE ($36,848,162 divided by 1,905,282 shares
outstanding)...................................................... $ 19.34
-----------
</TABLE>
7
See Notes to Financial Statements
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $2,349,739
----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 166,721
Directors Fees and Expenses (Note 4)................................ 49,946
Legal............................................................... 17,799
Printing............................................................ 17,031
Other............................................................... 33,106
----------
Total Expenses..................................................... 284,603
Less Expenses Reimbursed (Note 2).................................. 37,049
----------
Net Expenses....................................................... 247,554
----------
NET INVESTMENT INCOME............................................... $2,102,185
----------
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments.................................... $ 206,450
----------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period............................................ 3,198,568
End of the Period.................................................. 2,552,599
----------
Net Unrealized Depreciation on Investments During the Period........ (645,969)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS..................... $ (439,519)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $1,662,666
----------
</TABLE>
8
See Notes to Financial Statements
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income..................... $ 2,102,185 $ 2,418,199
Net Realized Gain on Investments.......... 206,450 585,047
Net Unrealized Appreciation/Depreciation
on Investments............................ (645,969) 1,980,331
----------- -----------
Change in Net Assets from Operations...... 1,662,666 4,983,577
----------- -----------
Distributions from Net Investment Income.. (2,000,547) (2,476,866)
Distributions from and in Excess of Net
Realized Gain on Investments.............. (666,849) -0-
----------- -----------
Total Distributions...................... (2,667,396) (2,476,866)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................ (1,004,730) 2,506,711
----------- -----------
NET ASSETS:
Beginning of the Period................... 37,852,892 35,346,181
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$400,672 and $370,702, respectively)..... $36,848,162 $37,852,892
----------- -----------
</TABLE>
9
See Notes to Financial Statements
<PAGE>
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period........... $19.87 $18.55 $20.36
------- ------ ------
Net Investment Income............................. 1.103 1.27 1.36
Net Realized and Unrealized Gain/Loss on
Investments...................................... (.233) 1.35 (1.80)
------- ------ ------
Total from Investment Operations................... .870 2.62 (.44)
------- ------ ------
Less:
Distributions from Net Investment Income.......... 1.050 1.30 1.37
Distributions from Net Realized Gain on
Investments (Note 1)............................. .350 -0- -0-
------- ------ ------
Total Distributions................................ 1.400 1.30 1.37
------- ------ ------
Net Asset Value, End of the Period................. $19.340 $19.87 $18.55
------- ------ ------
Total Return....................................... 4.59% 14.12% (2.16%)
Net Assets at End of the Period (In millions)...... $36.8 $37.9 $35.3
Ratio of Expenses to Average Net Assets*........... .67% .64% .74%
Ratio of Net Investment Income to Average Net
Assets*........................................... 5.67% 6.54% 7.03%
Portfolio Turnover................................. 35% 21% 18%
*If certain expenses had not been assumed by VKAC,
total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets............ .77% .69% .76%
Ratio of Net Investment Income to Average Net
Assets............................................. 5.57% 6.49% 7.01%
</TABLE>
N/A = Not Applicable
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$19.88 $19.45 $18.83 $19.54 $18.86 $17.99 $19.10
- ------ ------ ------ ------ ------ ------ ------
1.41 1.36 1.455 1.46 1.47 1.47 1.46
.47 .47 .665 (.67) .71 .85 (1.12)
- ------ ------ ------ ------ ------ ------ ------
1.88 1.83 2.12 .79 2.18 2.32 .34
- ------ ------ ------ ------ ------ ------ ------
1.40 1.40 1.50 1.50 1.50 1.45 1.45
-0- -0- -0- -0- -0- -0- -0-
- ------ ------ ------ ------ ------ ------ ------
1.40 1.40 1.50 1.50 1.50 1.45 1.45
- ------ ------ ------ ------ ------ ------ ------
$20.36 $19.88 $19.45 $18.83 $19.54 $18.86 $17.99
- ------ ------ ------ ------ ------ ------ ------
9.46% 9.41% 11.26% 4.04% 11.56% 12.90% 1.78%
$38.8 $37.9 $37.1 $35.9 $37.2 $35.9 $34.3
.73% .85% .77% .81% .85% .85% .84%
6.93% 6.91% 7.59% 7.67% 7.57% 7.93% 7.92%
5% 15% 2% 1% 0% 5% 37%
.78% N/A N/A N/A N/A N/A N/A
6.88% N/A N/A N/A N/A N/A N/A
</TABLE>
11
See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Mosher, Inc. (the "Fund") is registered as a diversified closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to provide current income that is exempt from
federal income tax by investing primarily in municipal debt securities.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prepa-
ration 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 as-
sets 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 in municipal bonds are valued at the most re-
cently quoted bid prices or at bid prices based on a matrix system (which con-
siders such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service. Short-term securities
with remaining maturities of 60 days or less are valued at amortized cost.
