-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H7eR1OuhmUfe7jcAEf2z3HR3Bhgr29KERk9HiNeWzs9AJPPAf6o2gKnqO13fu7Xk xvqZq5QSqCEG4VbH9S3/8Q== 0000807607-99-000011.txt : 19991029 0000807607-99-000011.hdr.sgml : 19991029 ACCESSION NUMBER: 0000807607-99-000011 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL OPPORTUNITIES FUND INC CENTRAL INDEX KEY: 0000807607 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 251542736 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04533 FILM NUMBER: 99735793 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWERS CITY: PITTSBURG STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: FORTRESS MUNICIPAL INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FORTRESS HIGH YIELD MUNICIPAL FUND INC DATE OF NAME CHANGE: 19900814 FORMER COMPANY: FORMER CONFORMED NAME: FORTRESS HIGH YIELD TAX FREE FUND INC DATE OF NAME CHANGE: 19881024 N-30D 1 ANNUAL REPORT [Graphic] RICHARD B. FISHER President Federated Municipal Opportunities Fund, Inc. President's Message Dear Fellow Shareholder: Federated Municipal Opportunities Fund, Inc. was created in 1987, and I am pleased to present its 13th Annual Report. The fund invests in 181 tax-free bonds that provide tax-free income to shareholders. For the last decade, the fund has earned a 4-star rating by Morningstar, 1 and 79% of the fund's holdings are rated "BBB" or better. The purchasers of this fund want to avoid federal taxes on the income of their investment. The fund's investment objective is to provide shareholders with a high level of current income which is generally exempt from federal regular income tax.2 At the end of the reporting period, the fund's $457.5 million portfolio was invested across 181 tax-free securities issued by municipalities in 39 states, the District of Columbia and Puerto Rico. This report covers the 12-month reporting period from September 1, 1998 through August 31, 1999. It begins with an interview with Mary Jo Ochson, Senior Vice President, who co-manages the fund with J. Scott Albrecht, Vice President, both of Federated Investment Management Company, the fund's investment adviser. Following their comments covering the municipal market, the fund's performance, and investment strategy are three additional items of shareholder interest. First is a series of graphs showing the fund's long-term investment performance. Second is a complete listing of the fund's broadly diversified municipal bond holdings, and third is the publication of the fund's financial statements. Over the 12-month reporting period, the broad bond market was weak from a total return perspective as rising rates caused bond prices to decline. Although municipal bond prices also suffered from this trend, municipal bonds continued to offer historically high yields compared to the yields available on Treasury securities. As a result, Federated Municipal Opportunities Fund, Inc. produced a very competitive stream of income. 1 Morningstar, Inc., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. 2 State, local, and federal alternative minimum taxes may apply. Due to its high-coupon bond holdings, the fund was able to deliver a yield advantage over the average municipal bond fund. The fund's 30-day SEC yield for Class A Shares on August 31, 1999 was 4.66%, based on offering price (i.e., less any applicable sales charge). 3 This is the equivalent of a 7.72% yield on a taxable bond investment for an investor in the 39.6% federal income tax bracket and equivalent to taxable yields of 7.28% and 6.75% for investors in the 36% and 31% tax brackets, respectively. Individual share class total return performance for the 12-month reporting period, including income distributions, follows. 4
TOTAL RETURN INCOME NET ASSET VALUE CHANGE Class A Shares (2.58%) $0.55 $11.04 to $10.22 = (7.43%) Class B Shares (3.23%) $0.47 $11.03 to $10.22 = (7.34%) Class C Shares (3.24%) $0.47 $11.03 to $10.22 = (7.34%) Class F Shares (2.58%) $0.55 $11.04 to $10.22 = (7.43%)
Thank you for investing a portion of your wealth in Federated Municipal Opportunities Fund, Inc. You are one of approximately 12,000 shareholders who earn monthly investment income free from federal tax. Of course, you have the option of receiving income from the fund or building your account by reinvesting your dividends to compound tax-free. As always, we welcome your comments and suggestions. Sincerely, [Graphic] Richard B. Fisher President October 15, 1999 3 The 30-day current SEC yield is calculated by dividing the investment income per share for the prior 30 days by the maximum offering price per share on that date. The figure is compounded and annualized. The 30-day current SEC yield as of August 31, 1999 for Class B, C, and F Shares were 4.12%, 4.12% and 4.83%, respectively, based on offering price (i.e., less any applicable sales charge). The taxable yield equivalents, based on offering price (i.e., less any applicable sales charge), for investors in 39.6%, 36%, and 31% federal tax brackets were as follows: Class B Shares: 6.82%, 6.44% and 5.97%, respectively; Class C Shares: 6.82%, 6.44% and 5.97%, respectively; and Class F Shares: 8.00%, 7.55% and 7.00%, respectively. 4 Performance quoted is based on net asset value, reflects past performance and is not indicative of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the reporting period, based on offering price (i.e., less any applicable sales charge), for Class A, B, C and F Shares were (6.96%), (8.32%), (4.17%) and (4.46%), respectively. [Graphic] Mary Jo Ochson Senior Vice President Federated Investment Management Company [Graphic] J. Scott Albrecht Vice President Federated Investment Management Company Investment Review THE FUND'S FISCAL YEAR SAW THE FEDERAL RESERVE BOARD (THE "FED") POLICY CHANGE FROM ONE OF "EASING" OR REDUCING RATES, TO "TIGHTENING" OR INCREASING RATES. WHILE BOND PRICES IN GENERAL HAVE DECLINED AS A RESULT, MUNICIPAL BONDS REMAINED ATTRACTIVE RELATIVE TO TREASURIES FROM A PRICE AND YIELD PERSPECTIVE. WHAT ARE YOUR COMMENTS ON THE MUNICIPAL BOND MARKETPLACE OVER THE FUND'S FISCAL YEAR? From a total return standpoint, the reporting period was relatively difficult, reflecting a rise in interest rates across the maturity spectrum after October 1998. The continued strong growth of the domestic economy and diminished concerns about international economic problems were the primary reasons for the rise in yields. For example, yields on the 30-year Treasury bonds moved up 0.95% since August 1998, while the Bond Buyer Revenue Bond Index ("RBI") was up 0.58% over the same period. 1 The reduced appetite for tax-exempt securities from traditional crossover buyers (corporations and insurance companies) was also a driver of the upward trend in municipal yields. Demand was weak from crossover buyers due to the large supply of pre-Year 2000 ("Y2K") corporate debt issuance, which has created attractive relative value opportunities in the corporate bond market. Although direct retail demand has been powerful, it was not able to support the trading of larger blocks of municipal bonds, which normally would support bond prices. 1 The Bond Buyer Revenue Bond Index is a standard against which municipal bonds are measured. This index is unmanaged and investments cannot be made in an index. Municipal yields as a percentage of Treasury yields are down from last year's record levels, but remain high when compared to any year except 1998. The RBI/30-Year Treasury ratio is now 94% compared to an historical average of about 88%. We believe that at these levels municipal bonds offer attractive relative value. HOW DID FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC. PERFORM ON A TOTAL RETURN BASIS FOR THE 12-MONTH REPORTING PERIOD ENDED AUGUST 31, 1999? On a relative basis, the fund's total return lagged the general municipal funds tracked by Lipper Analytical Services, Inc. For the 12-month reporting period ended August 31, 1999, the fund's Class A, B, C and F Shares returned (2.58%), (3.23%), (3.24%) and (2.58%), based on net asset value, 2 respectively, while the Lipper General Municipal Funds Average returned (1.63%).3 HOW DID THE FUND PERFORM WITH RESPECT TO INCOME? Federated Municipal Opportunities Fund, Inc. again produced more federal tax-exempt income than the average long-term general municipal bond fund. As of August 31, 1999, the fund's Class A Shares had a 30-day SEC yield of 4.66% (an increase from 4.33% a year earlier), which beat the 4.42% 30-day SEC yield of other funds with Class A Shares in its Lipper peer group. The fund's core positions in high coupon bonds (both investment and non-investment grade) were behind the strong income performance. This performance is even more impressive on a tax-equivalent basis. Tax-equivalent yields for the fund's Class A Shares ranged from 6.75% for an investor in the 31% tax bracket to 7.72% for an investor in the 39.6% tax bracket. 4 2 Performance quoted is based on net asset value, represents past performance and is not indicative of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period, based on offering price (i.e., less any applicable sales charge), for Class A, B, C and F Shares were (6.96%), (8.32%), (4.17%) and (4.46%), respectively. 3 Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the category indicated. Lipper figures do not take sales charges into account. 4 The 30-day current SEC yield is calculated by dividing the investment income per share for the prior 30 days by the maximum offering price per share on that date. The SEC yields are compounded and annualized. The 30-day SEC yields on August 31, 1999 for Class B, C and F shares were 4.12%, 4.12%, and 4.83%, based on offering price (i.e., less any applicable sales charge), respectively. The taxable yield equivalents, based on offering price for investors in 39.6%, 36%, and 31% federal tax brackets were as follows: Class B Shares: 6.82%, 6.44% and 5.97%, respectively; Class C Shares: 6.82%, 6.44% and 5.97%, respectively; and Class F Shares: 8.00%, 7.55% and 7.00%, respectively. WHAT WERE THE FUND'S TOP FIVE HOLDINGS AS OF AUGUST 31, 1999?
