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This is filed pursuant to Rule 497(c).
File Nos. 002-79807 and 811-03586.
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(LOGO) ALLIANCE MUNICIPAL TRUST
- Pennsylvania Portfolio
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P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
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STATEMENT OF ADDITIONAL INFORMATION
June 26, 2000
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TABLE OF CONTENTS
Page
Investment Objectives and Policies.........................
Investment Restrictions....................................
Management.................................................
Purchases and Redemption of Shares.........................
Additional Information.....................................
Daily Dividends-Determination of Net Asset Value...........
Taxes......................................................
General Information........................................
Appendix A-Description of Municipal Securities.............
Appendix B-Description of Securities Ratings...............
This Statement of Additional Information is not a prospectus
but supplements and should be read in conjunction with the
Portfolio's current Prospectus dated June 26, 2000. A copy
of the Prospectus may be obtained by contacting the Fund at
the address or telephone number shown above.
__________________________
(R) This registered service mark used under license from
the owner, Alliance Capital Management L.P.
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INVESTMENT OBJECTIVES AND POLICIES
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Alliance Municipal Trust (the "Fund") is an open-end
management investment company. The Fund was reorganized as a
Massachusetts business trust in April 1985, having previously
been a Maryland corporation since formation in January 1983.
Effective November 1, 1991, the Fund's former name of Alliance
Tax-Exempt Reserves was changed to Alliance Municipal Trust. The
Fund consists of eight distinct Portfolios, the General
Portfolio, the New York Portfolio, the California Portfolio, the
Connecticut Portfolio, the New Jersey Portfolio, the Virginia
Portfolio, the Florida Portfolio, the Massachusetts Portfolio and
the Pennsylvania Portfolio, each of which is, in effect, a
separate fund issuing a separate class of shares. This Statement
of Additional Information relates solely to the Pennsylvania
Portfolio (the "Portfolio"). The investment objectives of the
Portfolio are safety of principal, liquidity and, to the extent
consistent with these objectives, maximum current income that is
exempt from income taxation to the extent described below. The
Portfolio pursues its objectives by investing in high quality
municipal securities having remaining maturities of 397 days or
less (which maturities may extend to such greater length of time
as may be permitted from time to time pursuant to Rule 2a-7 under
the Investment Company Act of 1940, as amended (the "Act"), and,
except when the Portfolio assumes a temporary defensive position,
as a matter of fundamental policy, at least 80% of the
Portfolio's total assets will be invested in municipal
securities. While the Portfolio may change any "fundamental"
policy without shareholder approval, the other investment
policies set forth in this Statement of Additional Information
may be changed by the Portfolio upon notice but without such
approval. There can be no assurance, as is true with all
investment companies, that the Portfolio will achieve its
investment objectives.
Although the Portfolio may invest up to 20% of its total
assets in taxable money market securities, substantially all of
the Portfolio's income normally will be tax-exempt. The
Portfolio may purchase municipal securities issued by states
other than the Commonwealth of Pennsylvania if the Adviser
believes that suitable municipal securities of that state are not
available for investment. To the extent of its investments in
other states' municipal securities, the Portfolio's income will
be exempt only from Federal income tax, not state personal income
tax or other state tax.
To the extent consistent with its other investment
objectives, the Portfolio seeks maximum current income that is
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exempt from both Federal income taxes and Commonwealth of
Pennsylvania tax by investing principally in a non-diversified
portfolio of high quality municipal securities issued by the
Commonwealth of Pennsylvania or its political subdivisions. The
Portfolio may invest in restricted securities. Those restricted
securities that are determined by the Adviser to be liquid in
accordance with procedures adopted by the Trustees, including
securities eligible for resale under Rule 144A under the
Securities Act of 1933 (the "Securities Act"), will not be
treated as illiquid securities. Restricted securities are
securities subject to contractual or legal restrictions on
resale, such as those arising from an issuer's reliance upon
certain exemptions from registration under the Securities Act.
Shares of the Portfolio are offered only to Pennsylvania
residents.
Apart from the risks associated with investment in any
money market fund seeking tax-exempt income, such as default by
municipal issuers and fluctuation in short-term interest rates,
investors in the Portfolio should consider the greater risks of
the Portfolio's concentration versus the safety that comes with a
less concentrated investment portfolio and should compare yields
available on portfolios of Pennsylvania issues with those of more
diversified portfolios, including other states' issues, before
making an investment decision. The Portfolio is a non-
diversified investment company and, accordingly, the permitted
concentration of investments may present greater risks than in
the case of a diversified investment company. (See below
"Special Risk Factors of Concentration in a Single State.")
To the extent suitable Pennsylvania municipal securities
are not available for investment by the Portfolio, the Portfolio
may purchase municipal securities issued by other states and
political subdivisions. The dividends designated as derived from
interest income on such municipal securities generally will be
exempt from Federal income taxes, but non-corporate shareholders
will be subject to Pennsylvania income tax on such dividends.
Municipal Securities
The term "municipal securities," as used in the
Prospectus and this Statement of Additional Information, means
obligations issued by or on behalf of states, territories, and
possessions of the United States or their political subdivisions,
agencies and instrumentalities, the interest from which is exempt
(subject to the alternative minimum tax) from Federal income
taxes. The municipal securities in which the Portfolio invests
are limited to those obligations which at the time of purchase:
1. are backed by the full faith and credit of the
United States; or
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2. are municipal notes, municipal bonds or other types
of municipal securities rated in the two highest
rating categories by the requisite nationally
recognized statistical rating organizations
("NRSROs") such as Moody's Investors Services, Inc.
or Standard and Poor's Corporation, or judged by
the Adviser to be of comparable quality. (See
Appendix A for a description of municipal
securities and Appendix B for a description of
these ratings.)
Rule 2a-7 under the Act
The Portfolio will comply with Rule 2a-7 under the Act,
as amended from time to time, including the diversification,
quality and maturity limitations imposed by the Rule. To the
extent that the Fund's limitations are more permissive than Rule
2a-7, the Portfolio will comply with the more restrictive
provisions of the Rule.
Currently, pursuant to Rule 2a-7, the Portfolio may
invest only in U.S. dollar-denominated "Eligible Securities" (as
that term is defined in the Rule) that have been determined by
the Adviser to present minimal credit risks pursuant to
procedures approved by the Trustees. Generally, an Eligible
Security is a security that (i) has a remaining maturity of 397
days or less and (ii) is rated, or is issued by an issuer with
short-term debt outstanding that is rated, in one of the two
highest rating categories by two "NRSROs" or, if only one NRSRO
has issued a rating, by that NRSRO (the "requisite NRSROs").
Unrated securities may also be Eligible Securities if the Adviser
determines that they are of comparable quality to a rated
Eligible Security pursuant to guidelines approved by the
Trustees. A description of the ratings of some NRSROs appears in
Appendix B attached hereto.
Under Rule 2a-7, with respect to 75% of its assets, the
Portfolio may not invest more than 5% of its assets in the
securities of any one issuer other than the United States
Government, its agencies and instrumentalities. Government
securities are considered to be first tier securities. In
addition, the Portfolio may not invest in a conduit security that
has received, or is deemed comparable in quality to a conduit
security that has received, the second highest rating by the
requisite number of NRSROs (a "second tier security") if
immediately after the acquisition thereof the Portfolio would
have invested more than (A) the greater of one percent of its
total assets or one million dollars in securities issued by that
issuer which are second tier securities, or (B) five percent of
its total assets in second tier securities (the "second tier
security restriction"). A conduit security for purposes of Rule
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2a-7 is a security nominally issued by a municipality, but
dependent for principal and interest payments on non-municipal
issuer's revenues from a non-municipal project.
Alternative Minimum Tax
The Portfolio may invest without limitation in tax-
exempt municipal securities subject to the alternative minimum
tax (the "AMT"). Under current Federal income tax law,
(1) interest on tax-exempt municipal securities issued after
August 7, 1986 which are "specified private activity bonds," and
the proportionate share of any exempt-interest dividend paid by a
regulated investment company which receives interest from such
specified private activity bonds, will be treated as an item of
tax preference for purposes of the AMT imposed on individuals and
corporations, although for regular Federal income tax purposes
such interest will remain fully tax-exempt, and (2) interest on
all tax-exempt obligations will be included in "adjusted current
earnings" of corporations for AMT purposes. Such private
activity bonds ("AMT-Subject Bonds") have provided, and may
continue to provide, somewhat higher yields than other comparable
municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with taxing power
will be obligated with respect to AMT-Subject Bonds. AMT-Subject
Bonds are in most cases revenue bonds and do not generally have
the pledge of the credit or the taxing power, if any, of the
issuer of such bonds. AMT-Subject Bonds are generally limited
obligations of the issuer supported by payments from private
business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the
issuer of an AMT-Subject Bond is to make payments to bond holders
only out of and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject Bonds were
issued. Payment of the principal and interest on such revenue
bonds depends solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide
specific detail on each of these obligations in which Portfolio
assets may be invested.
Taxable Securities And Temporary Defensive Position
Although the Portfolio is, and expects to be, largely
invested in municipal securities, the Portfolio may elect to
invest up to 20% of its total assets in taxable money market
securities when such action is deemed to be in the best interests
of shareholders. For temporary defensive purposes, when, in the
judgment of the Adviser, financial, economic, and/or market
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conditions warrant, the Portfolio may invest any amount of its
total assets in taxable money market securities. When the
Portfolio is investing for temporary defensive purposes, it may
not achieve its investment objectives. Such taxable money market
securities also are limited to remaining maturities of 397 days
or less at the time of the Portfolio's investment, and the
Portfolio's municipal and taxable securities are maintained at a
dollar-weighted average of 90 days or less. Taxable money market
securities purchased by the Portfolio include those described
below:
1. marketable obligations of, or guaranteed by, the
United States Government, its agencies or
instrumentalities; or
2. certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are
members of the Federal Deposit Insurance
Corporation; or
3. commercial paper of prime quality rated in the two
highest rating categories by the requisite NRSROs
or, if not rated, issued by companies which have an
outstanding debt issue rated in the two highest
rating categories by the requisite NRSROs. (See
Appendix B for a description of these ratings.)
Repurchase Agreements
The Portfolio may also enter into fully collateralized
repurchase agreements. A repurchase agreement arises when a
buyer purchases a security and simultaneously agrees to resell it
to the vendor at an agreed-upon future date, normally one day or
a few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon market rate which is effective
for the period of time the buyer's money is invested in the
security and which is not related to the coupon rate on the
purchased security. The Portfolio requires continuous
maintenance of collateral in an amount equal to, or in excess of,
the market value of the securities which are the subject of the
agreement. In the event that a counterparty defaulted on its
repurchase obligation, the Portfolio might suffer a loss to the
extent that the proceeds from the sale of the collateral were
less than the repurchase price. If the counterparty became
bankrupt, the Portfolio might be delayed in selling the
collateral. Repurchase agreements may be entered into with
member banks of the Federal Reserve System (including the Fund's
Custodian),"primary dealers" (as designated by the Federal
Reserve Bank of New York) in U.S. Government securities or
broker-dealers determined to be creditworthy by the Adviser. It
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is the Portfolio's current practice to enter into repurchase
agreements only with such primary dealers, its Custodian or
broker-dealers that are determined to be creditworthy by the
Adviser. Pursuant to Rule 2a-7, a repurchase agreement is deemed
to be an acquisition of the underlying securities provided that
the obligation of the seller to repurchase the securities from
the money market fund is collateralized fully (as defined in such
Rule). Accordingly, the counterparty of a fully collateralized
repurchase agreement is deemed to be the issuer of the underlying
securities.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase
agreements, which involve the sale of securities held by such
Portfolio with an agreement to repurchase the securities at an
agreed upon price, date and interest payment, although the
Portfolio has not entered into, nor has any plans to enter into,
such agreements.
Adjustable Rate Obligations
The interest rate payable on certain municipal
securities in which the Portfolio may invest, called "adjustable"
obligations, is not fixed and may fluctuate based upon changes in
market rates. The interest rate payable on a adjustable rate
municipal security is adjusted either at pre-designated periodic
intervals or whenever there is a change in the market rate to
which the security's interest rate is tied. Other features may
include the right of the Portfolio to demand prepayment of the
principal amount of the obligation prior to its stated maturity
and the right of the issuer to prepay the principal amount prior
to maturity. The main benefit of an adjustable rate municipal
security is that the interest rate adjustment minimizes changes
in the market value of the obligation. As a result, the purchase
of adjustable rate municipal securities enhances the ability of
the Portfolio to maintain a stable net asset value per share and
to sell an obligation prior to maturity at a price approximating
the full principal amount. The payment of principal and interest
by issuers of certain municipal securities purchased by the
Portfolio may be guaranteed by letters of credit or other credit
facilities offered by banks or other financial institutions.
