<PAGE>
This is filed pursuant to Rule 497(c).
Files Nos. 33-7812 and 811-4791.
<PAGE>
<PAGE>
ALLIANCE MUNICIPAL
-----------------------------------------------------
INCOME PORTFOLIOS
-----------------------------------------------------
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
Prospectus and Application
February 3, 1997
National Portfolio Michigan Portfolio
Insured National Portfolio Minnesota Portfolio
Arizona Portfolio New Jersey Portfolio
California Portfolio New York Portfolio
Insured California Portfolio Ohio Portfolio
Florida Portfolio Pennsylvania Portfolio
Massachusetts Portfolio Virginia Portfolio
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
The Portfolios At A Glance............................ 2
Expense Information................................... 3
Financial Highlights.................................. 5
Description of the Portfolios........................ 14
Investment Objective.............................. 14
How the Portfolios Pursue Their Objective......... 14
Additional Investment Practices................... 16
Certain Fundamental Investment Policies........... 21
Risk Considerations............................... 21
Purchase and Sale of Shares.......................... 22
Management of the Funds.............................. 25
Dividends, Distributions and Taxes................... 26
General Information.................................. 28
</TABLE>
Adviser
Alliance Capital Management L.P.
1345 Avenue Of The Americas
New York, New York 10105
The fourteen Alliance Municipal Income Portfolios, by investing principally in
high-yielding, predominantly medium-quality municipal securities, seek to
provide their shareholders with the highest level of income exempt from Federal
and state tax that is available without assuming undue risk. These securities
generally offer current yields above those of higher quality municipal
obligations.
Each Portfolio is a series of Alliance Municipal Income Fund, Inc. or Alliance
Municipal Income Fund II (each a "Fund"), which are open-end management
investment companies. This Prospectus sets forth concisely the information which
a prospective investor should know about each Fund before investing. A
"Statement of Additional Information" for each Fund which provides further
information regarding certain matters discussed in this Prospectus and other
matters which may be of interest to some investors has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. For
a free copy, call or write Alliance Fund Services, Inc. at the indicated address
or call the "For Literature" telephone number shown above.
Each Portfolio offers three classes of shares which may be purchased at the
investor's choice at a price equal to their net asset value (i) plus an initial
sales charge imposed at the time of purchase (the "Class A shares"), (ii) with a
contingent deferred sales charge imposed on most redemptions made within three
years of purchase (the "Class B shares"), or (iii) without any initial or
contingent deferred sales charge (the "Class C shares"). See "Purchase and Sale
of Shares."
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[LOGO] Alliance(R)
Investing without the Mystery.(SM)
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
<PAGE>
The Portfolios At A Glance
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
ALLIANCE MUNICIPAL
INCOME PORTFOLIOS
National Portfolio
Insured National Portfolio
Arizona Portfolio
California Portfolio
Insured California Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
The Portfolios Seek...
High current tax-free income.
The National Portfolios Invest Principally in...
Diversified portfolios of medium-quality and investment grade municipal
securities.
The State Portfolios Invest Principally in...
Non-diversified portfolios of medium-quality and investment grade municipal
securities.
The Funds' Investment Manager Is...
Alliance Capital Management L.P. ("Alliance"), a global investment manager
providing diversified services to institutions and individuals through a broad
line of investments including more than 100 mutual funds. Since 1971, Alliance
has earned a reputation as a leader in the investment world with over $173
billion in assets under management as of September 30, 1996. Alliance provides
investment management services to employee benefit plans for 33 of the FORTUNE
100 companies.
The Type Of Investor Who May Want To Invest In These Portfolios Is...
An investor who wants tax-free income or is interested in the advantage of
tax-free investing. An investment in one of the Portfolios may soften the "tax
bite" because the income an investor earns is tax-free. Of course, bond prices
and yields will fluctuate with market conditions, so that your shares, when
redeemed, may be worth more or less than their original cost.
A Word About Risk...
The prices of the shares of the Alliance Municipal Income Portfolios will
fluctuate as the daily prices of the individual bonds in which they invest
fluctuate, so that your shares, when redeemed, may be worth more or less than
their original cost. Price fluctuations may be caused by changes in the general
level of interest rates or changes in bond credit quality ratings. Changes in
interest rates have a greater effect on bonds with longer maturities than those
with shorter maturities. While the Portfolios invest principally in bonds and
other fixed-income securities, in order to achieve their investment objectives,
the Portfolios may at times use certain types of derivative instruments, such as
options, futures, forwards and swaps. These involve risks different from, and,
in certain cases, greater than, the risks presented by more traditional
investments. These risks are fully discussed in this Prospectus. See
"Description of the Portfolios--Additional Investment Practices" and "--Risk
Considerations."