PERCENTAGE OF ISSUER MATURITY COUPON RATE NET ASSETS Indianapolis, IN Airport Authority, Special Facilities Revenue Bonds 1/15/2017 7.100% 4.0% District of Columbia, Revenue Bonds 10/1/2026 5.625% 3.6% Illinois Health Facilities Authority Hospital Revenue Bonds 7/1/2004 9.250% 2.6% Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds 4/1/2006 8.500% 2.0% St. Paul, MN Housing & Redevelopment Authority, Hospital Revenue Refunding Bonds 11/1/2017 6.625% 1.9% TOTAL 14.1%
HOW WERE THE FUND'S ASSETS ALLOCATED IN TERMS OF CREDIT QUALITY AT THE END OF THE REPORTING PERIOD? PERCENTAGE OF NET ASSETS AAA 20.5% AA 10.7% A 5.9% BBB 42.3% BB 17.5% B 1.7% Non-rated securities made up 27% of the portfolio's average quality. These securities were assigned a rating as follows: AA, 1.9%; A, 1.1%; BBB, 8.2%; BB, 14.0% and B, 1.7%. WHAT IS YOUR OUTLOOK FOR MUNICIPAL CREDIT QUALITY AND CREDIT SPREADS AS WE APPROACH THE YEAR 2000? Municipal credit quality in general has benefited from the strong U.S. economy. Municipal tax receipts at all levels of government have exceeded forecasts, which has allowed municipal fund balances and reserves to expand. There are sectors of the municipal revenue bond market that have experienced credit weakness. For example, the hospital sector, in particular, has experienced credit downgrades as a result of the reductions in Medicare reimbursement by the federal government and overly ambitious expansion plans. Y2K spending by municipal governments is a potential credit factor that must be taken into consideration as far as both the cost and effectiveness of their Y2K preparedness. While the market does not expect any material interruptions in the supply of necessary municipal services, there does remain the potential for some functions to suffer temporary disruptions. At the time of this writing, quality spreads were at their widest level since late 1997. If one believes that the U.S. economy will remain in good shape, a valid argument can be made that quality spreads may actually tighten from here on many lower rated bonds. Even if spreads continue to widen a bit more, the absolute levels of yield earned on lower rated bonds should translate into superior relative performance. Last Meeting of Shareholders An Annual Meeting of fund shareholders was held on March 26, 1999 and reconvened on May 11, 1999. On January 12, 1999, the record date for shareholders voting at the meeting, there were 44,112,715.175 total outstanding shares. The following items were considered by shareholders and the results of their voting were as follows: AGENDA ITEM 1 Election of Directors: 1
WITHHELD AUTHORITY FOR TO VOTE Thomas G. Bigley 35,685,883 1,262,672 John T. Conroy, Jr. 35,803,516 1,145,039 Nicholas P. Constantakis 35,839,553 1,109,002 John F. Cunningham 35,826,315 1,122,240 J. Christopher Donahue 35,818,517 1,130,038 Peter E. Madden 35,874,405 1,074,150 Charles F. Mansfield, Jr. 35,874,027 1,074,528 John E. Murray, Jr. 35,880,615 1,067,940 John S. Walsh 35,880,615 1,067,940
1 The following Directors of the fund continued their terms as Directors of the fund: John F. Donahue, Lawrence D. Ellis, M.D. and Marjorie P. Smuts. AGENDA ITEM 2 To ratify the selection of Deloitte & Touche LLP as the fund's independent auditor.
ABSTENTIONS AND BROKER FOR AGAINST NON-VOTES 35,428,252 299,837 1,220,465
AGENDA ITEM 3 To make changes to the fund's fundamental investment policies: (a) To make non-fundamental and to amend the fund's fundamental investment policy governing investments in restricted securities:
ABSTENTIONS AND BROKER FOR AGAINST NON-VOTES 22,939,092 1,543,030 1,936,873
(b) To amend the fund's fundamental investment policy regarding borrowing to permit the purchase of securities while borrowings are outstanding:
ABSTENTIONS AND BROKER FOR AGAINST NON-VOTES 22,338,721 2,094,432 1,985,843
(c) To make non-fundamental and to amend the fund's fundamental investment policy to permit the fund to invest in the securities of other investment companies:
ABSTENTIONS AND BROKER FOR AGAINST NON-VOTES 23,007,839 1,650,769 1,760,386
Two Ways You May Seek to Invest for Success: INITIAL INVESTMENT If you made an initial investment of $13,000 in the Class F Shares of Federated Municipal Opportunities Fund, Inc. on 4/10/87, reinvested your dividends and capital gains, and did not redeem any shares, your account would have been worth $28,458 on 8/31/99. You would have earned a 6.53% 1 average annual total return for the investment life span. One key to investing wisely is to reinvest all tax-free distributions in fund shares. This increases the number of shares on which you can earn future tax-free dividends, and you gain the benefit of compounding tax-free. As of 9/30/99, the Class A Shares' average annual 1-year and since-inception (8/5/96) total returns were (8.15%) and 2.78%, respectively. Class B Shares' average annual 1-year and since-inception (8/5/96) total returns were (9.67%) and 2.63%, respectively. Class C Shares' average annual 1-year and since inception (8/5/96) total returns were (5.58%) and 3.49%, respectively. Class F Shares' average annual 1-year, 5-year, and 10-year total returns were (5.69%), 5.11%, and 5.99%, respectively. 2 Graphic representation omitted. See Appendix A. 1 Total return represents the change in the value of an investment after reinvesting all income and capital gains, and takes into account the 1.00% sales charge for Class F Shares. A contingent deferred sales charge of 1.00% would be applied on any redemption of Class F Shares less than four years from the purchase date. Data quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. 2 The total returns stated take into account all applicable sales charges. The maximum sales charges and contingent deferred sales charges for the fund are as follows: Class A Shares, 4.50% sales charge; Class B Shares, 5.50% contingent deferred sales charge; Class C Shares, 1.00% contingent deferred sales charge; and Class F Shares, 1.00% sales charge and 1.00% contingent deferred sales charge. ONE STEP AT A TIME $1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR 12 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $20,930. With this approach, the key is consistency. If you had started investing $1,000 annually in the Class F Shares of Federated Municipal Opportunities Fund, Inc. on 4/10/87, reinvested your dividends and capital gains, and did not redeem any shares, you would have invested only $13,000, but your account would have reached a total value of $20,930 1 by 8/31/99. You would have earned an average annual total return of 5.98%. A practical investment plan helps you pursue a high level of income through tax-free municipal bonds. Through systematic investing, you buy shares on a regular basis and reinvest all tax-free earnings. An investment plan works for you when you invest only $1,000 annually. You can take it one step at a time. Put time, money and compounding to work. Graphic representation omitted. See Appendix B. 1 This chart assumes that the subsequent annual investments are made on the last day of each anniversary month. No method of investing can guarantee a profit or protect against loss in down markets. Hypothetical Investor Profile-Investing for Tax-Free Monthly Income Fred and Marge Potter both work and have no children. At the peak of their careers, this tax-sensitive couple was seeking a way to keep more of what they earned. On April 10, 1987, they invested $5,000 in the Class F Shares of Federated Municipal Opportunities Fund, Inc. and continue to invest $500 in the fund on the first of every month. As this chart shows, since that time, their investment has grown-on a tax-free basis-to $118,460. 1 This represents a 5.89% average annual total return for investors in the 39.6% federal tax bracket.2 For the Potters, the decision to invest tax-free has made the future worth waiting for. Graphic representation omitted. See Appendix C. 1 Income may be subject to the federal alternative minimum tax and state and local taxes. Upon redemption, any capital gains are subject to taxes. 2 This hypothetical scenario is provided for illustrative purposes only and does not represent the result obtained by any particular shareholder. Past performance does not guarantee future results. Federated Municipal Opportunities Fund, Inc.-Class A Shares GROWTH OF A $10,000 INVESTMENT The graph below illustrates the hypothetical investment of $10,000 1 in the Federated Municipal Opportunities Fund, Inc. (Class A Shares) (the "Fund") from August 5, 1996 (start of performance) to August 31, 1999 compared to the Lehman Brothers Municipal Bond Index (LBMBI).2 AVERAGE ANNUAL TOTAL RETURNS 3 FOR THE PERIOD ENDED AUGUST 31, 1999 1 Year (6.96%) Start of Performance (8/5/96) 3.00% Graphic representation omitted. See Appendix D. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED. 1 Represents a hypothetical investment of $10,000 in the Fund after deducting the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550). The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI has been adjusted to reflect reinvestment of dividends on securities in the index. 2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged. 3 Total returns quoted reflect all applicable sales charges and contingent deferred sales charges. Federated Municipal Opportunities Fund, Inc.-Class B Shares GROWTH OF A $10,000 INVESTMENT The graph below illustrates the hypothetical investment of $10,000 1 in the Federated Municipal Opportunities Fund, Inc. (Class B Shares) (the "Fund") from August 5, 1996 (start of performance) to August 31, 1999 compared to the Lehman Brothers Municipal Bond Index (LBMBI).2 AVERAGE ANNUAL TOTAL RETURNS 3 FOR THE PERIOD ENDED AUGUST 31, 1999 1 Year (8.32%) Start of Performance (8/5/96) 2.89% Graphic representation omitted. See Appendix E. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED. 1 Represents a hypothetical investment of $10,000 in the Fund. The ending value of the Fund reflects a 3.00% contingent deferred sales charge on any redemption less than four years from the purchase date. The maximum contingent deferred sales charge is 5.50% on any redemption less than one year from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI has been adjusted to reflect reinvestment of dividends on securities in the index. 2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged. 3 Total returns quoted reflect all applicable sales charges and contingent deferred sales charges. Federated Municipal Opportunities Fund, Inc.-Class C Shares GROWTH OF A $10,000 INVESTMENT The graph below illustrates the hypothetical investment of $10,000 1 in the Federated Municipal Opportunities Fund, Inc. (Class C Shares) (the "Fund") from August 5, 1996 (start of performance) to August 31, 1999 compared to the Lehman Brothers Municipal Bond Index (LBMBI).2 AVERAGE ANNUAL TOTAL RETURNS 3 FOR THE PERIOD ENDED AUGUST 31, 1999 1 Year (4.17%) Start of Performance (8/5/96) 3.78% Graphic representation omitted. See Appendix F. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED. 1 Represents a hypothetical investment of $10,000 in the Fund. A 1.00% contingent deferred sales charge would be applied on any redemption less than one year from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI has been adjusted to reflect reinvestment of dividends on securities in the index. 2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged. 3 Total returns quoted reflect all applicable sales charges and contingent deferred sales charges. Federated Municipal Opportunities Fund, Inc.-Class F Shares GROWTH OF A $10,000 INVESTMENT The graph below illustrates the hypothetical investment of $10,000 1 in the Federated Municipal Opportunities Fund, Inc. (Class F Shares) (the "Fund") from August 31, 1989 to August 31, 1999 compared to the Lehman Brothers Municipal Bond Index (LBMBI).2 AVERAGE ANNUAL TOTAL RETURNS 3 FOR THE PERIOD ENDED AUGUST 31, 1999 1 Year (4.46%) 5 Years 4.80% 10 Years 6.00% Start of Performance (4/10/87) 6.53% Graphic representation omitted. See Appendix G. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED. 1 Represents a hypothetical investment of $10,000 in the Fund after deducting the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge = $9,900). A contingent deferred sales charge of 1.00% would be applied on any redemption less than four years from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI has been adjusted to reflect reinvestment of dividends on securities in the index. 2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged. 3 Total returns quoted reflect all applicable sales charges and contingent deferred sales charges. Portfolio of Investments AUGUST 31, 1999
PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS-93.9% ALASKA-1.2% $ 1,440,000 Alaska Industrial Development and Export Authority, Power Revenue Bonds, 5.875% (Upper Lynn Canal Regional Power Supply System)/(Original Issue Yield: 6.00%), 1/1/2032 BB+ $ 1,307,246 310,000 Alaska State Housing Finance Corp., COL Home Mortgage Revenue Bonds, (Series B-1), 6.90% (GNMA LOC), 6/1/2032 AAA 322,512 4,000,000 Alaska State Housing Finance Corp., Mortgage Revenue Bonds (Series 1997 A-2), 5.75% (Original Issue Yield: 5.778%), 6/1/2024 AAA 3,937,360 TOTAL 5,567,118 ARIZONA-1.5% 4,985,000 Gilbert, AZ IDA, Revenue Bonds (Series 1999A), 5.85% (Southwest Student Services Corp.)/(Original Issue Yield: 5.90%), 2/1/2019 NR 4,586,399 2,400,000 Maricopa County, AZ, IDA, Solid Waste Disposal Revenue Bonds (Series 1999A), 7.50% (Rainbow Valley Landfill Project), 12/1/2020 NR 2,341,680 TOTAL 6,928,079 ARKANSAS-1.6% 2,920,000 Conway, AR Hospital Authority, Revenue Bonds, 7.125% (Conway Regional Hospital), 2/1/2013 BBB+ 3,064,511 2,215,000 Conway, AR Hospital Authority, Revenue Refunding Bonds, 8.125% (Conway Regional Hospital), 7/1/2005 BBB+ 2,302,891 1,000,000 Conway, AR Hospital Authority, Revenue Refunding Bonds, 8.375% (Conway Regional Hospital), 7/1/2011 BBB+ 1,041,680 1,000,000 Little Rock, AR Health Facilities Board, Revenue Refunding Bonds, 7.00% (Baptist Medical Center, AR), 10/1/2017 A 1,055,340 TOTAL 7,464,422 CALIFORNIA-5.1% 2,000,000 California Statewide Communities Development Authority, Multifamily Housing Revenue Bonds (Series 1999W), 6.65% (El Sereno City Lights Project), 7/1/2039 NR 1,929,520 2,000,000 California Statewide Communities Development Authority, Multifamily Housing Revenue Bonds (Series 1999X), 6.65% (Magnolia City Lights Project), 7/1/2039 NR 1,929,520 1,500,000 Folsom, CA, Special Tax Bonds (Series 1999), 6.00% (Folsom, CA Community Facilities District No. 7)/(Original Issue Yield: 6.077%), 9/1/2024 NR 1,459,350 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued CALIFORNIA-CONTINUED $ 2,300,000 San Dimas, CA Housing Authority, Mobile Home Park Revenue Bonds (Series 1998A), 5.70% (Charter Oak Mobile Home Estates Acquisition Project)/(Original Issue Yield: 5.90%), 7/1/2028 NR $ 2,163,771 24,000,000 San Joaquin Hills, CA Transportation Corridor Agency, Toll Road Capital Appreciation Refunding Revenue Bonds (MBIA INS)/(Original Issue Yield: 5.625%), 1/15/2025 AAA 5,544,720 21,625,000 San Joaquin Hills, CA Transportation Corridor Agency, Toll Road Capital Appreciation Refunding Revenue Bonds (Series A) (MBIA INS)/(Original Issue Yield: 5.60%), 1/15/2023 AAA 5,622,933 2,000,000 Stockton, CA Public Financing Authority, Reassessment Revenue Bonds, (Series 1998), 5.80% (Arch Road & Stockton Business Park Ads)/(Original Issue Yield: 5.80%), 9/2/2020 NR 1,906,980 1,250,000 Temecula, CA Community Facilities District No. 88-12, Special Tax Refunding Bonds (Series 1998A), 5.625%, 9/1/2017 NR 1,183,713 1,000,000 Vista, CA Mobile Home Park, Revenue Bonds (Series 1999A), 5.75% (Vista Manor Mobile Home)/(Original Issue Yield: 5.821%), 3/15/2029 NR 946,960 800,000 Vista, CA Mobile Home Park, Revenue Bonds, Series A, 5.875% (Estrella De Oro Mobile Home)/(Original Issue Yield: 5.947%), 2/1/2028 NR 783,192 TOTAL 23,470,659 COLORADO-3.0% 220,000 Colorado HFA, SFM Revenue Bonds (Series A-2), 7.70% (FHA GTD), 2/1/2023 AA+ 228,142 1,310,000 Colorado HFA, SFM Revenue Bonds (Series C-2), 7.375% (FHA GTD), 8/1/2023 AA+ 1,352,339 4,995,000 Colorado HFA, SFM Revenue Bonds (Series 1997C-2), 6.875%, 11/1/2028 Aa 5,406,638 10,000,000 E-470 Public Highway Authority, CO, Capital Appreciation Revenue Bonds (Series B) (MBIA INS)/(Original Issue Yield: 5.50%), 9/1/2021 AAA 2,803,400 9,700,000 E-470 Public Highway Authority, CO, Capital Appreciation Revenue Bonds (Series B) (MBIA INS)/(Original Issue Yield: 5.52%), 9/1/2022 AAA 2,561,964 5,000,000 E-470 Public Highway Authority, CO, Capital Appreciation Revenue Bonds (Series B) (MBIA INS)/(Original Issue Yield: 5.52%), 9/1/2023 AAA 1,244,000 105,000 El Paso County, CO HFA, SFM Revenue Bonds, 8.00% (GNMA COL), 9/1/2022 AAA 108,534 TOTAL 13,705,017 CONNECTICUT-0.6% 3,000,000 Connecticut Development Authority, PCR Refunding Revenue Bonds (Series A), 5.85% (Connecticut Light & Power Co.), 9/1/2028 BB- 2,824,980 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued DISTRICT OF COLUMBIA-3.6% $ 17,000,000 District of Columbia, Revenue Bonds, 5.625% (American University)/(AMBAC INS)/(Original Issue Yield: 5.90%), 10/1/2026 AAA $ 16,583,840 FLORIDA-1.9% 2,500,000 Florida Housing Finance Corp., Multifamily Housing Revenue Bonds (Series 1998 T-1), 6.50% (Whistler's Cove Apartments), 1/1/2039 NR 2,358,400 2,475,000 Lee County, FL HFA, SFM Step Coupon Revenue