Such guarantees will be considered in determining whether a
municipal security meets the Portfolio's investment quality
requirements.
Adjustable rate obligations purchased by the Portfolio
may include participation interests in variable rate industrial
development bonds that are backed by irrevocable letters of
credit or guarantees of banks that meet the criteria for banks
described above in "Taxable Securities." Purchase of a
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participation interest gives the Portfolio an undivided interest
in certain such bonds. The Portfolio can exercise the right, on
not more than 30 days' notice, to sell such an instrument back to
the bank from which it purchased the instrument and draw on the
letter of credit for all or any part of the principal amount of
the Portfolio's participation interest in the instrument, plus
accrued interest, but will do so only (i) as required to provide
liquidity to the Portfolio, (ii) to maintain a high quality
investment portfolio, or (iii) upon a default under the terms of
the demand instrument. Banks retain portions of the interest
paid on such adjustable rate industrial development bonds as
their fees for servicing such instruments and the issuance of
related letters of credit and repurchase commitments. The
Portfolio will comply with Rule 2a-7 with respect to its
investments in adjustable rate obligations supported by letters
of credit. The Portfolio will not purchase participation
interests in adjustable rate industrial development bonds unless
it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by the Portfolio from the
bonds in which it holds participation interests is exempt from
Federal income taxes. The Adviser will monitor the pricing,
quality and liquidity of variable rate demand obligations and
participation interests therein held by the Portfolio on the
basis of published financial agency reports and other research
services to which the Adviser may subscribe.
Standby Commitments
The acquisition of a standby commitment does not affect
the valuation or maturity of the underlying municipal securities
which continue to be valued in accordance with the amortized cost
method. Standby commitments acquired by the Portfolio are valued
at zero in determining net asset value. Where the Portfolio pays
directly or indirectly for a standby commitment, its cost is
reflected as unrealized depreciation for the period during which
the commitment is held. Standby commitments do not affect the
average weighted maturity of the Portfolio's portfolio of
securities.
When-Issued Securities
Municipal securities are frequently offered on a "when-
issued" basis. When so offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement
date occurs within one month after the purchase of municipal
bonds and notes. During the period between purchase and
settlement, no payment is made by the Portfolio to the issuer
and, thus, no interest accrues to the Portfolio from the
transaction. When-issued securities may be sold prior to the
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settlement date, but the Portfolio makes when-issued commitments
only with the intention of actually acquiring the securities. To
facilitate such acquisitions, the Fund's Custodian will maintain,
in a separate account of the Portfolio, cash, U.S. Government or
other liquid high-grade debt securities, having value equal to,
or greater than, such commitments. Similarly, a separate account
will be maintained to meet obligations in respect of reverse
repurchase agreements. On delivery dates for such transactions,
the Portfolio will meet its obligations from maturities or sales
of the securities held in the separate account and/or from the
available cash flow. If the Portfolio, however, chooses to
dispose of the right to acquire a when-issued security prior to
its acquisition, it can incur a gain or loss. At the time the
Portfolio makes the commitment to purchase a municipal security
on a when-issued basis, it records the transaction and reflects
the value of the security in determining its net asset value. No
when-issued commitments will be made if, as a result, more than
15% of the Portfolio's net assets would be so committed.
Illiquid Securities
The Portfolio will not invest more than 10% of its net
assets in illiquid securities (including illiquid restricted
securities.) As to these securities, the Portfolio is subject to
a risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net
assets could be adversely affected. Illiquid securities may
include securities that are not readily marketable and securities
subject to legal or contractual restrictions on resale.
Restricted securities determined by the Adviser to be liquid will
not be treated as "illiquid" for purposes of the restriction on
illiquid securities.
General
Yields on municipal securities are dependent on a
variety of factors, including the general condition of the money
market and of the municipal bond and municipal note market, the
size of a particular offering, the maturity of the obligation and
the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally
subject to greater price movements than obligations with shorter
maturities. An increase in interest rates will generally reduce
the market value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio
investments. There can be no assurance, as is true with all
investment companies, that the Portfolio's objectives will be
achieved. The achievement of the Portfolio's investment
objectives is dependent in part on the continuing ability of the
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issuers of municipal securities in which the Portfolio invests to
meet their obligations for the payment of principal and interest
when due. Municipal securities historically have not been
subject to registration with the Securities and Exchange
Commission (the "Commission"), although there have been proposals
which would require registration in the future. The Portfolio
generally will hold securities to maturity rather than follow a
practice of trading. However, the Portfolio may seek to improve
portfolio income by selling certain portfolio securities prior to
maturity in order to take advantage of yield disparities that
occur in securities markets.
Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the
Bankruptcy Code. In addition, the obligations of such issuers
may become subject to laws enacted in the future by Congress,
state legislatures, or referenda extending the time for payment
of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon the ability of
municipalities to levy taxes. There is also the possibility
that, as a result of litigation or other conditions, the ability
of any issuer to pay, when due, the principal of, and interest
on, its municipal securities may be materially affected.
Except as otherwise provided above, the Portfolio's
investment objectives and policies are not designated
"fundamental policies" within the meaning of the Act and may,
therefore, be changed without a shareholder vote. However, the
Portfolio will not change its investment policies without
contemporaneous written notice to shareholders.
Restricted Securities. The Portfolio may also purchase
restricted securities, including restricted securities determined
by the Adviser to be liquid in accordance with procedures adopted
by the Trustees, such as securities eligible for resale under
Rule 144A of the Securities Act. Restricted securities are
securities subject to contractual or legal restrictions on
resale, such as those arising from an issuer's reliance upon
certain exemptions from registration under the Securities Act.
In recent years, a large institutional market has
developed for certain types of restricted securities including,
among others, private placements, repurchase agreements,
commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because
they are sold in transactions not requiring registration. For
example, commercial paper issues include, among others,
securities issued by major corporations without registration
under the Securities Act in reliance on the exemption from
registration afforded by Section 3(a)(3) of such Act and
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commercial paper issued in reliance on the private placement
exemption from registration which is afforded by Section 4(2) of
the Securities Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the Federal securities laws in
that any resale must also be made in an exempt transaction.
Section 4(2) paper is normally resold to other institutional
investors through or with the assistance of investment dealers
who make a market in Section 4(2) paper, thus providing
liquidity. Institutional investors, rather than selling these
instruments to the general public, often depend on an efficient
institutional market in which such restricted securities can be
readily resold in transactions not involving a public offering.
In many instances, therefore, the existence of contractual or
legal restrictions on resale to the general public does not, in
practice, impair the liquidity of such investments from the
perspective of institutional holders. In recognition of this
fact, the Staff of the Commission has stated that Section 4(2)
paper may be determined to be liquid by the Trustees, so long as
certain conditions, which are described below, are met.
Rule 144A under the Securities Act establishes a safe
harbor from the Securities Act's registration requirements for
resale of certain restricted securities to qualified
institutional buyers. Pursuant to Rule 144A, the institutional
restricted securities markets may provide both readily
ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption
orders on a timely basis. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices.
The Trustees have the ultimate responsibility for
determining whether specific securities are liquid or illiquid.
The Trustees have delegated the function of making day-to-day
determinations of liquidity to the Adviser, pursuant to
guidelines approved by the Trustees.
The Adviser takes into account a number of factors in
determining whether a restricted security being considered for
purchase is liquid, including at least the following:
(i) the frequency of trades and quotations for the
security;
(ii) the number of dealers making quotations to
purchase or sell the security;
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(iii) the number of other potential purchasers of the
security;
(iv) the number of dealers undertaking to make a market
in the security;
(v) the nature of the security (including its
unregistered nature) and the nature of the
marketplace for the security (e.g., the time
needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer);
and
(vi) any applicable Commission interpretation or
position with respect to such types of securities.
To make the determination that an issue of Section 4(2)
paper is liquid, the Adviser must conclude that the following
conditions have been met:
(i) the Section 4(2) paper must not be traded flat or
in default as to principal or interest; and
(ii) the Section 4(2) paper must be rated in one of the
two highest rating categories by at least two
NRSROs, or if only one NRSRO rates the security,
by that NRSRO; if the security is unrated, the
Adviser must determine that the security is of
equivalent quality.
The Adviser must also consider the trading market for
the specific security, taking into account all relevant factors.
Following the purchase of a restricted security by the
Portfolio, the Adviser monitors continuously the liquidity of
such security and reports to the Trustees regarding purchases of
liquid restricted securities.
Asset-Backed Securities
The Portfolio may invest in asset-backed securities that
meet its existing diversification, quality and maturity criteria.
Asset-backed securities are securities issued by special purpose
entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may be in the form of a
beneficial interest in a special purpose trust, limited
partnership interest, or commercial paper or other debt
securities issued by a special purpose corporation. Although the
securities may have some form of credit or liquidity enhancement,
payments on the securities depend predominately upon collection
of the loans and receivables held by the issuer.
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Special Risk Factors of Concentration in a Single State
The primary purpose of investing in a portfolio of a
single state's municipal securities is the special tax treatment
accorded that state's resident individual investors. However,
payment of interest and preservation of principal is dependent
upon the continuing ability of the state's issuers and/or
obligors of its state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors
should consider the greater risk of the concentration of the
Portfolio versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on
portfolios of Pennsylvania's issues with those of more
diversified portfolios, including other states' issues, before
making an investment decision. The Adviser believes that by
maintaining the Portfolio's investment portfolio in liquid,
short-term, high-quality investments, including the participation
interests and other variable rate obligations that have credit
support such as letters of credit from major financial
institutions, the Portfolio is largely insulated from the credit
risks that exist on long-term municipal securities of the
relevant state.
PENNSYLVANIA
The following summary is included for the purpose of
providing a general description of credit and financial
conditions of Pennsylvania and is based on information from the
official statement (described more fully below) made available in
connection with the issuance of certain securities in
Pennsylvania. The summary is not intended to provide a complete
description of Pennsylvania. While the Fund has not undertaken
to independently verify such information, it has no reason to
believe that such information is not correct in all material
aspects. The summary does not provide specific information
regarding all securities in which the Portfolio is permitted to
invest and in particular does not provide specific information on
the private business entities whose obligations support the
payments on AMT-Subject Bonds.
The following was obtained from an Official Statement,
dated January 15, 2000, relating to the issuance of $192,000,000
Commonwealth of Pennsylvania General Obligation Bonds, First
Series of 2000.
Economic Climate
The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas
and Florida. Pennsylvania is an established yet growing state
with a diversified economy. It is the headquarters for many
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major corporations. Pennsylvania had been historically identified
as a heavy industry state. That reputation has changed over the
last thirty years as the coal, steel and railroad industries
declined and the Commonwealth's business environment readjusted
to reflect a more diversified economic base. This economic
readjustment was a direct result of a long-term shift in jobs,
investment, and workers away from the northeast part of the
nation. Currently, the major sources of growth in Pennsylvania
are in the service sector, including trade, medical and health
services, education and financial institutions.
Pennsylvania's agricultural industries remain an
important component of the Commonwealth's economic structure,
accounting for more than $3.6 billion in crop and livestock
products annually. Agribusiness and food related industries
support $39 billion in economic activity annually. Over 51,000
farms form the backbone of the State's agricultural economy.
Farmland in Pennsylvania includes over four million acres of
harvested cropland and four million acres of pasture and farm
woodlands - nearly one-third of the Commonwealth's total land
area. Agricultural diversity in the Commonwealth is demonstrated
by the fact that Pennsylvania ranks among the top ten states in
the production of a number of agricultural products.
Pennsylvania's natural resources include major deposits
of coal, petroleum, natural gas and cement. Extensive public and
private forests provide a vast source of material for the
lumber/wood products industry and the related furniture industry.
Additionally, the Commonwealth derives a good water supply from
underground sources, abundant rainfall, and a large number of
rivers, streams, natural and man-made lakes.
Human resources are plentiful in Pennsylvania. The
workforce is estimated at 5.9 million people, ranking as the
sixth largest labor pool in the nation. The high level of
education embodied in the Commonwealth's work force fosters a
wide variety of employment capabilities. Pennsylvania's basic
and higher education statistics compare favorably with other
states in the nation.
Pennsylvania is a Middle Atlantic state within easy
reach of the populous eastern seaboard and, as such, is a gateway
to the Midwest. The Commonwealth's strategic geographic position
is enhanced by a comprehensive transportation grid. The
Commonwealth's water systems afford the unique feature of triple
port coverage, a deep water port at Philadelphia, a Great Lakes
port at Erie and an inland water port at Pittsburgh.