The Fund's investments include lower-rated and unrated debt securities which
may be more susceptible to adverse economic conditions than investment grade
holdings. These securities are often subordinated to the prior claims of other
senior lenders and uncertainties exist as to an issuer's ability to meet prin-
cipal and interest payments. Securities rated below investment grade and compa-
rable unrated securities represented approximately 18% of the Fund's investment
portfolio at the end of the period.
B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date ba-
sis. Realized gains and losses are determined on an identified cost basis. The
Fund 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 Fund will
maintain, in a segregated account with its custodian, assets having an aggre-
gate value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1996, there were no
when issued or delayed delivery purchase commitments.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- -------------------------------------------------------------------------------
C. INVESTMENT INCOME-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the life of each appli-
cable security. Market discounts are recognized at the time of sale as real-
ized gains for book purposes and ordinary income for tax purposes.
D. FEDERAL INCOME TAXES-It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated investment compa-
nies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
E. DISTRIBUTION OF INCOME AND GAINS-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are distrib-
uted annually. Permanent book and tax basis differences of $71,668 relating to
the recharacterization of distributions from net realized gains were reclassi-
fied from net realized gain/loss on investments to accumulated undistributed
net investment income.
2. INVESTMENT ADVISORY AGREEMENT
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly of .45% of average weekly net assets. As of July 1, 1995, the Adviser
voluntarily agreed to waive all management fees in excess of .35% of the
Fund's average weekly net assets.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $13,127,527 and $12,595,098, re-
spectively.
4. DIRECTORS 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
$46,900.
5. SUBSEQUENT EVENT
On February 20, 1997, the Fund entered into a letter of intent with A I M Man-
agement Group Inc. to effect a combination transaction between the Fund and A
I M Municipal Bond Fund. The transaction is subject to execution of a defini-
tive agreement, common shareholder approval and compliance with applicable
regulatory requirements.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Mosher, Inc.:
We have audited the accompanying statement of assets and liabilities of Mosher,
Inc. (the "Fund"), including the portfolio of investments, as of December 31,
1996, 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 years in the ten-year pe-
riod then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our au-
dits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights 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 De-
cember 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates 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 Mo-
sher, Inc. as of December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the pe-
riod then ended, and the financial highlights for each of the years in the ten-
year period presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
January 17, 1997
14
<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds, or
1-800-282-4404 for Morgan Stanley retail funds.
15
<PAGE>
RESULTS OF SHAREHOLDER VOTES
An Annual Meeting of Shareholders of the Fund was held on June 7, 1996, where
shareholders voted on the election of directors and the ratification of KPMG
Peat Marwick LLP as independent auditors. With regard to the election of Dougal
Cameron as elected director by the shareholders of the Fund 1,140,970 shares
voted in his favor, 150 shares withheld. With regard to the election of Milton
E. Eliot as elected director by the shareholders of the Fund 1,141,120 shares
voted in his favor, 0 shares withheld. With regard to the election of Christo-
pher T. Jones as elected director by the shareholders of the Fund 1,141,120
shares voted in his favor, 0 shares withheld. With regard to the election of
Richard L. Kendall as elected director by the shareholders of the Fund
1,141,120 shares voted in his favor, 0 shares withheld. With regard to the
election of John H. Lindsey as elected director by the shareholders of the Fund
1,140,970 shares voted in his favor, 150 shares withheld. With regard to the
election of Robert C. McNair as elected director by the shareholders of the
Fund 1,140,970 shares voted in his favor, 150 shares withheld. With regard to
the election of Charles C. Ryrie as elected director by the shareholders of the
Fund 1,123,969 shares voted in his favor, 17,151 shares withheld. With regard
to the election of Robert Stewart, Jr. as elected director by the shareholders
of the Fund 1,132,975 shares voted in his favor, 8,145 shares withheld. With
regard to the ratification of KPMG Peat Marwick LLP as independent auditors for
the Fund 1,139,673 shares voted in favor of the proposal, 0 shares voted
against and 1,447 shares abstained.
A Special Meeting of Shareholders of the Fund was held on October 29, 1996,
where shareholders voted on the approval of a new investment advisory agreement
between Van Kampen American Capital Asset Management, Inc. and the Fund,
1,149,913 shares voted for the proposal, 2,000 shares voted against and 487
shares abstained.
16
<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 EQUISERVE LP
P.O. Box 8200
Boston, Massachusetts 02266-8200
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02110
LEGAL COUNSEL
FULBRIGHT & JAWORSKI
1301 McKinney
Houston, Texas 77010
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
NationsBank Center
700 Louisiana
Houston, Texas 77210-4545
Inquiries about an investor's account should be referred to the Fund's Trans-
fer Agent. Boston Equiserve LP
P.O. Box 8200
Boston, Massachusetts 02266-8200
Telephone: (800) 341-2929
Call collect (713) 993-0500
Ask for Closed-End Fund Account Services
17