Bonds, 6.85% (GNMA COL), 3/1/2029 Aaa 2,706,908 16,925,000 Miami-Dade County, FL, Special Obligation Capital Appreciation Revenue Bonds (Series B) (MBIA INS)/(Original Issue Yield: 5.65%), 10/1/2031 AAA 2,570,908 1,460,000 Orange County, FL HFA, Multifamily Housing Revenue Bonds (Series 1999B), 6.50% (Palm West Apartments Project), 3/1/2034 NR 1,394,563 TOTAL 9,030,779 GEORGIA-0.3% 1,640,000 Forsyth County, GA Hospital Authority, Revenue Anticipation Certificates (Series 1998), 6.375% (Georgia Baptist Health Care System)/(Original Issue Yield: 6.45%), 10/1/2028 NR 1,518,968 IDAHO-0.4% 550,000 Idaho Housing Agency, SFM Revenue Bonds (Series A), 7.50% (FHA GTD), 7/1/2024 AA 573,320 1,395,000 Idaho Housing Agency, SFM Revenue Bonds (Series F- 2), 7.80% (FHA GTD), 1/1/2023 AA 1,438,175 TOTAL 2,011,495 ILLINOIS-5.7% 2,020,000 Chicago, IL COL SFM Revenue Bonds (Series A), 7.25% (GNMA COL), 9/1/2028 Aaa 2,235,736 1,480,000 Chicago, IL, Gas Supply Revenue Bonds, 7.50% (Peoples Gas Light & Coke Company), 3/1/2015 AA- 1,529,876 1,100,000 Chicago, IL, Gas Supply Revenue Bonds, 7.50% (Peoples Gas Light & Coke Company), 3/1/2015 AA- 1,137,070 2,000,000 Chicago, IL, Water Revenue Bond, 7.20% (United States Treasury PRF)/(Original Issue Yield: 7.35%), 11/15/1999 (@102) AAA 2,054,060 3,000,000 Illinois Development Finance Authority, Housing Revenue Bonds, 6.10% (Catholic Charities Housing Development Corp.), 1/1/2020 NR 2,940,510 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued ILLINOIS-CONTINUED $ 2,500,000 Illinois Development Finance Authority, Mortgage Revenue Refunding Bonds, Series A, 5.80% (MBIA INS), 7/1/2028 AAA $ 2,505,350 9,825,000 Illinois Health Facilities Authority, Hospital Revenue Bonds (Series A), 9.25% (Edgewater Hospital & Medical Center, IL), (State & Local Government Securities PRF), 7/1/2004 (@102) NR 11,935,705 2,000,000 Rolling Meadows, IL, Multifamily Mortgage Revenue Refunding Bonds, 7.75% (Woodfield Garden Apartments)/(Banque Paribas, Paris LOC), 2/1/2004 A 2,133,100 TOTAL 26,471,407 INDIANA-6.2% 550,000 Beech Grove, IN, Economic Development Revenue Bond, 8.75% (Westvaco Corp.), 7/1/2010 A 556,859 1,000,000 Goshen, IN, Revenue Bonds (Series 1998), 5.75% (Greencroft Obligated Group)/(Original Issue Yield: 5.87%), 8/15/2028 NR 908,700 2,000,000 Indiana Health Facilities Finance Authority Rehabilitation Center, Revenue Refunding Bonds (Series 1998), 5.625% (Greenwood Village South Project)/(Original Issue Yield: 5.802%), 5/15/2028 BBB- 1,794,900 3,000,000 2 Indiana Port Commission, Port Facility Revenue Refunding Bonds, 6.875% (Cargill, Inc.), 5/1/2012 A1 3,175,290 1,735,000 Indiana State HFA, SFM Revenue Home Mortgage Program (Series F-2), 7.75% (GNMA COL), 7/1/2022 Aaa 1,802,023 17,100,000 Indianapolis, IN Airport Authority, Special Facilities Revenue Bonds, 7.10% (Federal Express Corp.)/(Original Issue Yield: 7.178%), 1/15/2017 BBB 18,478,431 2,000,000 South Bend, IN, Economic Development Revenue Bonds (Series 1999A), 6.25% (Southfield Village)/(Original Issue Yield: 6.375%), 11/15/2029 NR 1,861,620 TOTAL 28,577,823 IOWA-0.2% 1,000,000 Davenport, IA PCA, PCR Refunding Bonds, Nicols- Homeshield Project, 8.375% (Quanex Corp.), 12/1/2005 NR 1,008,720 KANSAS-1.2% 1,500,000 2 Kansas Development Finance Authority, Multifamily Housing Revenue Bonds, Series 1998K, 6.375% (Pioneer Olde Town Apartments), 10/1/2017 NR 1,437,870 50,000 Manhattan, KS, Industrial Revenue Bonds (Series 1999), 6.25% (Farrar Corporation Project), 8/1/2006 NR 49,720 1,625,000 Manhattan, KS, Industrial Revenue Bonds (Series 1999), 7.00% (Farrar Corporation Project), 8/1/2014 NR 1,626,593 2,260,000 Sedgwick & Shawnee Counties, KS, SFM Revenue Bonds (Series 1997A-1), 6.95% (GNMA COL), 6/1/2029 Aaa 2,434,562 TOTAL 5,548,745 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued KENTUCKY-1.6% $ 3,500,000 Kenton County, KY Airport Board, Special Facilities Revenue Bonds (Series A), 7.50% (Delta Air Lines, Inc.)/(Original Issue Yield: 7.60%), 2/1/2020 BBB- $ 3,715,110 4,000,000 Kentucky EDFA, Hospital System Refunding Revenue Bonds, 5.875% (Appalachian Regional Health Center)/(Original Issue Yield: 5.92%), 10/1/2022 BBB 3,649,680 TOTAL 7,364,790 LOUISIANA-4.9% 3,000,000 De Soto Parish, LA Environmental Improvement Authority, Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018 BBB+ 3,353,430 1,000,000 Iberville Parish, LA, PCR Refunding Bonds, (Series 1998), 5.70% (Entergy Gulf States, Inc.)/(Original Issue Yield: 5.699%), 1/1/2014 BB+ 934,150 LOUISIANA-4.9% 2,800,000 Lake Charles, LA Harbor & Terminal District, Port Facilities Revenue Refunding Bond, Trunkline Lining Co. Project, 7.75% (Panhandle Eastern Corp.), 8/15/2022 A3 3,095,540 5,645,000 St. Charles Parish, LA, PCR Bonds, 7.50% (Louisiana Power & Light Co.)/(Original Issue Yield: 7.542%), 6/1/2021 BBB 5,923,242 1,400,000 St. Charles Parish, LA, PCR Bonds, 8.00% (Louisiana Power & Light Co.), 12/1/2014 Baa3 1,450,848 3,650,000 St. Charles Parish, LA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (Louisiana Power & Light Co.)/(Original Issue Yield: 7.04%), 12/1/2022 BBB 3,856,590 3,000,000 St. James Parish, LA, Solid Waste Disposal Revenue Bonds, 7.70% (Freeport McMoRan, Inc.)/(Original Issue Yield: 7.75%), 10/1/2022 NR 3,166,140 1,000,000 West Feliciana Parish, LA, PCR Bonds, 5.80% (Entergy Gulf States, Inc.), 12/1/2015 BB+ 947,060 TOTAL 22,727,000 MASSACHUSETTS-1.4% 5,000,000 Massachusetts HEFA, Revenue Bonds (Series 1999A), 5.75% (Caritas Christi Obligated Group)/(Original Issue Yield: 5.80%), 7/1/2028 BBB 4,537,850 2,300,000 Massachusetts IFA, Refunding Revenue Bonds (Series 1998A), 5.625% (Chestnut Knoll at Glenmeadow)/(Original Issue Yield: 5.70%), 2/15/2025 NR 2,101,602 TOTAL 6,639,452 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued MICHIGAN-2.0% $ 1,000,000 Chelsea, MI Economic Development Corp., Revenue Refunding Bonds (Series 1998), 5.40% (United Methodist Retirement Communities, Inc.)/(Original Issue Yield: 5.52%), 11/15/2018 BBB $ 897,370 2,250,000 Chelsea, MI Economic Development Corp., Revenue Refunding Bonds (Series 1998), 5.40% (United Methodist Retirement Communities, Inc.)/(Original Issue Yield: 5.58%), 11/15/2027 BBB 1,968,233 1,755,000 Island City Academy, MI, Certificates of Participation, 7.25%, 12/1/2029 NR 1,755,456 455,000 Michigan State HDA, SFM Revenue Bonds (Series B), 6.95%, 12/1/2020 AA+ 470,775 1,000,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds, 6.90% (Central Wayne Energy Recovery Limited Partnership), 7/1/2019 NR 991,560 1,000,000 Michigan Strategic Fund, Resource Recovery Limited Obligation Revenue Bonds, 7.00% (Central Wayne Energy Recovery Limited Partnership), 7/1/2027 NR 1,001,520 2,100,000 Mosaica Academy of Saginaw, MI, Certificates of Participation, 7.00%, 6/1/2029 NR 2,048,445 TOTAL 9,133,359 MINNESOTA-4.7% 250,000 Centennial Independent School District No. 012, MN, UT GO Bonds, (Series A), 7.15% (FSA INS)/(PRF), 2/1/2011 AAA 253,630 90,000 Dakota County, MN Housing & Redevelopment Authority, SFM Revenue Bonds, 7.20% (GNMA GTD), 12/1/2009 AAA 90,235 165,000 Hennepin Co. MN, Lease Revenue Certificates of Participation,(Series A), 6.80%, 5/15/2017 AA 174,200 200,000 Minneapolis, MN Multifamily Housing Authority, Multifamily Housing Revenue Bonds, 7.125% (Seward Towers)/(GNMA COL), 12/20/2010 AAA 206,968 300,000 Minneapolis, MN Multifamily Housing Authority, Multifamily Housing Revenue Bonds, Churchill Project, 7.05% (FHA GTD), 10/1/2022 AAA 316,674 3,000,000 Minnesota State HFA, SFM Revenue Bonds (Series E), 6.85%, 1/1/2024 AA+ 3,107,820 100,000 Minnesota State HFA, Single Family Mortgage Revenue Bonds, Series C, 7.10% (FHA/VA Mortgages COL), 7/1/2011 AA+ 103,749 100,000 Minnetonka, MN, Multifamily Housing Revenue Bonds, Cedare Hills East Project, 7.50% (FHA COL), 12/1/2017 A+ 103,336 8,770,000 St. Paul, MN Housing & Redevelopment Authority, Hospital Revenue Refunding Bonds (Series A), 6.625% (Healtheast, MN)/(Original Issue Yield: 6.687%), 11/1/2017 BBB 8,784,295 8,000,000 2 VRDC/IVRC Trust, GO Inverse Variable Rate Certificates, 7.773% (University of Minnesota), 5/18/2012 AA 8,580,000 TOTAL 21,720,907 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued MISSISSIPPI-0.5% $ 2,500,000 Mississippi Business Finance Corp., PCR Bonds, 5.875% (System Energy Resources, Inc.)