The Commonwealth is highly urbanized. Of the
Commonwealth's 1990 census population, 79 percent resided in the
15 Metropolitan Statistical Areas ("MSAs") of the Commonwealth.
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The largest MSAs in the Commonwealth are those which include the
cities of Philadelphia and Pittsburgh, which together contain
almost 44 percent of the State's total population. The
population of Pennsylvania, 11.99 million people in 1999,
according to U.S. Bureau of the Census, represents a slight
increase from the 1990 population of 11.89 million.
Non-agricultural employment in Pennsylvania over the ten
years ending in 1998 increased at an annual rate of 0.75 percent.
This rate compares to a 0.29 percent rate for the Middle Atlantic
region and 1.72 percent for the U.S. during the period 1989
through 1998. For the five years ending with 1998, employment in
the Commonwealth has increased 7.0 percent. The growth in
employment experienced in Pennsylvania during this period is
higher than the 2.7 percent growth in the Middle Atlantic region.
Non-manufacturing employment in Pennsylvania has
increased in recent years to 82.8 percent of total employment in
1998. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth.
Manufacturing, contributing 17.2 percent of 1998 non-agricultural
employment, has fallen behind both the services sector and the
trade sector as the largest single source of employment within
the Commonwealth. In 1998, the services sector accounted for
32.3 percent of all non-agricultural employment while the trade
sector accounted for 22.4 percent.
Within the manufacturing sector of Pennsylvania's
economy, which now accounts for less than one-fifth of total non-
agricultural employment in Pennsylvania, the non-electrical
machinery industries employed the largest number of workers.
Employment in the non-electrical machinery industries was 11.3
percent of Pennsylvania manufacturing employment but only 2.0
percent of total Pennsylvania non-agricultural employment in
1998.
Pennsylvania's annual average unemployment rate was
equivalent to the national average throughout the 1990's. Slower
economic growth caused the unemployment rate in the Commonwealth
to rise to 7.0 percent in 1991 and 7.6 percent in 1992. The
resumption of faster economic growth resulted in an annual
decrease in the Commonwealth's unemployment rate to 4.3 percent
in 1999. From 1994 through 1998, Pennsylvania's annual average
unemployment rate was below the Middle Atlantic Region's average,
but slightly higher than that of the United States. As of
December 1999, the most recent month for which data is available,
the seasonally adjusted unemployment rate for the Commonwealth
was 4.1 percent, equal to that of the United States.
Personal income in the Commonwealth for 1998 is $321.5
billion, an increase of 4.1 percent over the previous year.
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During the same period, national personal income increased a t a
rate of 5.0 percent. Based on the 1998 personal income
estimates, per capita income for 1998 is at $26,792 in the
Commonwealth compared to per capita income in the United States
of $26,412.
The Commonwealth's 1998 average hourly wage rate of
$14.07 compare favorably to the national average of $13.49 for
1998.
Financial Condition
The Commonwealth utilizes the fund method of accounting.
The General Fund, the Commonwealth's largest fund, receives all
tax revenues, non-tax revenues and federal grants and
entitlements that are not specified by law to be deposited
elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt
service on all obligations, except that issued for highway
purposes or for the benefit of other special revenue funds, is
payable from the General Fund.
Financial information for the General Fund is maintained
on a budgetary basis of accounting. The Commonwealth also
prepares annual financial statements in accordance with generally
accepted accounting principles ("GAAP").
The five-year period ending with fiscal 1999 was a time
of economic growth with modest rates of growth at the beginning
of the period and larger increases during the most recent years.
Throughout the period, inflation has remained relatively low,
helping to restrain expenditure growth. Favorable economic
conditions have helped total revenues and other sources rise at
an average annual rate of 5.8 percent during the five-year
period. Taxes, the largest revenue source, increased at an
average annual rate of 4.3 percent during the five-year period.
License and fee revenues rose at a 7.1 percent average annual
rate, largely because of various motor vehicle fee increases
effective for fiscal 1998. Other revenues, mostly charges for
sales and services and investment income, increased at an average
annual rate of 20.3 percent during the period. Expenditure and
other uses during the fiscal 1995 through fiscal 1999 period rose
at a 4.8 percent average annual rate, led by a 9.6 percent
average annual increase for protection of person and property
costs. Though still high, the growth rate for this program has
declined from previous year's rates as the increased costs to
acquire, staff and operate expanded prison facilities becomes
part of the expenditure base. Public health and welfare programs,
the largest single category of expenditures, have experienced a
5.8 percent average annual increase for expenditures, slightly
above the average for total expenditures. Capital outlay has
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increased by an annual average rate of 20.8 percent during the
five-year period. Increased amounts committed to community and
economic development projects through the capital budget are
largely responsible for the growth rate. The decline of
expenditures in fiscal 1996 for the conservation of natural
resources category is due to a departmental restructuring in
fiscal 1996 that resulted in a re-categorization of expenditures
to other categories.
Fiscal 2000 Budget (Budgetary Basis)
The General Fund budget for the 2000 fiscal year was
approved by the General Assembly in May 1999. The budget as
adopted at the time included appropriation from Commonwealth
revenues of $19,061.5 million and estimated revenues (net of
estimated tax refunds and enacted tax changes) of $18,699.9
million. A partial draw down of the fiscal 1999 year-end balance
is intended to fund the $361.6 million difference between
estimated revenues and projected spending. The level of proposed
spending in the budget as originally enacted represents an
increase of 3.8 percent over the spending authorized for fiscal
1999 of $18,367.5 million. Enacted tax changes effective for
fiscal 2000 total a net reduction of $380.2 million for the
General Fund.
The estimate of Commonwealth revenues for fiscal 1999 is
based on an economic forecast for real gross domestic product to
grow at a 1.4 percent rate from the second quarter of 1999 to the
second quarter of 2000. Growth of real gross domestic product is
expected to be restrained by a slowing of the rate of consumer
spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling
capacity utilization and profits. Slowing economic growth is
expected to cause the unemployment rate to rise through the
fiscal year but inflation is expected to remain quite moderate.
Trends for the Pennsylvania economy are expected to maintain
their close association with national economic trends. Personal
income growth is anticipated to remain slightly below that of the
U.S. while the Pennsylvania unemployment rate is anticipated to
be very close to the national rate.
Commonwealth revenues (excluding the estimated cost of
enacted tax reductions) are projected to increase by 2.8 percent
over fiscal 1999 receipts. Tax revenues are expected to rise by
3.2 percent, led by a 11 percent increase in the gross receipts
tax. This large increase represents the receipt of the revenue
neutral reconciliation charge enacted as a part of the electric
deregulation legislation in 1996 that is intended to cover tax
revenue losses to Pennsylvania from electricity deregulation.
The structure of the revenue neutral reconciliation charge causes
it to recover revenue losses with an approximate one year lag.
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Projected increases for the sales and use tax and the personal
income tax are estimated at 3.2 percent and 3.3 percent
respectively. Non-tax Commonwealth revenues are estimated to
total $324 million, a l7.4 percent reduction from fiscal 1999.
The largest items accounting for the reduction are lower receipts
from sale of state property and lower investment earnings.
Appropriations from Commonwealth funds increase by 3.8
percent over fiscal 1999 appropriations. Program areas that have
been proposed to receive funding increases above the 2.9 percent
average include corrections (4 percent), basic education (3
percent), special education (6.2 percent), and medical assistance
(6.1 percent).
The fiscal 2000 budget continues the Governor's emphasis
on tax cuts targeted to making Pennsylvania competitive for
attracting new employment opportunities and retaining existing
jobs. Enacted tax cuts for fiscal 2000 total an estimated $380.2
million in the General Fund. The major components of the tax
reductions and their estimated fiscal 2000 General Fund cost are:
(i) reduce the tax rate for the capital stock and franchise taxes
by one mill to 10.99 mills ($91.6 million); (ii) repeal the gross
receipts tax on regulated gas companies ($78.4 million); (iii)
lower the current $300 minimum capital stock and franchise tax to
$200 ($16.2 million); (iv) raise the annual cap on net operating
loss credits per taxpayer from $1 million to $2 million ($35.5
million); (v) increase the weighting from 50 percent to 60
percent of the sales factor used in the apportionment formula to
calculate Pennsylvania taxable income for corporate net income
purposes ($31.5 million); and (vi) restructure the public utility
realty tax ($54.6 million); and (vii) expand the income limit to
qualify for personal income tax forgiveness by $500 to $6,500 per
dependent ($7.5 million). Most major changes are effective
January 1, 1999 except for the repeal of gross receipts tax on
natural gas companies which is to be effective when the state gas
utility industry is deregulated. The retroactive nature of tax
reductions did not affect fiscal 1999 revenues, but is expected
to result in a fiscal 2000 revenue reduction that is expected to
be higher than that estimated to occur in fiscal 2001 from these
tax changes.
Fiscal 1999 Financial Results (Budgetary Basis)
The 1999 fiscal year ended with an unappropriated
surplus (prior to the transfer to the Tax Stabilization Reserve
Fund) of $702.9 million, an increase of $214.2 million from June
30, 1998. Transfers to the Tax Stabilization Reserve Fund total
$255.4 million for fiscal year 1999 consisting of $105.4 million
representing the statutory 15 percent of the fiscal year-end
unappropriated surplus and an additional $150 million from the
unappropriated surplus authorized by the General Assembly. The
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$447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9 percent)
above estimate and $61.0 million of non-tax revenue (18.4
percent) above estimate. Higher than anticipated appropriation
lapses also contributed to the higher surplus. A portion of the
higher revenues and appropriation lapses were used for
supplemental fiscal 1999 appropriations totaling $357.8 million.
Of this amount, $200 million was appropriated for general
obligation debt service above current needs; $59 million to
accrue the fourth quarterly Commonwealth contribution to the
School Employees' Retirement System; and $90 million to the
Public Welfare department to pay additional medical assistance
costs estimated to occur in the 1999 fiscal year. These
supplemental appropriations represent expected one-time
obligations. Including the supplemental appropriations and net
of appropriation lapses, expenditures for fiscal 1999 totaled
$18,144.9 million, a 5.9 percent increase over expenditures
during fiscal 1998.
Revenues from taxes for the fiscal year rose 3.9 percent
after tax reductions enacted with the 1999 fiscal year budget
that were estimated to be $241.0 million for the fiscal year.
The sales and use tax represented the largest portion of the
above-estimate of revenues. Receipts from this tax were $331.3
million, or 5.3 percent above the estimated and final taxpayer
filings, boosted receipts $299.5 million, or 4.7 percent above
estimate for the fiscal year. Taxes paid through employee
withholding were slightly below estimate. For the fiscal year,
personal income tax receipts were 7.2 percent above those of the
prior fiscal year. Among the taxes paid by corporations, only
capital stock and franchise tax receipts exceeded estimates.
Revenues from this tax were $144.5 million (15.1 percent) over
estimate. The corporate net income tax and the various selective
business taxes all recorded receipts below estimate. In
aggregate, they were a net $68.5 million below estimate. Non-tax
revenues, led by interest earnings due to higher investable
balances, were $61.0 million (18.4 percent) above estimate. Non-
tax revenues, led by interest earnings due to higher investable
balances, were $61.0 million (18.4 percent) above estimate. The
major components of the enacted tax reductions and their
estimated fiscal 1999 cost were: (i) reduce the capital stock and
franchise tax rate from 12.75 mills to 11.99 mills ($72.5
million); (ii) increase the eligibility income limit for
qualification for personal income tax forgiveness ($57.1
million); (iii) eliminate personal income tax on gains from the
sale of an individual's residence ($30.0 million); (iv) extend
the time period from three to ten years over which net operating
loss deductions may be taken for the corporate net income tax
($17.8 million); (v) expand various sales tax exemptions ($40.4
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million); and (vi) reduce various other miscellaneous items
($23.2 million).
Appropriations enacted for fiscal 1999 when the budget
was originally adopted were 4.1 percent ($713.2 million) above
the appropriations enacted for fiscal 1998 (including
supplemental appropriations). Major increases in expenditures
budgeted for fiscal 1999 at that time included: (i) $249.5
million in direct support of local school district education
costs (local school districts will also benefit from an estimated
$104 million of reduced contributions by school districts to
their worker's retirement costs from a reduced employer
contribution rate); (ii) $60.4 million for higher education,
including scholarship grants; (iii) $56.5 million to fund the
correctional system, including $21 million to operate a new
correctional facility; (iv) $121.1 million for long-term care
medical assistance costs; (v) $14.4 million for technology and
Year 2000 investments; (vi) $55.9 million to fund the first
year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (v) $20 million to
replace bond funding for equipment loans for volunteer fire and
rescue companies. The balance of the increase is spread over
many departments and program operations. In May 1999, along with
the adoption of the fiscal 2000 budget, supplemental fiscal 1999
appropriations totaling $357.8 million were enacted. With these
additional amounts, total appropriations for fiscal 1999
represent a 6.2 percent increase over fiscal 1998 appropriations.