Getting Started...
Shares of the Portfolios are available through your financial representative and
most banks, insurance companies and brokerage firms nationwide. Shares can be
purchased for a minimum initial investment of $250, and subsequent investments
can be made for as little as $50. For detailed information about purchasing and
selling shares, see "Purchase and Sale of Shares." In addition, the Portfolios
offer several time and money saving services to investors. Be sure to ask your
financial representative about:
AUTOMATIC REINVESTMENT
AUTOMATIC INVESTMENT PROGRAM
SHAREHOLDER COMMUNICATIONS
DIVIDEND DIRECTION PLANS
AUTO EXCHANGE
SYSTEMATIC WITHDRAWALS
CHECKWRITING
A CHOICE OF PURCHASE PLANS
TELEPHONE TRANSACTIONS
24 HOUR INFORMATION
[LOGO] Alliance(R)
Investing without the Mystery.(SM)
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
2
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses are one of several factors to consider when you
invest in a Portfolio. The following table summarizes your maximum transaction
costs from investing in a Portfolio and annual expenses for each class of shares
of each Portfolio. For each Portfolio, the "Examples" to the right of the table
below show the cumulative expenses attributable to a hypothetical $1,000
investment in each class for the periods specified.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- ------------- --------------
<S> <C> <C> <C>
Maximum sales charge imposed on purchases (as a percentage
of offering price).............................................. 4.25% (A) None None
Sales charge imposed on dividend reinvestments.................. None None None
Deferred sales charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower)............... None 3.0% during the first year, 1% during the
decreasing 1.0% annually first year;
to 0% after the third year(b) 0% thereafter
Exchange fee.................................................... None None None
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reduced for larger purchases. Purchases of $1,000,000 or more are not
subject to an initial sales charge but may be subject to a 1% deferred
sales charge on redemptions within one year of purchase. See "Purchase and
Sale of Shares--How to Buy Shares" - page 22.
(b) Class B shares of each Portfolio automatically convert to Class A shares
after six years. See "Purchase and Sale of Shares--How to Buy Shares" -
page 22.
<TABLE>
<CAPTION>
Operating Expenses Examples
- -------------------------------------------------------------- ----------------------------------------------------------------
National Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .20% .20% .20% After 1 year $ 49 $ 44 $ 14 $ 24 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 64 $ 54 $ 44 $ 44 $ 44
Other expenses (a) .19% .20% .19% After 5 years $ 79 $ 77 $ 77 $ 76 $ 76
---- ---- ---- After 10 years $125 $131(c) $131(c) $167 $167
Total Portfolio
Operating expenses (b) .69% 1.40% 1.39%
==== ==== ====
<CAPTION>
Insured National Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .50% .50% .50% After 1 year $ 52 $ 48 $ 18 $ 27 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 74 $ 64 $ 54 $ 54 $ 54
Other expenses (a) .22% .23% .22% After 5 years $ 96 $ 94 $ 94 $ 93 $ 93
---- ---- ---- After 10 years $162 $168(c) $168(c) $203 $203
Total Portfolio
Operating expenses (b) 1.02% 1.73% 1.72%
==== ==== ====
<CAPTION>
Arizona Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 50 $ 45 $ 15 $ 25 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 66 $ 57 $ 47 $ 47 $ 47
Other expenses (after After 5 years $ 84 $ 81 $ 81 $ 81 $ 81
reimbursement) (a) .48% .48% .48% After 10 years $135 $140(c) $140(c) $177 $177
---- ---- ----
Total Portfolio
Operating expenses (b) .78% 1.48% 1.48%
==== ==== ====
<CAPTION>
California Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .35% .35% .35% After 1 year $ 50 $ 45 $ 15 $ 25 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 66 $ 56 $ 46 $ 46 $ 46
Other expenses (a) .12% .12% .12% After 5 years $ 83 $ 80 $ 80 $ 80 $ 80
---- ---- ---- After 10 years $134 $139(c) $139(c) $176 $176
Total Portfolio
Operating expenses (b) .77% 1.47% 1.47%
==== ==== ====
<CAPTION>
Insured California Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees .55% .55% .55% After 1 year $ 53 $ 48 $ 18 $ 28 $ 18
12b-1 fees .30% 1.00% 1.00% After 3 years $ 75 $ 66 $ 56 $ 56 $ 56
Other expenses (a) .23% .24% .23% After 5 years $100 $ 97 $ 97 $ 96 $ 96
---- ---- ---- After 10 years $169 $175(c) $175(c) $209 $209
Total Portfolio
Operating expenses 1.08% 1.79% 1.78%
==== ==== ====
<CAPTION>
Florida Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .11% .11% .11% After 1 year $ 50 $ 45 $ 15 $ 25 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 55 $ 45 $ 45 $ 45
Other expenses (a) .32% .32% .32% After 5 years $ 81 $ 78 $ 78 $ 78 $ 78
---- ---- ---- After 10 years $129 $135(c) $135(c) $171 $171
Total Portfolio
Operating expenses (b) .73% 1.43% 1.43%
==== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on page 4 and the discussion following these
tables on page 5.