/(Original Issue Yield: 5.934%), 4/1/2022 BBB- $ 2,356,700 MISSOURI-0.5% 2,445,000 Kansas City, MO IDA, Multifamily Housing Revenue Bonds, 6.90% (Woodbridge Apartments Project), 8/1/2030 NR 2,410,305 MONTANA-0.2% 850,000 Montana State Board of Housing, SFM Revenue Bonds (Series B-2), 7.50% (FHA GTD), 4/1/2023 Aa2 881,918 NEVADA-1.7% 3,000,000 Clark County, NV, Industrial Development Refunding Revenue Bonds (Series 1995B), 5.90% (Nevada Power Co.), 10/1/2030 BBB 2,871,630 5,110,000 Clark County, NV, Industrial Development Revenue Bonds (Series 1997A), 5.90% (Nevada Power Co.), 11/1/2032 BBB 4,887,255 TOTAL 7,758,885 NEW HAMPSHIRE-1.9% 600,000 New Hampshire Higher Educational & Health Facilities Authority, Revenue Bonds (Series 1998), 5.75% (RiverMead at Peterborough), 7/1/2028 NR 552,228 795,000 New Hampshire State HFA, SFM Revenue Bonds (Series B), 7.75%, 7/1/2023 A+ 829,877 4,420,000 New Hampshire State HFA, SFM Revenue Bonds (Series D), 7.25%, 7/1/2015 A+ 4,572,623 2,865,000 New Hampshire State IDA, PCR Bonds ( Series A), 8.00% (United Illuminating Co.), 12/1/2014 BBB+ 2,966,421 TOTAL 8,921,149 NEW JERSEY-0.5% 2,550,000 New Jersey EDA, Revenue Bonds (Series 1997A), 5.875% (Host Marriott Corp.), 12/1/2027 NR 2,360,204 NEW MEXICO-1.2% 2,500,000 Dona Ana County, NM, Multifamily Housing Revenue Bonds (Series 1999A), 6.75% (Montana Meadows Apartments), 8/1/2029 NR 2,487,075 2,000,000 Farmington, NM, PCR Refunding Bonds (Series 1997), 6.375% (Public Service Co. New Mexico), 4/1/2022 BB+ 2,042,980 1,250,000 Santa Fe County, NM, Project Revenue Bonds (Series 1998A), 5.625% (El Castillo Retirement Residences)/(Original Issue Yield: 5.828%), 5/15/2025 NR 1,137,963 TOTAL 5,668,018 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued NEW YORK-3.1% $ 2,500,000 Brookhaven, NY IDA, Senior Residential Housing Revenue Bonds, 6.25% (Woodcrest Estates), 12/1/2023 NR $ 2,360,325 1,500,000 New York City, NY IDA, Industrial Development Revenue Refunding Bonds (Series 1998), 6.00% (Field Hotel Associates, L.P.- JFK Project), 11/1/2028 NR 1,434,540 2,500,000 New York State Energy Research & Development Authority, Electric Facilities Revenue Bonds (Series A), 7.50% (Consolidated Edison Co.)/(Original Issue Yield: 7.65%), 1/1/2026 A+ 2,551,375 280,000 New York State Environmental Facilities Corp., PCR State Water Revolving Fund, 7.25% (Original Issue Yield: 7.334%), 6/15/2010 AA+ 299,090 2,620,000 New York State Environmental Facilities Corp., PCR State Water Revolving Fund, 7.25% (United States Treasury PRF), 6/15/2001 (@102) AAA 2,810,736 5,000,000 New York State Environmental Facilities Corp., Solid Waste Disposal Revenue Bonds, 6.10% (Occidental Petroleum Corp.)/(Original Issue Yield: 6.214%), 11/1/2030 BBB+ 4,969,800 TOTAL 14,425,866 NORTH CAROLINA-0.6% 1,000,000 Martin County, NC IFA, (Series 1995) Solid Waste Disposal Revenue Bonds, 6.00% (Weyerhaeuser Co.), 11/1/2025 A 997,940 2,000,000 North Carolina Medical Care Commission, Health Care Facilities First Mortgage Revenue Refunding Bonds (Series 1998), 5.625% (United Church Retirement Homes)/(Original Issue Yield: 5.80%), 9/1/2024 NR 1,835,620 TOTAL 2,833,560 NORTH DAKOTA-0.6% 1,660,000 North Dakota State HFA, SFM Revenue Bonds (Series C), 7.30%, 7/1/2024 A+ 1,716,241 1,095,000 North Dakota State HFA, SFM Revenue Bonds, (Series A), 6.75% (FHA COL), 7/1/2012 A+ 1,135,515 TOTAL 2,851,756 OHIO-1.2% 2,000,000 Cleveland, OH, Airport Special Refunding Revenue Bonds (Series 1999), 5.70% (Continental Airlines, Inc.)/(Original Issue Yield: 5.80%), 12/1/2019 BB 1,864,620 1,680,000 2 Franklin County, OH, Multifamily Housing Revenue Refunding Bonds (Series 1998B), 6.25% (Jefferson Chase Apartments Project), 11/1/2015 NR 1,615,454 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued OHIO-CONTINUED $ 1,500,000 Ohio State Air Quality Development Authority, PCR Refunding Revenue Bonds (Series 1997A), 6.10% (Cleveland Electric Illuminating Co.), 8/1/2020 BB+ $ 1,464,450 500,000 Ohio State Water Development Authority, PCR Bonds (Series A), 8.10% (Ohio Edison Co.)/(Original Issue Yield: 8.142%), 10/1/2023 BB- 513,985 TOTAL 5,458,509 OKLAHOMA-2.7% 4,585,000 Jackson County, OK Hospital Authority, Hospital Revenue Refunding Bonds, 7.30% (Jackson County Memorial Hospital, OK)/(Original Issue Yield: 7.40%), 8/1/2015 BB 4,778,625 1,250,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.375% (American Airlines), 12/1/2020 BBB- 1,303,550 6,200,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.60% (American Airlines)/(Original Issue Yield: 7.931%), 12/1/2030 BBB- 6,542,922 TOTAL 12,625,097 OREGON-0.5% 2,500,000 Klamath Falls, OR, Senior Lien Electric Revenue Refunding Bonds, 6.00% (Klamath Cogeneration Project), 1/1/2025 NR 2,355,800 PENNSYLVANIA-10.4% 3,000,000 Allegheny County, PA HDA, Health & Education Revenue Bonds, 7.00% (Rehabilitation Institute of Pittsburgh)/(Original Issue Yield: 7.049%), (United States Treasury PRF), 6/1/2002 (@102) AAA 3,257,400 2,500,000 Allegheny County, PA HDA, Health & Education Revenue Bonds, 7.00% (Rehabilitation Institute of Pittsburgh)/(United States Treasury PRF)/(Original Issue Yield: 7.132%), 6/1/2002 (@102) AAA 2,714,500 2,330,000 Allegheny County, PA HDA, Health Care Facilities Revenue Bonds (Series 1998), 5.875% (Villa St. Joseph of Baden, Inc.)/(Original Issue Yield: 6.02%), 8/15/2018 NR 2,151,079 4,770,000 Allegheny County, PA Higher Education, Building Authority Revenue Bonds, 7.375% (La Roche College), 7/15/2012 NR 4,988,132 1,480,000 Allegheny County, PA IDA, Revenue Bonds, 8.75% (United Parcel Service), 2/15/2009 NR 1,499,847 1,000,000 Bucks County, PA IDA, First Mortgage Health Care Facilities Revenue Bonds (Series 1999), 6.30% (Chandler Hall Health Services Obligated Group)/(Original Issue Yield: 6.40%), 5/1/2029 NR 934,780 1,500,000 Chartiers Valley, PA Industrial & Commercial Development Authority, First Mortgage Revenue Refunding Bonds (Series 1999), 6.375% (Asbury Health Center)/(Original Issue Yield: 6.52%), 12/1/2024 NR 1,447,890 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued PENNSYLVANIA-CONTINUED $ 3,000,000 Delaware County, PA Authority, College Revenue Bonds, 7.25% (Eastern College)/(United States Treasury PRF)/(Original Issue Yield: 7.875%), 3/1/2004 (@100) AAA $ 3,320,490 2,055,000 Erie County, PA Hospital Authority, Revenue Bonds, 7.50% (Erie Infants & Youth Home, Inc.), 10/1/2011 NR 2,120,472 400,000 Erie County, PA IDA, PCR Refunding Bonds, 7.15% (International Paper Co.), 9/1/2013 BBB+ 422,168 6,000,000 2 Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 1997B), 6.125% (National Gypsum Co.), 11/1/2027 NR 5,800,440 4,000,000 2 Pennsylvania EDFA, Exempt Facilities Revenue Bonds, 6.25% (National Gypsum Co.), 11/1/2027 NR 3,930,400 3,500,000 Pennsylvania EDFA, Resource Recovery Revenue Bonds (Series A), 6.40% (Northampton Generating), 1/1/2009 BBB- 3,573,430 8,000,000 Pennsylvania EDFA, Wastewater Treatment Revenue Bonds (Series A), 7.60% (Sun Co., Inc.)/(Original Issue Yield: 7.653%), 12/1/2024 BBB 8,749,760 1,740,000 Pennsylvania State Higher Education Facilities Authority, College & University Revenue Bonds, 6.75% (Thiel College), (United States Treasury PRF), 9/1/2003 (@102) AAA 1,893,277 1,200,000 Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 1996), 7.15% (Thiel College), (United States Treasury PRF), 5/15/2006 (@102) AAA 1,367,220 TOTAL 48,171,285 PUERTO RICO-0.4% 1,000,000 2 Puerto Rico Highway and Transportation Authority, Residual Interest Tax- Exempt Securites (Series PA 331A), 7.203% (AMBAC INS), 7/1/2013 NR 1,057,520 1,000,000 2 Puerto Rico Highway and Transportation Authority, Residual Interest Tax- Exempt Securities (Series PA 331B), 7.203% (AMBAC INS), 7/1/2014 NR 1,049,900 TOTAL 2,107,420 SOUTH CAROLINA-1.2% $ 2,000,000 Charleston, SC, Industrial Refunding Revenue Bonds, 6.95% (AEI Resources, Inc.), 8/10/2028 NR $ 1,967,820 15,550,000 Connector 2000 Association, Inc., SC, Toll Road Capital Appreciation Revenue Bonds (Series 1998A) (Original Issue Yield: 5.85%), 1/1/2034 BBB- 1,617,822 2,000,000 South Carolina Jobs-EDA, First Mortgage Health Facilities Revenue Refunding Bonds (Series 1998), 5.70% (The Lutheran Homes of South Carolina, Inc.)/(Original Issue Yield: 5.80%), 5/1/2026 NR 1,867,720 TOTAL 5,453,362 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued TENNESSEE-3.3% $ 1,160,000 Metropolitan Government Nashville & Davidson County, TN HEFA, Refunding Revenue Bonds (Series 1998), 5.65% (The Blakeford at Green Hills)/(Original Issue Yield: 5.75%), 7/1/2024 NR $ 1,037,864 1,000,000 Shelby County, TN Health Education & Housing Facilities Board, Health Care Facilities Revenue Bonds (Series 1997A), 6.375% (Kirby Pines Retirement Community)/(Original Issue Yield: 6.50%), 11/15/2025 NR 967,170 3,100,000 Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds, 8.25% (NorthCrest Medical Center)/(Original Issue Yield: 8.50%), (PRF), 4/1/2006 (@102) AAA 3,655,303 7,800,000 Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds, 8.50% (NorthCrest Medical Center)/(Original Issue Yield: 8.875%), (PRF), 4/1/2006 (@102) Aaa 9,553,596 5,000 Tennessee Housing Development Agency, Homeownership Program, Issue V Revenue Bonds, 7.65%, 7/1/2022 AA 5,121 TOTAL 15,219,054 TEXAS-11.8% 2,500,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A), 7.875% (Texas Utilities Electric Co.), 3/1/2021 BBB+ 2,647,575 1,800,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A), 8.125% (Texas Utilities Electric Co.), 2/1/2020 BBB+ 1,856,250 7,320,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.125% (Delta Air Lines, Inc.)