Appropriation lapses of $222.6 million and additional
Commonwealth revenues above budget estimates provided the funding
for the additional appropriations. Appropriation lapses in
fiscal 1998 and 1997 were $161.8 million and $200.6 million
respectively.
Reserves for tax refunds for fiscal 1999 were raised
during the fiscal year to $644.0 million, a $39.2 million
increase over the budget as enacted. Reserves for tax refunds
for fiscal 1999 are $266.0 million below the reserve established
for fiscal 1998.
Fiscal 1998 Financial Results (Budgetary Basis)
Operations during the 1998 fiscal year increased the
unappropriated balance of Commonwealth revenues during that
period by $86.4 million to $488.7 million at June 30, 1998 (prior
to reserves for transfer to the Tax Stabilization Reserve Fund).
Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the
Tax Stabilization Reserve Fund for fiscal 1998 operations will
total $223.3 million consisting of $73.3 million representing the
required transfer of fifteen percent of the ending unappropriated
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surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget.
With these transfers, the balance in the Tax Stabilization
Reserve Fund will exceed $664 million and represent 3.7 percent
of fiscal 1998 revenue.
Commonwealth revenues (prior to tax refunds) during the
fiscal year totaled $18,123.2 million, $676.1 million (3.9
percent) above the estimate made at the time the budget was
enacted. Tax revenue received in fiscal 1998 grew 4.8 percent
over tax revenues received during fiscal 1997. This rate of
increase includes the effect of legislated tax reductions that
affected receipts during both fiscal years and therefore
understates the actual underlying rate of growth of tax revenue
during fiscal 1998. Receipts from the personal income tax
produced the largest single component of higher revenues during
fiscal 1998. Personal income tax collections were $416.6 million
over estimate representing an 8.5 percent increase over fiscal
1997 receipts. Receipts of the sales and use tax were $6.2
million over estimate representing a 1.9 percent increase
although receipts from non-motor vehicle sales were 0.7 percent
below estimate. Sales tax receipts on motor vehicle sales were
above estimate and offset the shortfall in non-motor vehicle
sales tax receipts. Collections of all corporate taxes exceeded
their estimate for the fiscal year, led by the capital stock and
franchise tax and the corporate net income tax, which were over
estimate by 7.8 percent and 2.7 percent respectively. Receipts
from the utility property tax, a state corporate tax, were below
estimate by $102.3 million or 30.8 percent. This shortfall was
due in large part to the recent deregulation of the electric
industry in Pennsylvania. Utility property revenues support in
lieu of property tax payments to school districts and local
municipalities in Pennsylvania. Non-tax revenues were $27.5
million (8.6 percent) over estimate, mostly due to greater than
anticipated interest earnings for the fiscal year.
Reserves established during fiscal 1998 for tax refunds
totaled $910 million. This amount is a $370 million increase
over tax refund reserves for fiscal 1997 representing an increase
of 68.5 percent. The fiscal 1998 amount includes a one-time
addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999.
Expenditures from all fiscal 1998 appropriations of
Commonwealth revenues totaled $17,229.8 million (excluding pooled
financing expenditures and net of current year lapses). This
amount represents an increase of 4.5 percent over fiscal 1997
appropriation expenditures. Lapses of appropriation authority
during the fiscal year totaled $161.8 million including $58.8
million from fiscal 1998 appropriations. These appropriation
lapses were used to fund $120.5 million of supplemental fiscal
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1998 appropriations. Of the total fiscal 1998 supplemental
appropriations, an amount of $111.6 million was made to the
Department of Public Welfare, mostly for the medical assistance
program.
City of Philadelphia
Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census.
The Pennsylvania Intergovernmental Cooperation Authority
("PICA") was created by Commonwealth legislation in 1991 to
assist Philadelphia, the Commonwealth's largest city, in
remedying its fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make
factual findings and recommendations to Philadelphia concerning
its budgetary and fiscal affairs. This financial assistance has
included the refunding of certain city general obligation bonds,
funding of capital projects and the liquidation of the cumulative
general fund balance deficit of Philadelphia as of June 30, 1992,
of $224.9 million. At this time, Philadelphia is operating under
a five-year fiscal plan approved by PICA on June 15, 1999.
No further bonds are to be issued by PICA for the
purpose of financing a capital project or deficit as the
authority for such bond sales expired December 31, 1994. PICA'S
authority to issue debt for the purpose of financing a cash flow
deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,014.1
million in special revenue bonds outstanding as of June 30, 1999.
Neither the taxing power nor the credit of the Commonwealth is
pledged to pay debt service on PICA's bonds.
Commonwealth Debt
The Constitution permits the Commonwealth to incur the
following types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster, (ii) electorate approved
debt, (iii) debt for capital projects subject to an aggregate
debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years, and (iv) tax anticipation notes
payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular
amounts.
Net outstanding general obligation debt totaled $4,924.5
million at June 30, 1999, an increase of $197.0 million from
June 30, 1998. Over the 10-year period ending June 30, 1999,
total outstanding general obligation debt increased at an annual
rate of 0.5 percent. Within the most recent 5-year period,
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outstanding general obligation debt has decreased at an annual
rate of 0.6 percent.
Certain state-created organizations have statutory
authorization to issue debt for which state appropriations to pay
debt service thereon are not required. The debt of these
organizations is funded by assets of, or revenues derived from
the various projects financed and is not a statutory or moral
obligation of the Commonwealth. However, some of these
organizations are indirectly dependent upon Commonwealth
operating appropriations. In addition, the Commonwealth may
choose to take action to financially assist these organizations.
Litigation
In 1978, the General Assembly approved a limited waiver
of sovereign immunity. Damages for any loss are limited to
$250,000 for each person and $1,000,000 for each accident. The
Supreme Court of Pennsylvania has held that this limitation is
constitutional. Approximately 3,500 suits against the
Commonwealth remain open. Tort claim payments for the
departments and agencies, other than the Department of
Transportation, are paid from departmental and agency operating
and program appropriations. Tort claim payments for the
Department of Transportation are paid from an appropriation from
the Motor License Fund. The Motor License Fund tort claim
appropriation for fiscal 2000 is $20.0 million.
Dom Giordano v. Tom Ridge, Governor, et. al.
In February 1999, Dom Giordano, a taxpayer of the
Commonwealth of Pennsylvania, filed a petition for review
requesting that the Commonwealth Court of Pennsylvania declare
that Chapter 5 (relating to sports facilities financing) of the
Capital Facilities Debt Enabling Act (enacted by Act 1999-1)
violates Article VIII, Sections 7 & 8, of the Pennsylvania
Constitution. The Commonwealth Court dismissed the petitioner's
action with prejudice. The petitioner has appealed the
Commonwealth Court's ruling to the Supreme Court.
Powell v. Ridge
In March 1998, several residents of the City of
Philadelphia on behalf of themselves and their school-aged
children, along with the School District of Philadelphia, the
Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the
Mayor of Philadelphia, and several membership organizations
interested in the Philadelphia public schools, brought suit in
the United States District Court for the Eastern District of
Pennsylvania against the Governor, the Secretary of Education,
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the chairman of the State Board of Education, and the State
Treasurer. The plaintiffs claim that the Commonwealth's system
for funding public schools has the effect of discriminating on
the basis of race and violates Title VI of the Civil Rights Act
of 1964.
The plaintiffs have asked the court to declare the
funding system to be illegal, to enjoin the defendants from
violating the regulation in the future and to award counsel fees
and costs.
The District Court allowed two groups of petitioners to
intervene. The Philadelphia Federation of Teachers intervened on
the side of the plaintiffs, while several leaders of the
Pennsylvania General Assembly intervened on the side of the
defendants. In addition, the U.S. Department of Justice
intervened to defend against a claim made by the legislator
intervenors that a statute waiving states' immunity under the
Eleventh Amendment to the U.S. Constitution for Title VI claims
is unconstitutional.
The District Court found that the plaintiffs had failed
to state a claim under the Title VI regulation at issue or under
42 U.S.C. 1983 and dismissed the action in its entirety with
prejudice. The plaintiffs appealed. In August 1999, the U.S.
Court of Appeals for the Third Circuit reversed the District
Court's dismissal of the action and remanded the case for further
proceedings including the filing of an answer. The defendants
and legislator intervenors filed petitions for writ of certiorari
with the U.S. Supreme Court. In December 1999, the Supreme Court
denied the petitions.
In the District Court, the parties are beginning the
process of discovery and the development of a case management
plan, including deadlines for the filing of motions for summary
judgment.
County of Allegheny v. Commonwealth of Pennsylvania
In December 1987, the Supreme Court of Pennsylvania held
in County of Allegheny v. Commonwealth of Pennsylvania, that the
statutory scheme for county funding of the judicial system is in
conflict with the Pennsylvania Constitution. However, the
Supreme Court of Pennsylvania stayed its judgment to afford the
General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the
prior system of county funding shall remain in place until this
is done.
The Court appointed retired Justice Frank J. Montemuro,
Jr. as special master to devise and submit a plan for
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implementation. The Interim Report of the Master recommended a
four phase transition to state funding of a unified judicial
system, during each of which specified court employees would
transfer into the state payroll system. Phase I recommended that
the General Assembly provide for an administrative structure of
local court administrators to be employed by the Administrative
Office of Pennsylvania Courts, a state agency. Numbering
approximately 165 people statewide, local court administrators
are employees of the counties in which they work. On June 22,
1999, the Governor approved Act 1999-12 under which approximately
165 county-level court administrators are to become employees of
the Commonwealth. Act 12 also triggered the release of
appropriations that had been made for this purpose in 1998 and
1999.
Pennsylvania Association of Rural and Small Schools
(PARSS) v. Ridge
In 1991, an association of rural and small schools,
several individual school districts, and a group of parents and
students, filed suit against the Governor and the Secretary of
Education. The litigation challenges the constitutionality of
the Commonwealth's system for funding local school districts.
The litigation consists of two parallel cases, one in the
Commonwealth Court, and one in the United States District Court
for the Middle District of Pennsylvania. The federal court case
has been stayed indefinitely, pending resolution of the state
court case.
Commonwealth Court held that Pennsylvania's system for
funding public schools is constitutional under both the education
clause and the equal protection clause of the Pennsylvania
Constitution. On October 1, 1999, the Supreme Court of
Pennsylvania affirmed the Commonwealth Court's decision. In
December 1999, the Supreme Court denied the petitioners' motion
for reconsideration. The parallel federal action remains
pending.
Ridge v. State Employees' Retirement Board
In 1993 and in 1995, Joseph H. Ridge, former judge of
the Allegheny Court of Common Pleas filed suit in the
Commonwealth Court alleging that the State Employees' Retirement
Board's use of gender distinct actuarial factors for benefits
based upon his pre-August 1, 1993 service violates Article 1,
Section 26 (equal protection) and Article 1, Section 28 (equal
rights) of the Pennsylvania Constitution. He seeks "topped up"
benefits equal to those that a similarly situated female would be
receiving, Due to the constitutional nature of the claim, it is
possible that a decision adverse to the State Employees'
Retirement Board would be applicable to other members of the
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State Employees' Retirement System and Public School Employees'
Retirement System who accrued service between the effective date
of the state constitutional provisions and before August 1, 1983,
and who have received, are receiving, or will receive benefits
less than those received by other members of the systems because
of their sex or the sex of their survivor annuitants.
The Commonwealth Court granted the State Employees'
Retirement Board's preliminary objections to Judge Ridge's claims
for punitive damages, attorneys' fees and compensatory damages
other than a recalculation of his pension benefits should he
prevail. In 1996, the Commonwealth Court heard oral argument en
banc on Judge Ridge's motion for judgment of the pleadings. In
February 1997, the Commonwealth Court, after oral argument en
banc, denied Judge Ridge's motion for judgment on the pleadings.
The case is currently in discovery.
PPG Industries, Inc. v. Commonwealth of
Pennsylvania
PPG Industries challenged the Department of Revenue's
application of the manufacturing exemption from the capital
stock/franchise tax to PPG's headquarters in Pittsburgh, which
allowed the exemption only for that portion of PPG's headquarters
property and payroll attributable to manufacturing in the
Commonwealth. PPG argued that it is entitled to the exemption for
all of its headquarters property and payroll attributable to
manufacturing, regardless of where the manufacturing takes place.
The Commonwealth successfully defended PPG's challenge in the
Commonwealth Court.
On PPG's appeal, however, the Pennsylvania Supreme Court
reversed Commonwealth Court, holding that the manufacturing
exemption was applied by the Department consistent with the
statute, but that the statute facially discriminates against
interstate commerce. The Supreme Court remanded the case to
Commonwealth Court to determine whether the capital
stock/franchise tax is a "compensatory tax" justifying the
discrimination, or, failing that, to recommend to the Supreme
Court a remedy for the discrimination.