3
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses Examples
- -------------------------------------------------------------- ----------------------------------------------------------------
Massachusetts Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 49 $ 43 $ 13 $ 23 $ 13
12b-1 fees .30% 1.00% 1.00% After 3 years $ 62 $ 52 $ 42 $ 42 $ 42
Other expenses (after After 5 years $ 76 $ 72 $ 72 $ 72 $ 72
reimbursement) (a) .32% .32% .31% After 10 years $117 $122(c) $122(c) $158 $158
---- ---- ----
Total Portfolio
Operating expenses (b) .62% 1.32% 1.31%
==== ==== ====
<CAPTION>
Michigan Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 52 $ 47 $ 17 $ 27 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 72 $ 62 $ 52 $ 52 $ 52
Other expenses (after After 5 years $ 93 $ 90 $ 90 $ 90 $ 90
reimbursement) (a) .66% .66% .66% After 10 years $155 $161(c) $161(c) $197 $197
---- ---- ----
Total Portfolio
Operating expenses (b) .96% 1.66% 1.66%
==== ==== ====
<CAPTION>
Minnesota Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 50 $ 44 $ 14 $ 24 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 55 $ 45 $ 45 $ 45
Other expenses (after After 5 years $ 81 $ 78 $ 78 $ 77 $ 77
reimbursement) (a) .42% .42% .41% After 10 years $128 $134(c) $134(c) $169 $169
---- ---- ----
Total Portfolio
Operating expenses (b) .72% 1.42% 1.41%
==== ==== ====
<CAPTION>
New Jersey Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .18% .18% .18% After 1 year $ 51 $ 46 $ 16 $ 25 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 68 $ 58 $ 48 $ 48 $ 48
Other expenses (a) .34% .35% .34% After 5 years $ 86 $ 83 $ 83 $ 83 $ 83
---- ---- ---- After 10 years $140 $146(c) $146(c) $181 $181
Total Portfolio
Operating expenses (b) .82% 1.53% 1.52%
==== ==== ====
<CAPTION>
New York Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .15% .15% .15% After 1 year $ 49 $ 44 $ 14 $ 24 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 62 $ 53 $ 43 $ 42 $ 42
Other expenses (a) .19% .20% .19% After 5 years $ 77 $ 74 $ 74 $ 73 $ 73
---- ---- ---- After 10 years $119 $125(c) $125(c) $161 $161
Total Portfolio
Operating expenses (b) .64% 1.35% 1.34%
==== ==== ====
<CAPTION>
Ohio Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .02% .02% .02% After 1 year $ 50 $ 45 $ 15 $ 25 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 56 $ 46 $ 46 $ 46
Other expenses (a) .43% .44% .43% After 5 years $ 82 $ 80 $ 80 $ 79 $ 79
---- ---- ---- After 10 years $132 $138(c) $138(c) $174 $174
Total Portfolio
Operating expenses (b) .75% 1.46% 1.45%
==== ==== ====
<CAPTION>
Pennsylvania Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .23% .23% .23% After 1 year $ 52 $ 47 $ 17 $ 27 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 73 $ 64 $ 54 $ 54 $ 54
Other expenses (a) .47% .48% .47% After 5 years $ 95 $ 93 $ 93 $ 92 $ 92
---- ---- ---- After 10 years $160 $166(c) $166(c) $201 $201
Total Portfolio
Operating expenses (b) 1.00% 1.71% 1.70%
==== ==== ====
<CAPTION>
Virginia Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C+ Class C++
------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 49 $ 44 $ 14 $ 24 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 63 $ 53 $ 43 $ 43 $ 43
Other expenses (after After 5 years $ 78 $ 75 $ 75 $ 75 $ 75
reimbursement) (a) .37% .37% .37% After 10 years $122 $128(c) $128(c) $165 $165
---- ---- ----
Total Portfolio
Operating expenses (b) .67% 1.37% 1.37%
==== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Assumes redemption at end of period.
++ Assumes no redemption at end of period.