/(Original Issue Yield: 7.55%), 11/1/2026 BBB- 7,562,072 3,000,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.25% (American Airlines)/(Original Issue Yield: 7.428%), 11/1/2030 BBB- 3,192,330 2,370,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.50% (American Airlines)/(Original Issue Yield: 8.20%), 11/1/2025 BBB- 2,478,214 2,500,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.625% (Delta Air Lines, Inc.)/(Original Issue Yield: 7.65%), 11/1/2021 BBB- 2,652,350 1,000,000 Guadalupe-Blanco River Authority TX, Industrial Development Corp., PCR Bonds, 8.60% (A.P. Green Industries), 4/1/2009 NR 1,040,180 2,500,000 Guadalupe-Blanco River Authority TX, Industrial Development Corp., PCR Bonds, 8.60% (A.P. Green Industries), 4/1/2009 NR 2,600,450 5,000,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds (Series A), 6.875% (Champion International Corp.)/(Original Issue Yield: 7.15%), 12/1/2028 BBB 5,310,800 3,000,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds, 5.60% (Valero Energy Corp.), 4/1/2032 BBB- 2,731,740 5,000,000 Harris County-Houston, TX Sports Authority, Special Revenue Jr. Lien Capital Appreciation Revenue Bonds (Series B) (MBIA INS)/(Original Issue Yield: 5.45%), 11/15/2017 AAA 1,734,700 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued TEXAS-CONTINUED $ 4,000,000 2 Matagorda County, TX Navigation District Number One, Residual Interest Tax-Exempt Securities (Series PA-427), 6.088% (Houston Industries, Inc.)/(MBIA INS), 11/1/2029 NR $ 3,304,960 4,675,000 Richardson, TX Hospital Authority, Refunding Revenue Bonds, 6.75% (Baylor/Richardson Medical Center, TX)/(Original Issue Yield: 6.82%), 12/1/2023 BBB+ 4,835,259 2,955,000 Richardson, TX Hospital Authority, Refunding Revenue Bonds, 6.75% (Baylor/Richardson Medical Center, TX)/(Original Issue Yield: 6.82%), 12/1/2023 BBB+ 3,245,565 1,000,000 Tarrant County, TX HFDC, Revenue Bonds (Series 1998C), 5.75% (Bethesda Living Center)/(Original Issue Yield: 5.89%), 8/15/2018 NR 932,390 1,000,000 Tarrant County, TX HFDC, Revenue Bonds (Series 1998C), 5.75% (Bethesda Living Center)/(Original Issue Yield: 5.97%), 8/15/2028 NR 906,290 7,500,000 West Side Calhoun County, TX Navigation District, Solid Waste Revenue Bond, 6.40% (Union Carbide Corp.)/(Original Issue Yield: 6.437%), 5/1/2023 BBB 7,654,125 TOTAL 54,685,250 UTAH-0.5% 560,000 Hildale, UT, Electric Revenue Bonds (Series 1995), 7.00%, 9/1/2002 NR 545,569 425,000 Utah State HFA, SFM Revenue Bonds (Series B-3), 7.10%, 7/1/2024 AAA 440,355 485,000 Utah State HFA, SFM Revenue Bonds (Series E-2), 7.15% (FHA GTD)/(Original Issue Yield: 7.169%), 7/1/2024 AAA 501,844 530,000 Utah State HFA, SFM Revenue Bonds, 7.55% (FHA GTD), 7/1/2023 AAA 550,511 60,000 Utah State HFA, SFM Revenue Bonds, 7.75% (FHA GTD), 1/1/2023 AAA 60,589 TOTAL 2,098,868 VIRGINIA-1.1% 7,500,000 Pocohontas Parkway Association, VA, Toll Road Capital Appreciation Revenue Bonds (Series B) (Original Issue Yield: 5.75%), 8/15/2017 BBB- 2,473,200 16,000,000 Pocohontas Parkway Association, VA, Toll Road Capital Appreciation Revenue Bonds (Series 1998B) (Original Issue Yield: 5.90%), 8/15/2029 BBB- 2,434,720 TOTAL 4,907,920 WASHINGTON-0.9% 4,300,000 Port of Camas-Washougal, WA, PCR Refunding Bonds (Series 1993), 6.70% (James River Project, WA)/(Original Issue Yield: 6.75%), 4/1/2023 BBB- 4,422,894 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE LONG-TERM MUNICIPALS- continued WISCONSIN-2.0% $ 1,250,000 Wisconsin HEFA, Revenue Bonds (Series 1998), 5.70% (United Lutheran Program For The Aging, Inc.)/(Original Issue Yield: 5.778%), 3/1/2028 NR $ 1,149,738 2,000,000 Wisconsin HEFA, Revenue Bonds (Series B), 6.75% (Grant Regional Health Center, Inc.)/(Original Issue Yield: 6.90%), 10/1/2022 NR 1,974,540 1,750,000 Wisconsin HEFA, Revenue Bonds, 5.80% (Beaver Dam Community Hospitals, Inc.), 8/15/2028 NR 1,601,635 2,300,000 Wisconsin HEFA, Revenue Bonds, Series 1998, 5.75% (Attic Angel Obligated Group)/(Original Issue Yield: 6.00%), 11/15/2027 NR 2,059,029 2,470,000 Wisconsin Housing & EDA, Home Ownership Revenue Bonds (Series H), 5.75%, 9/1/2028 AA 2,418,843 TOTAL 9,203,785 TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $430,282,047) 435,475,165 SHORT-TERM MUNICIPALS-4.7% CONNETICUT-1.4% 6,600,000 Connecticut State HEFA, (1999 Series U-1) Weekly VRDNs (Yale University) AAA 6,600,000 IDAHO-0.2% 700,000 Boise, ID Industrial Development Corp., Multi- Mode Variable Rate Industrial Development Revenue Bonds (Series 1998) Weekly VRDNs (Multiquip Inc. Project)/(Bank of Tokyo- Mitsubishi Ltd. LOC) A- 700,000 MISSOURI-0.3% 1,600,000 Missouri State Health Facilities Educational Authority Revenue Bonds, 3.00%, (Series B) AA+ 1,600,000 NEW YORK-1.5% 500,000 New York City Municipal Water Finance Authority, Water and Sewer System Revenue Bonds (Series 1995 A) Daily VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) AAA 500,000 300,000 New York City, NY Transitional Finance Authority, (1998 Subseries A-1) Weekly VRDNs (Commerzbank AG, Frankfurt LIQ) AA 300,000 600,000 New York City, NY, Subseries A-10 Daily VRDNs (Morgan Guaranty Trust Co., New York LOC) AAA 600,000 5,500,000 New York State Energy Research & Development Authority, (1985 Series A) Daily VRDNs (Niagara Mohawk Power Corp.)/(Toronto-Dominion Bank LOC) AA- 5,500,000 TOTAL 6,900,000 PRINCIPAL CREDIT AMOUNT RATING 1 VALUE SHORT-TERM MUNICIPALS- continued NORTH CAROLINA-1.0% $ 4,400,000 Person County, NC Industrial Facilities & PCFA Daily VRDNs (Carolina Power & Light Co.)/(SunTrust Bank, Atlanta LOC) Aa3 $ 4,400,000 200,000 Wake County, NC Industrial Facilities & PCFA, (Series 1990B) Daily VRDNs (Carolina Power & Light Co.)/(Bank of New York, New York LOC) AA- 200,000 TOTAL 4,600,000 TEXAS-0.3% 1,600,000 Harris County, TX HFDC, (Series 1994) Daily VRDNs (Methodist Hospital, Harris County, TX) AA 1,600,000 TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 22,000,000 TOTAL INVESTMENTS (IDENTIFIED COST $452,282,047) 3 $ 457,475,165
1 Please refer to the "Investment Ratings" in the Statement of Additional Information for an explanation of the credit ratings. Current credit ratings are unaudited. 2 Denotes a restricted security which is subject to restrictions on resale under federal securites laws. These securites have been deemed liquid based upon criteria approved by the fund's board of directors. At August 31, 1999, these securities amounted to $29,951,834 which represents 6.5% of net assets. 3 The cost of investments for federal tax purposes amounts to $452,282,047. The net unrealized appreciation of investments on a federal tax basis amounts to $5,193,118 which is comprised of $17,329,859 appreciation and $12,136,741 depreciation at August 31, 1999. Note: The categories of investments are shown as a percentage of net assets ($464,006,608) at August 31, 1999. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation COL -Collateralized EDA - -Economic Development Authority EDFA -Economic Development Financing Authority FGIC -Financial Guaranty Insurance Company FHA -Federal Housing Administration FSA -Financial Security Assurance GNMA -Government National Mortgage Association GO -General Obligation GTD -Guaranty HDA -Hospital Development Authority HEFA - -Health and Education Facilities Authority HFA -Housing Finance Authority HFDC - -Health Facility Development Corporation IDA -Industrial Development Authority IFA -Industrial Finance Authority INS -Insured LIQ -Liquidity Agreement LOC - -Letter of Credit MBIA -Municipal Bond Investors Assurance PCA -Pollution Control Authority PCR -Pollution Control Revenue PCFA -Pollution Control Finance Authority PRF -Prerefunded SFM -Single Family Mortgage UT -Unlimited Tax VA - -Veterans Adminstration VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities AUGUST 31, 1999