Following briefing and argument by the parties, the
Commonwealth Court issued its determination November 30, 1999.
After taking judicial notice that the General Assembly is
considering legislation to deal with this issue, the Court
recommended the following to the Supreme Court: (1) for the
duration of the contested period, invalidate the exemption's
"within the state" restriction, but only in the limited
"headquarters context," and (2) prospectively, invalidate the
exemption in its entirety, leaving to the General Assembly the
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task of amending the statute to restore any exemption it chooses
to adopt in a constitutional manner.
The General Assembly subsequently enacted amendments to
the Tax Reform Code of 1971, which essentially provide that for
taxable years January 1, 1999 through December 31, 2000, the
manufacturing exemption will apply to both in-State and
out-of-State property and payroll, with no exemption for sales
attributable to manufacturing.
In response to the Commonwealth Court's recommendation,
the Supreme Court has set up a briefing schedule requiring PPG's
brief on or before January 10, 2000 and the Commonwealth's brief
thirty days after service of PPG's brief.
________________________________________________________________
INVESTMENT RESTRICTIONS
________________________________________________________________
THE FOLLOWING RESTRICTIONS ARE FUNDAMENTAL POLICIES:
The Portfolio has adopted the following investment
restrictions, which may not be changed without the approval of
the holders of a majority of the Portfolio's outstanding voting
securities. The approval of a majority of the Portfolio's
outstanding voting securities means the affirmative vote of
(i) 67% or more of the shares represented at a meeting at which
more than 50% of the outstanding shares are present in person or
by proxy, or (ii) more than 50% of the outstanding shares,
whichever is less. If a percentage restriction is adhered to at
the time of an investment, a later increase or decrease in
percentage resulting from a change in value of portfolio
securities or in amount of the Portfolio's assets will not
constitute a violation of that restriction.
The Portfolio:
1. May not invest more than 25% of its total assets in
the securities of issuers conducting their principal business
activities in any one industry, provided that for purposes of
this policy (a) there is no limitation with respect to
investments in municipal securities (including industrial
development bonds), securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of
deposit, bankers' acceptances and interest-bearing savings
deposits, and (b) consumer finance companies, industrial finance
companies and gas, electric, water and telephone utility
companies are each considered to be separate industries. For
purposes of this restriction, the Portfolio will regard the
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entity which has the primary responsibility for the payment of
interest and principal as the issuer;
2. May not borrow money except from banks on a
temporary basis or via entering into reverse repurchase
agreements for extraordinary or emergency purposes in an
aggregate amount not to exceed 15% of the Portfolio's total
assets. Such borrowings may be used, for example, to facilitate
the orderly maturation and sale of portfolio securities during
periods of abnormally heavy redemption requests, if they should
occur, such borrowings may not be used to purchase investments
and the Portfolio will not purchase any investment while any such
borrowings exist;
3. May not issue senior securities except to the
extent permitted by the 1940 Act;
4. May not pledge, hypothecate, mortgage or otherwise
encumber its assets except to secure borrowings, including
reverse repurchase agreements, effected within the limitations
set forth in restriction 2;
5. May not make loans of money or securities except by
the purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and policies and
by investment in repurchase agreements;
6. May not invest in real estate (other than
securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or
interests therein), commodities or commodity contracts; and
7. May not act as an underwriter of securities.
NON-FUNDAMENTAL POLICIES:
The following policies are not fundamental and may be
changed by the Trustees without shareholder approval. If a
percentage restriction is adhered to at the time of an
investment, a later increase or decrease in percentage resulting
from a change in value of portfolio securities or in amount of
the Portfolio's assets will not constitute a violation of that
restriction. The Portfolio:
1. May not invest more than 5% of its total assets in
the securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities), except that with respect to 50% of the
Portfolio's total assets the Portfolio may invest in the
securities of as few as four issuers (provided that no more than
25% of the Portfolio's total assets are invested in the
28
<PAGE>
securities of any one issuer).1 For purposes of this limitation,
the issuer of the letter of credit or other guarantee backing a
participation interest in an adjustable rate industrial
development bond is deemed to be the issuer of such participation
interest;
2. May not purchase more than 10% of any class of the
voting securities of any one issuer except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities;
3. May not invest more than 25% of its total assets in
municipal securities the interest upon which is paid from
revenues of similar-type projects;
4. May not enter into repurchase agreements not
terminable within seven days if, as a result thereof, more than
10% of the Portfolio's net assets would be committed to such
repurchase agreements;
5. May not purchase any securities on margin;
6. May not make short sales of securities or maintain
a short position or write, purchase or sell puts (except for
standby commitments as described in the Prospectus and above),
calls, straddles, spreads or combinations thereof; and
7. May not invest more than 10% of its net assets in
illiquid securities.
_________________________________________________________________
MANAGEMENT
_________________________________________________________________
Trustees and Officers
The business and affairs of the Fund are managed under
the direction of the Board of Trustees. The Trustees and
principal officers of the Fund and their principal occupations
____________________
1. As a matter of operating policy, pursuant to Rule 2a-7, the
Portfolio may, with respect to 75% of its assets, invest no
more than 5% of its assets in the securities of any one
issuer; the remaining 25% of the Portfolio's assets may be
invested in securities of one or more issuers provided that
they are first tier securities. Non-fundamental policy #1
would give the Portfolio the investment latitude described
therein only in the event Rule 2a-7 is further amended in the
future.
29
<PAGE>
during the past five years are set forth below. Unless
otherwise specified, the address of each such person is 1345
Avenue of the Americas, New York, NY 10105. Those Trustees whose
names are followed by a footnote are "interested persons" of the
Fund as defined under the Act. Each Trustee and officer is also
a director, trustee or officer of other registered investment
companies sponsored by the Adviser.
Trustees
DAVE H. WILLIAMS,2 68, Chairman, is Chairman of the
Board of Directors of Alliance Capital Management Corporation
("ACMC")3 sole general partner of the Adviser with which he has
been associated since prior to 1995.
JOHN D. CARIFA,** 55, is the President, Chief Operating
Officer, and a Director of ACMC with which he has been associated
since prior to 1995.
SAM Y. CROSS, 73, was, since prior to 1995, Executive
Vice President of The Federal Reserve Bank of New York and
manager for foreign operations for The Federal Reserve System.
He is Executive-In-Residence at the School of International and
Public Affairs, Columbia University. He is also a director of
Fuji Bank and Trust Co. His address is 200 East 66th Street, New
York, New York 10021.
CHARLES H. P. DUELL, 62, is President of Middleton Place
Foundation with which he has been associated since prior to 1995.
He is also a Director of GRC International, Inc., a Trustee
Emeritus of the National Trust for Historic Preservation and
serves on the Board of Architectural Review, City of Charleston.
His address is Middleton Place Foundation, Ashley River Road,
Charleston, South Carolina 29414.
WILLIAM H. FOULK, JR., 67, is an Investment Adviser and
an Independent Consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1995. His address is
2 Greenwich Plaza, Suite 100, Greenwich, CT 06830.
____________________
2. An "interested person" of the Fund as defined in the Act.
3. For purposes of this Statement of Additional Information,
ACMC refers to Alliance Capital Management Corporation, the
sole general partner of the Adviser, and to the predecessor
general partner of the Adviser of the same name.
30
<PAGE>
DAVID K. STORRS, 56, is President and Chief Executive
Officer of Alternative Investment Group, LLC (an investment
firm). He was formerly President of The Common Fund (investment
management for educational institutions) with which he had been
associated since prior to 1995. His address is 65 South Gate
Road, Southport, Connecticut 06490.
SHELBY WHITE, 61, is an author and financial journalist.
Her address is One Sutton Place South, New York, New York 10022.
Officers
RONALD M. WHITEHILL - President, 62, is a Senior Vice
President of ACMC and President of Alliance Cash Management
Services with which he has been associated since prior to 1995.
KATHLEEN A. CORBET - Senior Vice President, 40, is an
Executive Vice President of ACMC with which she has been
associated since prior to 1995.
DREW BIEGEL - Senior Vice President, 49, is a Vice
President of ACMC with which he has been associated since prior
to 1995.
JOHN R. BONCZEK - Senior Vice President, 40, is a Vice
President of ACMC with which he has been associated since prior
to 1995.
ROBERT I. KURZWEIL - Senior Vice President, 49, is a
Vice President of ACMC with which he has been associated since
prior to 1995.
WAYNE D. LYSKI - Senior Vice President, 58, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1995.
WILLIAM E. OLIVER - Senior Vice President, 50, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1995.
PATRICIA ITTNER - Senior Vice President, 49, is a Vice
President of ACMC with which she has been associated since prior
to 1995.
RAYMOND J. PAPERA - Senior Vice President, 44, is a
Senior Vice President of ACMC with which he has been associated
since prior to 1995.
31
<PAGE>
DORIS T. CILIBERTI - Senior Vice President, 36, is an
Assistant Vice President of ACMC with which she has been
associated since prior to 1995.
FRANCES M. DUNN - Vice President, 29, is a Vice
President of ACMC with which she has been associated since prior
to 1995.
WILLIAM J. FAGAN - Vice President, 38, is an Assistant
Vice President of ACMC with which he has been associated since
prior to 1995.
LINDA N. KELLEY - Vice President, 39, is an Assistant
Vice President of ACMC with which she has been associated since
prior to 1995.
JOSEPH R. LASPINA - Vice President, 39, is an Assistant
Vice President of ACMC with which he has been associated since
prior to 1995.
MARIA C. SAZON - Vice President, 33, is an Assistant
V.P. of ACMC with which she has been associated since 1997.
Prior thereto, she was a municipal bond analyst at Financial
Guaranty Insurance Company since prior to 1995.
EDMUND P. BERGAN, Jr. - Secretary, 50, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS") with which
he has been associated since prior to 1995.
MARK D. GERSTEN - Treasurer and Chief Financial Officer,
49, is a Senior Vice President of AFS and a Vice President of AFD
with which he has been associated since prior to 1995.
VINCENT S. NOTO - Controller, 35, is a Vice President of
AFS with which he has been associated since prior to 1995.
ANDREW L. GANGOLF - Assistant Secretary, 45, is a Senior
Vice President and Assistant General Counsel of AFD with which he
has been associated since prior to 1995.
DOMENICK PUGLIESE - Assistant Secretary, 39, is a Vice
President and Assistant General Counsel of AFD with which he has
been associated since prior to 1995.
As of October 8, 1999, the Trustees and officers as a
group owned less than 1% of the shares of each Portfolio. The
Fund does not pay any fees to, or reimburse expenses of, its
Trustees who are considered "interested persons" of the Fund. The
aggregate compensation paid by the Fund to each of the Trustees
during its fiscal year ended June 30, 1999, the aggregate
32
<PAGE>
compensation paid to each of the Trustees during calendar year
1999 by all of the funds to which the Adviser provides investment
advisory services (collectively, the "Alliance Fund Complex") and
the total number of registered investment companies (and separate
investment portfolios within those companies) in the Alliance
Fund Complex with respect to which each of the Trustees serves as
a director or trustee, are set forth below. Neither the Fund nor
any other fund in the Alliance Fund Complex provides compensation
in the form of pension or retirement benefits to any of its
directors or trustees.
<TABLE>
<S> <C> <C> <C> <C>
Total Number Total Number
of Funds in of Investment
the Alliance Portfolios
Total Fund Complex, Within the Funds,
Compensation Including the Including the
From the Fund, as to Fund, as to
Alliance Fund which the which the
Name of Aggregate Complex, Trustee is a Trustee is a
Trustee Compensation Including the Director or Director or
of the Fund From the Fund Fund Trustee Trustee
___________ ____________ ______________ _____________ _______________
Dave H. Williams $-0- $-0- 6 15
John D. Carifa $-0- $-0- 50 116
Sam Y. Cross $3,455 $12,000 3 12
Charles H.P. Duell $3,455 $12,000 3 12
William H. Foulk, Jr. $3,455 $241,003 45 111
David K. Storrs $3,455 $12,000 3 12
Shelby White $3,455 $12,000 3 12
</TABLE>
The Adviser
The Adviser, a Delaware limited partnership with
principal offices at 1345 Avenue of the Americas, New York, New
York 10105, has been retained under an investment advisory
agreement (the "Advisory Agreement") to provide investment advice
and, in general, to conduct the management and investment program
of the Fund under the supervision and control of the Fund's
Trustees.
The Adviser is a leading global investment adviser
supervising client accounts with assets as of September 30, 1999
totaling $317.3 billion. The Adviser has eight offices in the
United States. Subsidiaries of Alliance operate out of offices
in Bahrain, Bangalore, Calculta, Chennai, Istanbul, Johannesburg,
London, Luxembourg, Madrid, Mumbai, New Delhi, Paris, Pune,
Singapore, Sydney, Tokyo and Toronto, and affiliate offices are
33
<PAGE>
located in Cairo, Hong Kong, Moscow, Sao Paulo, Seoul, Vienna and
Warsaw. The Adviser and its subsidiaries employ over 2,000
persons worldwide.
The Adviser's clients are primarily major corporate
employee benefit fund, public employee retirement systems,
investment companies, foundations and endowment funds. There are
52 U.S.-registered investment companies managed by the Adviser,
comprising 118 separate investment portfolios. There are also
105 non-U.S. investment companies, comprising 127 separate
investment portfolios, managed by the Adviser and its affiliates.
These investment portfolios currently have approximately 4.8
million shareholder accounts, in aggregate. As of September 30,
1999, the Adviser was retained as an investment manager of
employee benefit fund assets for 28 of the Fortune 100 companies.
Alliance Capital Management Corporation ("ACMC") is the
general partner of the Adviser and a wholly owned subsidiary of
the The Equitable Life Assurance Society of the United States
("Equitable"). Equitable, one of the largest life insurance
companies in the United States, is the beneficial owner of an
approximately 55.4% partnership interest in the Adviser.
Alliance Capital Management Holding L.P. ("Alliance Holding")
owns an approximately 41.9% partnership interest in the Adviser.4
Equity interests in Alliance Holding are traded on the New York
Stock Exchange in the form of units. Approximately 98% of such
interests are owned by the public and management or employees of
the Adviser and approximately 2% are owned by Equitable.
Equitable is a wholly owned subsidiary of AXA Financial, Inc.
("AXA Financial"), a Delaware corporation whose shares are traded
on the New York Stock Exchange. AXA Financial serves as the
holding company for the Adviser, Equitable and Donaldson, Lufkin
& Jenrette, Inc., an integrated investment and merchant bank. As
of June 30, 1999, AXA, a French insurance holding company, owned
approximately 58.2% of the issued and outstanding shares of
common stock of AXA Financial.
____________________
4. Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material business
operations. One result of the reorganization was that the
Advisory Agreement, then between the Fund and Alliance
Holding, was transferred to the Adviser by means of a
technical assignment, and ownership of Alliance Fund
Distributors, Inc. and Alliance Fund Services, Inc., the
Fund's principal underwriter and transfer agent,
respectively, also was transferred to the Advisers.
34
<PAGE>
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
the Portfolio of the Fund and pays all compensation of Trustees
of the Fund who are affiliated persons of the Adviser. The
Adviser or its affiliates also furnish the Fund, without charge,
with management supervision and assistance and office facilities.
Under the Advisory Agreement, the Portfolio pays an advisory fee
at the annual rate of .50 of 1% up to $1.25 billion of the
average daily value of its net assets, .49 of 1% of the next $.25
billion of such assets, .48 of 1% of the next $.25 billion of
such assets, .47 of 1% of the next $.25 billion of such assets,
.46 of 1% of the next $1 billion of such assets and .45 of 1% of
the average daily net assets of the Portfolio in excess of $3
billion. The fee is accrued daily and paid monthly. Pursuant to
the Advisory Agreement the Adviser will reimburse the Portfolio
to the extent that its net expenses (excluding taxes, brokerage,
interest and extraordinary expenses) exceed 1% of its average
daily net assets for any fiscal year.
In accordance with the Distribution Services Agreement
described below, the Fund may pay a portion of advertising and
promotional expenses in connection with the sale of shares of the
Fund. The Fund also pays for printing of prospectuses and other
reports to shareholders and all expenses and fees related to
registration and filing with the Commission and with state
regulatory authorities. The Fund pays all other expenses
incurred in its operations, including the Adviser's management
fees; custody, transfer and dividend disbursing expenses; legal
and auditing costs; clerical, accounting, administrative and
other office costs; fees and expenses of Trustees who are not
affiliated with the Adviser; costs of maintenance of the Fund's
existence; and interest charges, taxes, brokerage fees, and
commissions. As to the obtaining of clerical and accounting
services not required to be provided to the Fund by the Adviser
under the Advisory Agreement, the Fund may employ its own
personnel. For such services, it also may utilize personnel
employed by the Adviser or its affiliates; if so done, the
services are provided to the Fund at cost and the payments
therefore must be specifically approved in advance by the Fund's
Trustees.
The Fund has made arrangements with certain broker-
dealers, including Pershing, Division of Donaldson, Lufkin &
Jenrette Securities Corporation ("Pershing"), an affiliate of the
Adviser, whose customers are Fund shareholders pursuant to which
payments are made to such broker-dealers performing recordkeeping
and shareholder servicing functions. Such functions may include
opening new shareholder accounts, processing purchase and
redemption transactions, and responding to inquiries regarding
the Fund's current yield and the status of shareholder accounts.
The Fund pays fully disclosed and omnibus broker dealers
35
<PAGE>
(including Pershing) for such services. The Fund may also pay
for the electronic communications equipment maintained at the
broker-dealers' offices that permits access to the Fund's
computer files and, in addition, reimburses fully-disclosed
broker-dealers at cost for personnel expenses involved in
providing such services. All such payments must be approved or
ratified by the Trustees.
The Advisory Agreement became effective on July 22,
1992. The Advisory Agreement with respect to the Portfolio was
approved by the vote, cast in person by all the Trustees of the
Fund who neither were interested persons of the Fund nor had any
direct or indirect financial interest in the Agreement or any
related agreement, at a meeting called for that purpose on June
5, 2000. The continuance of the Advisory Agreement for an
additional annual term was also approved by the vote, cast in
person by all the Trustees of the Fund who neither were
interested persons of the Fund nor had any direct or indirect
financial interest in the Agreement or any related agreement, at
a meeting called for that purpose on June 5, 2000.
The Advisory Agreement remains in effect from year to
year provided that such continuance is specifically approved at
least annually by a vote of a majority of the outstanding shares
of the Portfolio or by the Fund's Trustees, including in either
case approval by a majority of the Trustees who are not parties
to the Agreement, or interested persons as defined in the Act.
The Advisory Agreement may be terminated without penalty on 60
days' written notice at the option of either party or by a vote
of the outstanding voting securities of the Fund; it will
automatically terminate in the event of assignment. The Adviser
is not liable for any action or inaction with regard to its
obligations under the Advisory Agreement as long as it does not
exhibit willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations.
Distribution Services Agreement
Rule 12b-1 under the Act permits an investment company
to directly or indirectly pay expenses associated with the
distribution of its shares in accordance with a duly adopted and
approved plan. The Fund has entered into a Distribution Services
Agreement (the "Agreement") which includes a plan adopted
pursuant to Rule 12b-1 (the "Plan"), with Alliance Fund
Distributors, Inc. ("AFD" or the "Distributor"), which applies to
all Series of the Trust. Pursuant to the Plan, the Fund makes
payments each month to AFD in an amount that will not exceed, on
an annualized basis, .25 of 1% of the Portfolio's aggregate
average daily net assets. In addition, under the Agreement the
Adviser may make payments to the the Distributor for distribution
assistance and for administrative, accounting and other services
36
<PAGE>
from its own resources, which may include the management fee it
receives from the Fund.
Payments under the Agreement are used in their entirety
for (i) payments to broker-dealers and other financial
intermediaries, including the Distributor and Donaldson, Lufkin &
Jenrette Securities Corporation and its Pershing Division,
affiliates of the Adviser, for distribution assistance and to
banks and other depository institutions for administrative and
accounting services, and (ii) otherwise promoting the sale of
shares of the Fund such as by paying for the preparation,
printing and distribution of prospectuses and other promotional
materials sent to existing and prospective shareholders and by
directly or indirectly purchasing radio, television, newspaper
and other advertising. In approving the Agreement, the Trustees
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders.
The administrative and accounting services provided by
broker-dealers, depository institutions and other financial
institutions may include, but are not limited to, establishing
and maintaining shareholder accounts, sub-accounting, processing
of purchase and redemption orders, sending confirmations of
transactions, forwarding financial reports and other
communications to shareholders and responding to shareholder
inquiries regarding the Fund. As interpreted by courts and
administrative agencies, certain laws and regulations limit the
ability of a bank or other depository institution to become an
underwriter or distributor of securities. However, in the
opinion of the Fund's management based on the advice of counsel,
these laws and regulations do not prohibit such depository
institutions from providing other services for investment
companies such as the administrative and accounting services
described above. The Trustees will consider appropriate
modifications to the Fund's operations, including discontinuance
of payments under the Agreement to banks and other depository
institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to
provide the above-mentioned services.
The Treasurer of the Fund reports the amounts expended
under the Agreement and the purposes for which such expenditures
were made to the Trustees on a quarterly basis. Also, the
Agreement provides that the selection and nomination of
disinterested Trustees (as defined in the Act) are committed to
the discretion of the disinterested Trustees then in office.
The Agreement for the Fund became effective on July 22,
1992. The Agreement with respect to the Portfolio was approved
by the vote, cast in person by all the Trustees of the Fund who
neither were interested persons of the Fund nor had any direct or
37
<PAGE>
indirect financial interest in the Agreement or any related
agreement, at a meeting called for that purpose on June 5, 2000.
The Agreement may be continued annually thereafter if approved by
a majority vote of the Trustees who neither are interested
persons of the Fund nor have any direct or indirect financial
interest in the Agreement or in any related agreement, cast in
person at a meeting called for that purpose. The continuance of
the Agreement for an additional annual term was also approved by
the vote, cast in person by all the Trustees of the Fund who
neither were interested persons of the Fund nor had any direct or
indirect financial interest in the Agreement or any related
agreement, at a meeting called for that purpose on June 5, 2000.
All material amendments to the Agreement must be
approved by a vote of the Trustees, including a majority of the
disinterested Trustees, cast in person at a meeting called for
that purpose, and the Agreement may not be amended in order to
increase materially the costs which the Fund may bear pursuant to
the Agreement without the approval of a majority of the
outstanding shares of the Fund. The Agreement may also be
terminated at any time by a majority vote of the disinterested
Trustees, or by a majority of the outstanding shares of the Fund
or by the Distributor. Any agreement with a qualifying broker-
dealer or other financial intermediary may be terminated without
penalty on not more than 60 days' written notice by a vote of the
majority of non-party Trustees, by a vote of a majority of the
outstanding shares of the Fund, or by the Distributor and will
terminate automatically in the event of its assignment.
The Agreement is in compliance with rules of the
National Association of Securities Dealers, Inc. (the "NASD")
which became effective July 7, 1993 and which limit the annual
asset-based sales charges and service fees that a mutual fund may
impose to .75% and .25%, respectively, of average annual net
assets.
_________________________________________________________________
PURCHASES AND REDEMPTION OF SHARES
_________________________________________________________________
The Portfolio may refuse any order for the purchase of
shares. The Portfolio reserves the right to suspend the sale of
its shares to the public in response to conditions in the
securities markets or for other reasons.
38
<PAGE>
Accounts Not Maintained Through Financial Intermediaries
Opening Accounts-New Investments
A. When Funds are Sent by Wire (the wire method permits
immediate credit)
1) Telephone the Portfolio toll-free at
(800) 824-1916. The Portfolio will ask for the
name of the account as you wish it to be
registered, address of the account, and taxpayer
identification number (social security number for
an individual). The Portfolio will then provide
you with an account number.
2) Instruct your bank to wire Federal funds (minimum
$1,000) exactly as follows:
ABA 0110 00028
State Street Bank and Trust Company
Boston, MA 02101
Alliance Municipal Trust
DDA 9903-279-9
Your account name as registered with the Portfolio
Your account number as registered with the
Portfolio
3) Mail a completed Application Form to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, New Jersey 07096-1520
B. When Funds are Sent by Check
1) Fill out an Application Form.
2) Mail the completed Application Form along with your
check or negotiable bank draft (minimum $1,000),
payable to "Alliance Municipal Trust," to Alliance
Fund Services, Inc. as in A(3) above.
Subsequent Investments
A. Investments by Wire (to obtain immediate credit)
Instruct your bank to wire Federal funds (minimum $100)
to State Street Bank and Trust Company ("State Street Bank") as
in A(2) above.
39
<PAGE>
B. Investments by Check
Mail your check or negotiable bank draft (minimum $100),
payable to "Alliance Municipal Trust," to Alliance Fund Services,
Inc. as in A(3) above.
Include with the check or draft the "next investment"
stub from one of your previous monthly or interim account
statements. For added identification, place your Fund account
number on the check or draft.