ASSETS: Total investments in securities, at value (identified and tax cost $452,282,047) $ 457,475,165 Cash 28,942 Income receivable 7,404,008 Receivable for investments sold 7,948,000 Receivable for shares sold 783,582 TOTAL ASSETS 473,639,697 LIABILITIES: Payable for investments purchased $ 8,449,451 Payable for shares redeemed 1,002,531 Accrued expenses 181,107 TOTAL LIABILITIES 9,633,089 Net assets for 45,393,314 shares outstanding $ 464,006,608 NET ASSETS CONSIST OF: Paid in capital $ 480,874,294 Net unrealized appreciation of investments 5,193,118 Accumulated net realized loss on investments (23,865,842) Undistributed net investment income 1,805,038 TOTAL NET ASSETS $ 464,006,608 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE CLASS A SHARES: Net Asset Value Per Share ($109,296,609 / 10,691,412 shares outstanding) $10.22 Offering Price Per Share (100/95.50 of $10.22) 1 $10.70 Redemption Proceeds Per Share $10.22 CLASS B SHARES: Net Asset Value Per Share ($77,439,602 / 7,579,580 shares outstanding) $10.22 Offering Price Per Share $10.22 Redemption Proceeds Per Share (94.50/100 of $10.22) 1 $9.66 CLASS C SHARES: Net Asset Value Per Share ($7,603,386 / 744,068 shares outstanding) $10.22 Offering Price Per Share $10.22 Redemption Proceeds Per Share (99.00/100 of $10.22) 1 $10.12 CLASS F SHARES: Net Asset Value Per Share ($269,667,011 / 26,378,254 shares outstanding) $10.22 Offering Price Per Share (100/99.00 of $10.22) 1 $10.32 Redemption Proceeds Per Share (99.00/100 of $10.22) 1 $10.12
1 See "What Do Shares Cost?" in the Prospectus. See Notes which are an integral part of the Financial Statements Statement of Operations YEAR ENDED AUGUST 31, 1999
INVESTMENT INCOME: Interest $ 29,968,349 EXPENSES: Investment advisory fee $ 2,898,235 Administrative personnel and services fee 364,212 Custodian fees 22,046 Transfer and dividend disbursing agent fees and expenses 367,369 Directors'/Trustees' fees 13,610 Auditing fees 13,974 Legal fees 13,084 Portfolio accounting fees 110,844 Distribution services fee- Class B Shares 485,484 Distribution services fee- Class C Shares 61,432 Shareholder services fee- Class A Shares 279,016 Shareholder services fee- Class B Shares 161,828 Shareholder services fee- Class C Shares 20,477 Shareholder services fee- Class F Shares 746,275 Share registration costs 40,508 Printing and postage 24,279 Insurance premiums 11,263 Taxes 36,985 Miscellaneous 22,318 TOTAL EXPENSES 5,693,239 Net investment income 24,275,110 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investments (17,594,800) Net change in unrealized appreciation of investments (19,467,255) Net realized and unrealized loss on investments (37,062,055) Change in net assets resulting from operations $ (12,786,945)
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED AUGUST 31 1999 1998 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 24,275,110 $ 22,471,420 Net realized gain (loss) on investments ($1,110,583 and $4,375,593, respectively, as computed for federal tax purposes) (17,594,800) 4,375,593 Net change in unrealized appreciation of investments (19,467,255) 11,688,975 CHANGE IN NET ASSETS RESULTING FROM OPERATIONS (12,786,945) 38,535,988 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Class A Shares (5,694,395) (5,141,911) Class B Shares (2,791,321) (1,241,221) Class C Shares (355,204) (144,720) Class F Shares (15,268,147) (16,533,742) CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS (24,109,067) (23,061,594) SHARE TRANSACTIONS: Proceeds from sale of shares 105,746,491 75,194,657 Net asset value of shares issued to shareholders in payment of distributions declared 14,496,584 13,981,416 Cost of shares redeemed (101,993,641) (65,472,597) CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 18,249,434 23,703,476 Change in net assets (18,646,578) 39,177,870 NET ASSETS: Beginning of period 482,653,186 443,475,316 End of period (including undistributed net investment income of $1,805,038 and $0, respectively) $ 464,006,608 $ 482,653,186
See Notes which are an integral part of the Financial Statements Financial Highlights-Class A Shares (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $11.04 $10.67 $10.33 $10.42 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.55 0.54 0.58 0.08 Net realized and unrealized gain (loss) on investments (0.82) 0.39 0.33 (0.12) TOTAL FROM INVESTMENT OPERATIONS (0.27) 0.93 0.91 (0.04) LESS DISTRIBUTIONS: Distributions from net investment income (0.55) (0.56) (0.57) (0.05) NET ASSET VALUE, END OF PERIOD $10.22 $11.04 $10.67 $10.33 TOTAL RETURN 2 (2.58%) 8.91% 9.07% (0.36%) RATIOS TO AVERAGE NET ASSETS: Expenses 1.07% 1.08% 1.09% 0.84% 3 Net investment income 5.14% 4.98% 5.29% 6.15% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $109,297 $112,179 $94,941 $296 Portfolio turnover 25% 41% 20% 22%
1 Reflects operations for the period from August 5, 1996 (date of initial public investment) to August 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Financial Highlights-Class B Shares (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $11.03 $10.66 $10.33 $10.42 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.47 0.44 0.51 0.08 Net realized and unrealized gain (loss) on investments (0.81) 0.40 0.31 (0.12) TOTAL FROM INVESTMENT OPERATIONS (0.34) 0.84 0.82 (0.04) LESS DISTRIBUTIONS: Distributions from net investment income (0.47) (0.47) (0.49) (0.05) NET ASSET VALUE, END OF PERIOD $10.22 $11.03 $10.66 $10.33 TOTAL RETURN 2 (3.23%) 8.08% 8.17% (0.36%) RATIOS TO AVERAGE NET ASSETS: Expenses 1.82% 1.83% 1.84% 0.84% 3 Net investment income 4.39% 4.25% 4.55% 6.15% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $77,440 $47,028 $14,997 $296 Portfolio turnover 25% 41% 20% 22%
1 Reflects operations for the period from August 5, 1996 (date of initial public investment) to August 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Financial Highlights-Class C Shares (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $11.03 $10.66 $10.33 $10.42 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.47 0.45 0.50 0.08 Net realized and unrealized gain (loss) on investments (0.81) 0.40 0.32 (0.12) TOTAL FROM INVESTMENT OPERATIONS (0.34) 0.85 0.82 (0.04) LESS DISTRIBUTIONS: Distributions from net investment income (0.47) (0.48) (0.49) (0.05) NET ASSET VALUE, END OF PERIOD $10.22 $11.03 $10.66 $10.33 TOTAL RETURN 2 (3.24%) 8.11% 8.17% (0.36%) RATIOS TO AVERAGE NET ASSETS: Expenses 1.82% 1.83% 1.86% 0.84% 3 Net investment income 4.39% 4.24% 4.51% 6.15% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $7,603 $6,269 $1,950 $296 Portfolio turnover 25% 41% 20% 22%
1 Reflects operations for the period from August 5, 1996 (date of initial public investment) to August 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Financial Highlights-Class F Shares (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995 NET ASSET VALUE, BEGINNING OF PERIOD $11.04 $10.67 $10.33 $10.71 $10.56 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.55 0.55 0.54 0.69 0.63 Net realized and unrealized gain (loss) on investments (0.82) 0.38 0.37 (0.42) 0.15 TOTAL FROM INVESTMENT OPERATIONS (0.27) 0.93 0.91 0.27 0.78 LESS DISTRIBUTIONS: Distributions from net investment income (0.55) (0.56) (0.57) (0.65) (0.63) NET ASSET VALUE, END OF PERIOD $10.22 $11.04 $10.67 $10.33 $10.71 TOTAL RETURN 1 (2.58%) 8.91% 9.07% 2.47% 7.73% RATIOS TO AVERAGE NET ASSETS: Expenses 2 1.07% 1.08% 1.09% 1.09% 1.08% Net investment income 2 5.14% 4.98% 5.22% 5.90% 6.18% Expenses (after waivers) 1.07% 1.08% 1.08% 1.08% 1.08% Net investment income (after waivers) 5.14% 4.98% 5.23% 5.91% 6.18% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $269,667 $317,178 $331,588 $383,028 $426,010 Portfolio turnover 25% 41% 20% 22% 13%
1 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 2 During the period, certain fees were voluntarily waived. If such voluntary waivers had not occurred, the ratios would have been as indicated. See Notes which are an integral part of the Financial Statements Notes to Financial Statements AUGUST 31, 1999 ORGANIZATION Federated Municipal Opportunities Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The investment objective is to provide a high level of current income which is generally exempt from federal regular income tax. The Fund offers four classes of shares: Class A Shares, Class B Shares, Class C Shares, and Class F Shares. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles. INVESTMENT VALUATIONS Municipal bonds are valued by an independent pricing service, taking into consideration yield, liquidity, risk, credit quality, coupon, maturity, type of issue, and any other factors or market data the pricing service deems relevant. Short-term securities are valued at the prices provided by an independent pricing service. However, short-term securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Interest income and expenses are accrued daily. Bond premium and discount, if applicable, are amortized as required by the Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are recorded on the ex- dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to prior year interest payments on defaulted securities. The following reclassifications have been made to the financial statements.