Investments Made by Check
Money transmitted by a check drawn on a member of the
Federal Reserve System is converted to Federal funds in one
business day following receipt and, thus, is then invested in the
Fund. Checks drawn on banks which are not members of the Federal
Reserve System may take longer to be converted and invested. All
payments must be in United States dollars.
PROCEEDS FROM ANY SUBSEQUENT REDEMPTION BY YOU OF FUND
SHARES THAT WERE PURCHASED BY CHECK OR ELECTRONIC FUNDS TRANSFER
WILL NOT BE FORWARDED TO YOU UNTIL THE FUND IS REASONABLY ASSURED
THAT YOUR CHECK OR ELECTRONIC FUNDS TRANSFER HAS CLEARED, UP TO
FIFTEEN DAYS FOLLOWING THE PURCHASE DATE. If the redemption
request during such period is in the form of a Portfolio check,
the check will be marked "insufficient funds" and be returned
unpaid to the presenting bank.
Redemptions
A. By Telephone
You may withdraw any amount from your account on any
Portfolio business day (i.e., any weekday exclusive of days on
which the New York Stock Exchange or State Street Bank is
closed) via orders given to AFS by telephone toll-free
(800) 824-1916. Such redemption orders must include your account
name as registered with the Portfolio and the account number.
If your telephone redemption order is received by AFS
prior to 12:00 Noon, Eastern time, we will send the proceeds in
Federal funds by wire to your designated bank account that day.
The minimum amount for a wire is $1,000. If your telephone
redemption order is received by AFS after 12:00 Noon and before
4:00 p.m., Eastern time, we will wire the proceeds the next
business day. You also may request that proceeds be sent by
check to your designated bank. Redemptions are made without any
charge to you.
40
<PAGE>
During periods of drastic economic or market
developments, such as the market break of October 1987, it is
possible that shareholders would have difficulty in reaching AFS
by telephone (although no such difficulty was apparent at any
time in connection with the 1987 market break). If a shareholder
were to experience such difficulty, the shareholder should issue
written instructions to AFS at the address shown on the cover of
this Statement of Additional Information. AFS reserves the right
to suspend or terminate its telephone redemption service at any
time without notice. Neither the Fund nor the Adviser, nor AFS
will be responsible for the authenticity of telephone requests
for redemptions that AFS reasonably believes to be genuine. AFS
will employ reasonable procedures in order to verify that
telephone requests for redemptions are genuine, including among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If AFS did not employ such procedures, it could be
liable for losses arising from unauthorized or fraudulent
telephone instructions. Selected dealers or agents may charge a
commission for handling telephone requests for redemptions.
B. By Checkwriting
With this service, you may write checks made payable to
any payee. Checks cannot be written for more than the principal
balance (not including any accrued dividends) in your account.
First, you must fill out the Signature Card which is with the
Application Form. If you wish to establish this checkwriting
service subsequent to the opening of your Fund account, contact
the Portfolio by telephone or mail. There is no separate charge
for the checkwriting service, except that State Street Bank may
impose charges for checks which are returned unpaid because of
insufficient funds or for checks upon which you have placed a
stop order. There is currently a $7.50 charge for check
reorders.
The checkwriting service enables you to receive the
daily dividends declared on the shares to be redeemed until the
day that your check is presented to State Street Bank for
payment.
C. By Mail
You may withdraw any amount from your account at any
time by mail. Written orders for withdrawal, accompanied by
duly endorsed certificates, if issued, should be mailed to
Alliance Fund Services, Inc., P.O. Box 1520, Secaucus, New Jersey
07096-1520. Such orders must include the account name as
registered with the Fund and the account number. All written
orders for redemption, and accompanying certificates, if any,
must be signed by all owners of the account with the signatures
41
<PAGE>
guaranteed by an institution which is an "eligible guarantor" as
defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended.
_________________________________________________________________
ADDITIONAL INFORMATION
_________________________________________________________________
Automatic Investment Program. A shareholder may
purchase shares of the Portfolio through an automatic investment
program through a bank that is a member of the National
Automated Clearing House Association. Purchases can be made on a
Fund business day each month designated by the shareholder.
Shareholders wishing to establish an automatic investment program
should write or telephone the Portfolio or AFS at (800) 221-5672.
Shareholders maintaining Portfolio accounts through
brokerage firms and other institutions should be aware that such
institutions necessarily set deadlines for receipt of transaction
orders from their clients that are earlier than the transaction
times of the Portfolio itself so that the institutions may
properly process such orders prior to their transmittal to State
Street Bank and Trust Company ("State Street Bank"). Should an
investor place a transaction order with such an institution after
its deadline, the institution may not effect the order with the
Portfolio until the next business day. Accordingly, an investor
should familiarize himself or herself with the deadlines set by
his or her institution. For example, the Portfolio's Distributor
accepts purchase orders from its customers up to 2:15 p.m.,
Eastern time, for issuance at the 4:00 p.m., Eastern time,
transaction time and price. A brokerage firm acting on behalf of
a customer in connection with transactions in Portfolio shares is
subject to the same legal obligations imposed on it generally in
connection with transactions in securities for a customer,
including the obligation to act promptly and accurately.
Orders for the purchase of Portfolio shares become
effective at the next transaction time after Federal funds or
bank wire monies become available to State Street Bank for a
shareholder's investment. Federal funds are a bank's deposits in
a Federal Reserve Bank. These funds can be transferred by
Federal Reserve wire from the account of one member bank to that
of another member bank on the same day and are considered to be
immediately available funds; similar immediate availability is
accorded monies received at State Street Bank by bank wire.
Money transmitted by a check drawn on a member of the Federal
Reserve System is converted to Federal funds in one business day
following receipt. Checks drawn on banks which are not members
of the Federal Reserve System may take longer. All payments
42
<PAGE>
(including checks from individual investors) must be in United
States dollars.
All shares purchased are confirmed to each shareholder
and are credited to his or her account at the net asset value.
To avoid unnecessary expense to the Portfolio and to facilitate
the immediate redemption of shares, share certificates, for which
no charge is made, are not issued except upon the written request
of a shareholder. Certificates are not issued for fractional
shares. Shares for which certificates have been issued are not
eligible for any of the optional methods of withdrawal; namely,
the telephone, telegraph, checkwriting or periodic redemption
procedures. The Portfolio reserves the right to reject any
purchase order.
Arrangements for Telephone Redemptions. If you wish to
use the telephone redemption procedure, indicate this on your
Application Form and designate a bank and account number to
receive the proceeds of your withdrawals. If you decide later
that you wish to use this procedure, or to change instructions
already given, send a written notice to Alliance Fund Services,
Inc., P.O. Box 1520, Secaucus, New Jersey 07096-1520, with your
signature guaranteed by an institution which is an eligible
guarantor. For joint accounts, all owners must sign and have
their signatures guaranteed.
Retirement Plans. The Portfolio's objectives of safety
of principal, excellent liquidity and maximum current income to
the extent consistent with the first two objectives may make it a
suitable investment vehicle for part or all of the assets held in
various tax-deferred retirement plans. The Portfolio has
available forms of individual retirement account (IRA),
simplified employee pension plans (SEP), 403(b)(7) plans and
employer-sponsored retirement plans (Keogh or HR10 Plan).
Certain services described in this prospectus may not be
available to retirement accounts and plans. Persons desiring
information concerning these plans should write or telephone the
Fund or AFS at (800) 221-5672.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of The Equitable Life Assurance Society of the United
States, is the custodian under these plans. The custodian
charges a nominal account establishment fee and a nominal annual
maintenance fee. A portion of such fees is remitted to AFS to
compensate that organization for services rendered to retirement
plan accounts maintained with the Fund.
Periodic Distribution Plans. Without affecting your
right to use any of the methods of redemption described above, by
checking the appropriate boxes on the Application Form, you may
elect to participate additionally in the following plans without
43
<PAGE>
any separate charge. Under the Income Distribution Plan you
receive monthly payments of all the income earned in your Fund
account, with payments forwarded by check or electronically via
the Automated Clearing House ("ACH") network shortly after the
close of the month. Under the Systematic Withdrawal Plan, you
may request payments by check or electronically via the ACH
network in any specified amount of $50 or more each month or in
any intermittent pattern of months. If desired, you can order,
via a signature-guaranteed letter to the Portfolio , such
periodic payments to be sent to another person. Shareholders
wishing either of the above plans electronically through the ACH
network should write or telephone the Fund or AFS at
(800) 221-5672.
The Portfolio has the right to close out an account if
it has a zero balance on December 31 and no account activity for
the first six months of the subsequent year. Therefore, unless
this has occurred, a shareholder with a zero balance, when
reinvesting, should continue to use his account number.
Otherwise, the account should be re-opened pursuant to procedures
described above or through instructions given to a financial
intermediary.
A "business day," during which purchases and redemptions
of Portfolio shares can become effective and the transmittal of
redemption proceeds can occur, is considered for Portfolio
purposes as any weekday exclusive of New Year's Day, Martin
Luther King, Jr. Day, President's Day (observed), Good Friday,
Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day; if one of these holidays
falls on a Saturday or Sunday, purchases and redemptions will
likewise not be processed on the preceding Friday or the
following Monday, respectively. On any such day that is an
official bank holiday in Massachusetts, neither purchases nor
wired redemptions can become effective because Federal funds
cannot be received or sent by State Street Bank. On such days,
therefore, the Portfolio can only accept redemption orders for
which shareholders desire remittance by check. The right of
redemption may be suspended or the date of a redemption payment
postponed for any period during which the New York Stock Exchange
is closed (other than customary weekend and holiday closings),
when trading on the New York Stock Exchange is restricted, or an
emergency (as determined by the Commission) exists, or the
Commission has ordered such a suspension for the protection of
shareholders. The value of a shareholder's investment at the
time of redemption may be more or less than his or her cost,
depending on the market value of the securities held by the
Portfolio at such time and the income earned.
44
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_________________________________________________________________
DAILY DIVIDENDS - DETERMINATION OF NET ASSET VALUE
_________________________________________________________________
All net income of the Portfolio is determined after the
close of each business day, currently 4:00 p.m., Eastern time,
(and at such other times as the Trustees may determine) and is
paid immediately thereafter pro rata to shareholders of record of
the Portfolio via automatic investment in additional full and
fractional shares in each shareholder's account at the rate of
one share for each dollar distributed. As such additional shares
are entitled to dividends on following days, a compounding growth
of income occurs.
The Portfolio's net income consists of all accrued
interest income on Portfolio assets less expenses allocable to
the Portfolio (including accrued expenses and fees payable to the
Adviser) applicable to that dividend period. Realized gains and
losses are reflected in the Portfolio's net asset value and are
not included in net income. Net asset value per share of the
Portfolio is expected to remain constant at $1.00 since all net
income of each Portfolio is declared as a dividend each time net
income is determined and net realized gains and losses are
expected to be relatively small.
The valuation of the Portfolio's portfolio securities is
based upon their amortized cost which does not take into account
unrealized securities gains or losses as measured by market
valuations. The amortized cost method involves valuing an
instrument at its cost and thereafter applying a constant
amortization to maturity of any discount or premium, regardless
of the impact of fluctuating interest rates on the market value
of the instrument. During periods of declining interest rates,
the daily yield on shares of the Portfolio may be higher than
that of a fund with identical investments utilizing a method of
valuation based upon market prices for its portfolio instruments;
the converse would apply in a period of rising interest rates.
Pursuant to Rule 2a-7 the Portfolio currently treats a
municipal security which has a variable or floating rate of
interest as having a maturity equal to the period prescribed by
such rule. The Portfolio maintains procedures designed to
maintain, to the extent reasonably possible, the price per share
of each Portfolio as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the
Portfolio's portfolio holdings by the Trustees to the extent
required by Rule 2a-7 under the Act at such intervals as they
deem appropriate to determine whether and to what extent the net
asset value of the Portfolio calculated by using available market
quotations or market equivalents deviates from net asset value
45
<PAGE>
based on amortized cost. There can be no assurance, however,
that the Fund's net asset value per share will remain constant at
$1.00.
The net asset value of the shares of the Portfolio is
determined each business day (and on such other days as the
Trustees deem necessary) at 12:00 Noon and 4:00 p.m. Eastern
time. The net asset value per share of the Portfolio is
calculated by taking the sum of the value of the Portfolio's
investments and any cash or other assets, subtracting
liabilities, and dividing by the total number of shares of that
Portfolio outstanding. All expenses, including the fees payable
to the Adviser, are accrued daily.
_________________________________________________________________
TAXES
_________________________________________________________________
Federal Income Tax Considerations
The Portfolio intends to qualify each year to be taxed
as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), and, as such, will not be
liable for Federal income and excise taxes on the net income and
capital gains distributed to its shareholders. Since the
Portfolio intends to distribute all of its net income and capital
gains, the Portfolio should thereby avoid all Federal income and
excise taxes.
For shareholders' Federal income tax purposes,
distributions to shareholders out of tax-exempt interest income
earned by the Portfolio generally are not subject to Federal
income tax. See, however, "Investment Objectives and Policies-
Alternative Minimum Tax" above.
Distributions out of taxable interest income, other
investment income, and short-term capital gains are taxable to
shareholders as ordinary income. Since the Portfolio's
investment income is derived from interest rather than dividends,
no portion of its distributions is eligible for the dividends-
received deduction available to corporations. Long-term capital
gains, if any, distributed by the Portfolio to a shareholder are
taxable to the shareholder as long-term capital gain,
irrespective of the length of time he may have held his shares.
Distributions of short and long-term capital gains, if any, are
normally made once each year near calendar year-end, although
such distributions may be made more frequently if necessary in
order to maintain the Portfolio's net asset value at $1.00 per
share.
46
<PAGE>
Interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio is not deductible for
Federal income tax purposes. Under rules of the Internal Revenue
Service for determining when borrowed funds are used for
purchasing or carrying particular assets, shares may be
considered to have been purchased or carried with borrowed funds
even though those funds are not directly linked to the shares.
Further, persons who are "substantial users" (or related persons)
of facilities financed by private activity bonds (within the
meaning of Section 147(a) of the Code) should consult their tax
advisers before purchasing shares of the Portfolio.
Substantially all of the dividends paid by the Portfolio
are anticipated to be exempt from Federal income taxes. Shortly
after the close of each calendar year, a notice is sent to each
shareholder advising him of the total dividends paid into his
account for the year and the portion of such total that is exempt
from Federal income taxes. This portion is determined by the
ratio of the tax-exempt income to total income for the entire
year and, thus, is an annual average rather than a day-by-day
determination for each shareholder.
Pennsylvania Income and Stock/Franchise Tax Considerations
It is anticipated that substantially all of the
dividends paid by the Portfolio will be exempt from Pennsylvania
personal and fiduciary income taxes, the Philadelphia School
District investment net income tax and the Pennsylvania corporate
net income tax. Dividends will be exempt from such taxes to the
extent attributable to interest received from the Portfolio's
investments in Pennsylvania municipal securities and U.S.
Government securities. Distributions of capital gain from the
Portfolio are subject to Pennsylvania individual, fiduciary and
corporate income taxes, but are not taxable for purposes of the
Philadelphia School District income tax. Portfolio shares are
included for purposes of determining a corporation's capital
stock value subject to the Pennsylvania capital stock/franchise
tax.
_________________________________________________________________
GENERAL INFORMATION
_________________________________________________________________
Portfolio Transactions. Subject to the general
supervision of the Trustees of the Fund, the Adviser is
responsible for the investment decisions and the placing of the
orders for portfolio transactions for the Fund. Because the Fund
invests in securities with short maturities, there is a
relatively high portfolio turnover rate. However, the turnover
47
<PAGE>
rate does not have an adverse effect upon the net yield and net
asset value of the Fund's shares since the Fund's portfolio
transactions occur primarily with issuers, underwriters or major
dealers in money market instruments acting as principals. Such
transactions are normally on a net basis which do not involve
payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission paid
by the issuer to the underwriters; transactions with dealers
normally reflect the spread between bid and asked prices.
The Fund has no obligations to enter into transactions
in portfolio securities with any dealer, issuer, underwriter or
other entity. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Where
best price and execution may be obtained from more than one
dealer, the Adviser may, in its discretion, purchase and sell
securities through dealers who provide research, statistical and
other information to the Adviser. Such services may be used by
the Adviser for all of its investment advisory accounts and,
accordingly, not all such services may be used by the Adviser in
connection with the Fund. The supplemental information received
from a dealer is in addition to the services required to be
performed by the Adviser under the Advisory Agreement, and the
expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such information. During the fiscal
years ended June 30, 1997, 1998 and 1999, the Fund paid no
brokerage commissions.
Capitalization. All shares of the Fund, when issued,
are fully paid and non-assessable. The Trustees are authorized
to reclassify and issue any unissued shares to any number of
additional classes or series without shareholder approval.
Accordingly, the Trustees in the future, for reasons such as the
desire to establish one or more additional portfolios with
different investment objectives, policies or restrictions, may
create additional classes or series of shares. Any issuance of
shares of another class would be governed by the Investment
Company Act of 1940 and the law of the Commonwealth of
Massachusetts. Shares of the Portfolio are normally entitled to
one vote for all purposes. Generally, shares of all Portfolios
vote as a single series for the election of Trustees and on any
other matter affecting all Portfolios in substantially the same
manner. As to matters affecting the Portfolio differently, such
as approval of the Advisory Agreement and changes in investment
policy, shares of the Portfolio vote as a separate class.
Certain procedures for the removal by shareholders of trustees of
investment trusts, such as the Fund, are set forth in Section
16(c) of the Act.
At October 8, 1999, there were 3,359,900,731 shares of
beneficial interest of the Fund outstanding. Of this amount
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<PAGE>
1,202,876,823 were for the General Portfolio; 606,818,695 were
for the New York Portfolio; 803,381,526 were for the California
Portfolio; 153,332,963 were for the Connecticut Portfolio;
238,066,649 were for the New Jersey Portfolio; 127,384,063 were
for the Virginia Portfolio; 167,783,102 were for the Florida
Portfolio and 60,256,910 were for the Massachusetts Portfolio.
Shareholder Liability. Under Massachusetts law,
shareholders could, under certain circumstances, be held
personally liable for the obligations of the Fund. However, the
Agreement and Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund and requires that
the Trustees use their best efforts to ensure that notice of such
disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the trustees or
officers of the Fund. The Agreement and Declaration of Trust
provides for indemnification out of the property of the Fund for
all loss and expense of any shareholder of the Fund held
personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the
Fund would be unable to meet its obligations. In the view of the
Adviser, such risk is not material.
Legal Matters. The legality of the shares offered
hereby has been passed upon by Seward & Kissel LLP, New York, New
York, counsel for the Fund and the Adviser. Seward & Kissel LLP
has relied upon the opinion of Sullivan & Worcester, Boston,
Massachusetts, for matters relating to Massachusetts law.
Accountants. An opinion relating to the Portfolio's
financial statements is given herein by PricewaterhouseCoopers
LLP, New York, New York, independent accountants for the Fund.
Yield Quotations. Advertisements containing yield
quotations for the Portfolio may from time to time be sent to
investors or placed in newspapers, magazines or other media on
behalf of the Portfolio. These advertisements may quote
performance rankings, ratings or data from independent
organizations or financial publications such as Lipper, Inc.,
Morningstar, Inc., IBC's Money Fund Report, IBC's Money Market
Insight or Bank Rate Monitor or compare the Portfolio's
performance to bank money market deposit accounts, certificates
of deposit or various indices. Such yield quotations are
calculated in accordance with the standardized method referred to
in Rule 482 under the Securities Act.
Yield quotations for the Portfolio are thus determined
by (i) computing the net change over a seven-day period,
exclusive of the capital changes, in the value of a hypothetical
49
<PAGE>
pre-existing account having a balance of one share of the
Portfolio at the beginning of such period, (ii) dividing the net
change in account value by the value of the account at the
beginning of the base period to obtain the base period return,
and (iii) multiplying the base period return by (365/7) with the
resulting yield figure carried to the nearest hundredth of one
percent. The Portfolio's effective annual yield represents a
compounding of the annualized yield according to the formula:
effective yield = [(base period return + 1) 365/7] - 1.
Depending on an investor's tax bracket, an investor may
earn a substantially higher after-tax return from the Portfolio
than from comparable investments the income from which is
taxable.
Reports. You will receive semi-annual and annual
reports of the Fund as well as a monthly summary of your account.
You can arrange for a copy of each of your account statements to
be sent to other parties.
Additional Information. This Statement of Additional
Information does not contain all the information set forth in the
Registration Statement filed by the Fund with the Commission
under the Securities Act. Copies of the Registration Statement
may be obtained at a reasonable charge from the Commission or may
be examined, without charge, at the Commission's offices in
Washington, D.C.
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_________________________________________________________________
APPENDIX A
DESCRIPTION OF MUNICIPAL SECURITIES
_________________________________________________________________
Municipal Notes generally are used to provide for short-
term capital needs and usually have maturities of one year or
less. They include the following:
1. Project Notes, which carry a U.S. Government
guarantee, are issued by public bodies (called "local issuing
agencies") created under the laws of a state, territory, or U.S.
possession. They have maturities that range up to one year from
the date of issuance. Project Notes are backed by an agreement
between the local issuing agency and the Federal Department of
Housing and Urban Development. These Notes provide financing for
a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing
programs and renewal programs).
2. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are
issued in anticipation of various seasonal tax revenues, such as
income, sales, use and business taxes, and are payable from these
specific future taxes.
3. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenues, such as
Federal revenues available under the Federal Revenue Sharing
Programs.
4. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In
most cases, the long-term bonds then provide the money for the
repayment of the Notes.
5. Construction Loan Notes are sold to provide
construction financing. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
6. Tax-Exempt Commercial Paper is a short-term
obligation with a stated maturity of 365 days or less. It is
issued by agencies of state and local governments to finance
seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
A-1
<PAGE>
Municipal Bonds, which meet longer term capital needs
and generally have maturities of more than one year when issued,
have three principal classifications:
1. General Obligation Bonds are issued by such
entities as states, counties, cities, towns, and regional
districts. The proceeds of these obligations are used to fund a
wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer
systems. The basic security behind General Obligation Bonds is
the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. The taxes that can be
levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
2. Revenue Bonds generally are secured by the net
revenues derived from a particular facility, group of facilities,
or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue Bonds are issued to finance a
wide variety of capital projects including electric, gas, water
and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals.
Many of these Bonds provide additional security in the form of a
debt service reserve fund to be used to make principal and
interest payments. Housing authorities have a wide range of
security, including partially or fully insured mortgages, rent
subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability
(without obligation) to make up deficiencies in the debt service
reserve fund.
3. Industrial Development Bonds are considered
municipal bonds if the interest paid thereon is exempt from
Federal income tax and are issued by or on behalf of public
authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, sports, and
pollution control. These Bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such Bonds
is dependent solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of real and
personal property as security for such payment.
A-2
<PAGE>
_________________________________________________________________
APPENDIX B
DESCRIPTION OF SECURITIES RATING
_________________________________________________________________
Municipal and Corporate Bonds and Municipal Loans
The two highest ratings of Moody's Investors Service,
Inc. ("Moody's") for municipal and corporate bonds are Aaa and
Aa. Bonds rated Aaa are judged by Moody's to be of the best
quality. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. Moody's states that Aa
bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat
larger than Aaa securities. The generic rating Aa may be
modified by the addition of the numerals 1, 2 or 3. The modifier
1 indicates that the security ranks in the higher end of the Aa
rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower
end of such rating category.
The two highest ratings of Standard & Poor's Corporation
("Standard & Poor's") for municipal and corporate bonds are AAA
and AA. Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA have a
very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in a small degree. The
AA rating may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within that rating category.
Short-Term Municipal Loans
Moody's highest rating for short-term municipal loans is
MIG-1/VMIG-1. Moody's states that short-term municipal
securities rated MIG-1/VMIG-1 are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2
designation are of high quality, with margins of protection ample
although not so large as in the MIG-1/VMIG-1 group.
Standard & Poor's highest rating for short-term
municipal loans is SP-1. Standard & Poor's states that short-
term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those
issues rated SP-1 which are determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
B-1
<PAGE>
Issues rated SP-2 have satisfactory capacity to pay principal and
interest.
Other Municipal Securities and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for
other short-term municipal securities and commercial paper, and
"A-1+" and "A-1" are the two highest ratings for commercial paper
assigned by Standard & Poor's (Standard & Poor's does not rate
short-term tax-free obligations). Moody's uses the numbers 1, 2
and 3 to denote relative strength within its highest
classification of "Prime", while Standard & Poor's uses the
number 1+, 1, 2 and 3 to denote relative strength within its
highest classification of "A". Issuers rated "Prime" by Moody's
have the following characteristics: their short-term debt
obligations carry the smallest degree of investment risk, margins
of support for current indebtedness are large or stable with cash
flow and asset protection well assured, current liquidity
provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available.
While protective elements may change over the intermediate or
longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations.
Commercial paper issuers rated "A" by Standard & Poor's have the
following characteristics: liquidity ratios are better than
industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow are in an upward
trend. Typically, the issuer is a strong company in a well-
established industry and has superior management.
B-2
00250433.AC1