INCREASE (DECREASE) ACCUMULATED NET REALIZED UNDISTRIBUTED LOSS ON NET INVESTMENT PAID-IN CAPITAL INVESTMENTS INCOME $(1,468,753) $(945,000) $2,413,753
Net investment income, net realized gains (losses), and net assets were not affected by this reclassification. FEDERAL TAXES It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal tax is necessary. At August 31, 1999, the Fund, for federal tax purposes, had a capital loss carryforward of $4,215,460, which will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire as follows: EXPIRATION YEAR EXPIRATION AMOUNT 2002 $ 566,748 2004 $3,648,712 Additionally, net capital losses of $19,650,382 attributable to security transactions after October 31, 1998, are treated as arising on September 1, 1999, the first day of the Fund's next taxable year. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. CAPITAL STOCK At August 31, 1999, par value shares ($0.001 per share) authorized were as follows:
NUMBER OF PAR VALUE CAPITAL SHARE CLASS NAME STOCK AUTHORIZED Class A Shares 500,000,000 Class B Shares 500,000,000 Class C Shares 500,000,000 Class F Shares 500,000,000 TOTAL 2,000,000,000
Transactions in capital stock were as follows:
YEAR ENDED AUGUST 31 1999 1998 CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT Shares sold 1,892,571 $ 20,449,506 2,396,950 $ 26,115,990 Shares issued to shareholders in payment of distributions declared 367,199 3,960,907 325,421 3,526,334 Shares redeemed (1,732,230) (18,757,769) (1,457,233) (15,845,507) NET CHANGE RESULTING FROM CLASS A SHARE TRANSACTIONS 527,540 $ 5,652,644 1,265,138 $ 13,796,817 YEAR ENDED AUGUST 31 1999 1998 CLASS B SHARES: SHARES AMOUNT SHARES AMOUNT Shares sold 4,254,176 $ 46,057,634 3,100,694 $ 33,768,993 Shares issued to shareholders in payment of distributions declared 123,252 1,325,784 54,169 587,226 Shares redeemed (1,060,466) (11,420,830) (298,593) (3,262,688) NET CHANGE RESULTING FROM CLASS B SHARE TRANSACTIONS 3,316,962 $ 35,962,588 2,856,270 $ 31,093,531 YEAR ENDED AUGUST 31 1999 1998 CLASS C SHARES: SHARES AMOUNT SHARES AMOUNT Shares sold 598,868 $ 6,508,764 419,685 $ 4,574,972 Shares issued to shareholders in payment of distributions declared 22,128 238,543 11,298 122,567 Shares redeemed (445,091) (4,718,986) (45,704) (497,848) NET CHANGE RESULTING FROM CLASS C SHARE TRANSACTIONS 175,905 $ 2,028,321 385,279 $ 4,199,691 YEAR ENDED AUGUST 31 1999 1998 CLASS F SHARES: SHARES AMOUNT SHARES AMOUNT Shares sold 3,049,629 $ 32,730,587 985,428 $ 10,734,702 Shares issued to shareholders in payment of distributions declared 831,010 8,971,350 899,119 9,745,289 Shares redeemed (6,238,960) (67,096,056) (4,227,235) (45,866,554) NET CHANGE RESULTING FROM CLASS F SHARE TRANSACTIONS (2,358,321) $ (25,394,119) (2,342,688) $ (25,386,563) NET CHANGE RESULTING FROM SHARE TRANSACTIONS 1,662,086 $ 18,249,434 2,163,999 $ 23,703,476
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.60% of the Fund's average daily net assets. ADMINISTRATIVE FEE Federated Services Company ("FServ"), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FServ is based on the level of average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc. for the period. The administrative fee received during the period of the Administrative Services Agreement shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will reimburse Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Shares. The Plan provides that the Fund may incur distribution expenses of the average daily net assets of each class as follows: PERCENT OF AVERAGE SHARE CLASS NAME DAILY NET ASSETS Class A Shares 0.25% Class B Shares 0.75% Class C Shares 0.75% Class F Shares 0.25% For the fiscal year ended August 31, 1999, Class A Shares and Class F Shares did not incur a distribution services fee. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary FSSC, serves as transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the size, type, and number of accounts and transactions made by shareholders. PORTFOLIO ACCOUNTING FEES FServ maintains the Fund's accounting records for which it receives a fee. The fee is based on the level of the Fund's average daily net assets for the period, plus out-of-pocket expenses. INTERFUND TRANSACTIONS During the year ended August 31, 1999, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $154,265,000 and $159,059,400, respectively. GENERAL Certain of the Officers and Directors of the Fund are Officers and Directors or Trustees of the above companies. INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the year ended August 31, 1999, were as follows: Purchases $120,132,324 Sales $131,547,319 INVESTMENT RISK Although the Fund has a diversified portfolio, the Fund has 19% of its portfolio invested in lower rated (BB or lower) and comparable quality unrated high-yield securities. Investments in higher yield securities are accomplished by greater degree of credit risk and the risk tends to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and often subordinated to other creditors of the issuer. YEAR 2000 (UNAUDITED) Similar to other financial organizations, the Fund could be adversely affected if the computer systems used by the Fund's service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Fund's Adviser and administrator are taking measures that they believe are reasonably designed to address the Year 2000 issue with respect to computer systems that they use and to obtain reasonable assurances that comparable steps are being taken by each of the Fund's other service providers. At this time, however, there can be no assurance that these steps will be sufficient to avoid any adverse impact to the Fund. Independent Auditors' Report TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Municipal Opportunities Fund, Inc. as of August 31, 1999, the related statement of operations for the year then ended, the statement of changes in net assets for the years then ended August 31, 1999 and 1998, and the financial highlights for the periods presented. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of the securities owned at August 31, 1999, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Municipal Opportunities Fund, Inc. as of August 31, 1999, the results of its operations, the changes in its net assets and its financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Boston, Massachusetts October 15, 1999 Directors JOHN F. DONAHUE THOMAS G. BIGLEY JOHN T. CONROY, JR. NICHOLAS P. CONSTANTAKIS JOHN F. CUNNINGHAM J. CHRISTOPHER DONAHUE LAWRENCE D. ELLIS, M.D. PETER E. MADDEN CHARLES F. MANSFIELD, JR. JOHN E. MURRAY, JR., J.D., S.J.D. MARJORIE P. SMUTS JOHN S. WALSH Officers JOHN F. DONAHUE Chairman RICHARD B. FISHER President WILLIAM D. DAWSON, III Chief Investment Officer J. CHRISTOPHER DONAHUE Executive Vice President EDWARD C. GONZALES Executive Vice President JOHN W. MCGONIGLE Executive Vice President and Secretary RICHARD J. THOMAS Treasurer LESLIE K. ROSS Assistant Secretary Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal. This report is authorized for distribution to prospective investors only when preceded or accompanied by the fund's prospectus which contains facts concerning its objective and policies, management fees, expenses, and other information. [Graphic] Federated World-Class Investment Manager Federated Municipal Opportunities Fund, Inc. Established 1987 13TH ANNUAL REPORT ANNUAL REPORT AS OF AUGUST 31, 1999 [Graphic] Federated Federated Municipal Opportunities Fund, Inc. Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 1-800-341-7400 WWW.FEDERATEDINVESTORS.COM Federated Securities Corp., Distributor Cusip 313910200 Cusip 313910309 Cusip 313910408 Cusip 313910101 G01091-01 (10/99) [Graphic] APPENDIX A. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color coded mountain chart is a visual representation of the narrative text above it. The "x" axis reflects computation periods from 4/10/87 to 8/31/99. The "y" axis is measured in increments of $5,000 ranging from $0 to $30,000 and indicates that the ending value of hypothetical initial investment of $13,000 in the fund's Class F Shares, assuming the reinvestment of capital gains and dividends, would have grown to $28,458 on 8/31/99 B. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color coded mountain chart is a visual representation of the narrative text above it. The "x" axis reflects computation periods from 4/10/87 to 8/31/99. The "y" axis is measured in increments of $5,000 ranging from $0 to $30,000 and indicates that the ending value of hypothetical initial investment of $1,000 in and subsequent investments of $1,000 each year for 12 years in the fund's Class F Shares, assuming the reinvestment of capital gains and dividends, would have grown to $20,930 on 8/31/99 C. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color coded mountain chart is a visual representation of the narrative text above it. The "x" axis reflects computation periods from 4/10/87 to 8/31/99. The "y" axis is measured in increments of $20,000 ranging from $0 to $120,000 and indicates that the ending value of hypothetical initial investment of $5,000 in and subsequent investments of $500 on the first of every month in the fund's Class F Shares , assuming the reinvestment of capital gains and dividends, would have grown to $118,460 on 8/31/99 D. - The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed above the graph. The Class A Shares of Federated Municipal Opportunities Fund, Inc. (the "Fund") are represented by a solid line. The Lehman Brothers Municipal Bond Index (LBMBI) is represented by a dotted line. The line graph is a visual representation of a comparison of change in value of a $10,000 hypothetical investment in the Class A Shares of the Fund and the LBMBI. The "x" axis reflects computation periods from 8/5/1996 to 8/31/1999. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Class A Shares as compared to the LBMBI. The ending values were $10,957 and $11,927, respectively. E. - The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed above the graph. The Class B Shares of Federated Municipal Opportunities Fund, Inc. (the "Fund") are represented by a solid line. The Lehman Brothers Municipal Bond Index (LBMBI) is represented by a dotted line. The line graph is a visual representation of a comparison of change in value of a $10,000 hypothetical investment in the Class A Shares of the Fund and the LBMBI. The "x" axis reflects computation periods from 8/5/1996 to 8/31/1999. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Class A Shares as compared to the LBMBI. The ending values were $10,916 and $11,927, respectively. F. - The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed above the graph. The Class C Shares of Federated Municipal Opportunities Fund, Inc. (the "Fund") are represented by a solid line. The Lehman Brothers Municipal Bond Index (LBMBI) is represented by a dotted line. The line graph is a visual representation of a comparison of change in value of a $10,000 hypothetical investment in the Class C Shares of the Fund and the LBMBI. The "x" axis reflects computation periods from 8/5/1996 to 8/31/1999. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Class C Shares as compared to the LBMBI. The ending values were $11,218 and $11,927, respectively. G. - The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed above the graph. The Class F Shares of Federated Municipal Opportunities Fund, Inc. (the "Fund") are represented by a solid line. The Lehman Brothers Municipal Bond Index (LBMBI) is represented by a dotted line. The line graph is a visual representation of a comparison of change in value of a $10,000 hypothetical investment in the Class F Shares of the Fund and the LBMBI. The "x" axis reflects computation periods from 8/5/1996 to 8/31/1999. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Class F Shares as compared to the LBMBI. The ending values were $17,913 and $20,309, respectively. -----END PRIVACY-ENHANCED MESSAGE-----