(a) These expenses include a transfer agency fee payable to Alliance Fund
Services, Inc., an affiliate of Alliance, based on a fixed dollar amount
charged to the Portfolio for each shareholder's account.
(b) Net of any voluntary fee waiver and expense reimbursement.
(c) Assumes Class B shares converted to Class A shares after six years.
4
<PAGE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in a Portfolio will bear
directly or indirectly. Long-term shareholders of a Portfolio may pay aggregate
sales charges totaling more than the economic equivalent of the maximum initial
sales charges permitted by the Conduct Rules of the National Association of
Securities Dealers, Inc. See "Management of the Funds--Distribution Services
Agreements." The Rule 12b-1 fee for each class comprises a service fee not
exceeding .25% of the aggregate average daily net assets of the portfolio
attributable to the class and an asset-based sales charge equal to the remaining
portion of the Rule 12b-1 fee. The management fees listed in the above tables
are net of voluntary fee waivers and total expenses are, for certain funds, net
of expense reimbursements. Absent such waivers and reimbursements, (i) the
management fees for the National, Insured National, California and New York
Portfolios would have been .625%, .604%, .625% and .625% of daily average net
assets, respectively, and total portfolio operating expenses would have been
1.10%, 1.12%, 1.05% and 1.11% of daily average net assets, respectively, of the
Class A shares; 1.81%, 1.83%, 1.75% and 1.82% of daily average net assets,
respectively, of the Class B shares; and 1.80%, 1.82%, 1.75% and 1.81% of daily
net average net assets, respectively, of the Class C shares; and (ii) the
management fees for the Arizona, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, Ohio, Pennsylvania and Virginia Portfolios would have been .625% of
daily average net assets for each Portfolio, and total portfolio operating
expenses would have been 3.69%, 1.33%, 3.15%, 2.77%, 2.19%, 1.35%, 1.48%, 1.45%
and 5.18% of daily average net assets, respectively, of the Class A shares,
4.40%, 2.03%, 3.85%, 3.48%, 2.89%, 2.05%, 2.18%, 2.15% and 5.88% of daily
average net assets, respectively, of Class B shares, and 4.41%, 2.02%, 3.84%,
3.48%, 2.88%, 2.04%, 2.16%, 2.14% and 5.88% of daily average net assets for each
Portfolio's Class C shares. The examples set forth above assume reinvestment of
all dividends and distributions and utilize a 5% annual rate of return as
mandated by Commission regulations. The examples should not be considered
representative of past or future expenses; actual expenses may be greater or
less than those shown.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The tables on the following pages present, for each Portfolio, per share income
and capital changes for a share outstanding throughout each period indicated.
The information in the tables has been audited by Ernst & Young LLP, the Funds'
independent auditors, whose report thereon (referring to financial highlights)
appears in the Statement of Additional Information for each Fund. The following
information for each Fund should be read in conjunction with financial
statements and related notes which are included in each Fund's Statement of
Additional Information.
Further information about the Portfolios' performance is contained in each
Fund's annual report to shareholders, which may be obtained without charge by
contacting Alliance Fund Services, Inc. at the address or the "For Literature"
telephone number shown on the cover of this Prospectus.
5
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
--------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
National Portfolio
Class A
Year ended 10/31/96 .......... $10.45 $0.58 $0.06 $0.64 ($0.58) $0.00
Year ended 10/31/95 .......... 9.41 0.58 1.04 1.62 (0.58) 0.00
Year ended 10/31/94 .......... 11.05 0.57 (1.37) (0.80) (0.57) (0.24)
Year ended 10/31/93 .......... 10.19 0.61 0.88 1.49 (0.62) (0.01)
Year ended 10/31/92 .......... 9.96 0.65 0.28 0.93 (0.65) (0.05)
Year ended 10/31/91 .......... 9.47 0.66 0.49 1.15 (0.66) 0.00
Year ended 10/31/90 .......... 9.56 0.68 (0.07) 0.61 (0.68) (0.02)
Year ended 10/31/89 .......... 9.48 0.69 0.09 0.78 (0.70) 0.00
Year ended 10/31/88 .......... 8.61 0.71 0.86 1.57 (0.70) 0.00
12/29/86+ to 10/31/87 ........ 9.60 0.61 (0.99) (0.38) (0.61) 0.00
Class B
Year ended 10/31/96 .......... 10.45 0.51 0.06 0.57 (0.51) 0.00
Year ended 10/31/95 .......... 9.41 0.51 1.04 1.55 (0.51) 0.00
Year ended 10/31/94 .......... 11.05 0.50 (1.38) (0.88) (0.50) (0.24)
1/4/93+ to 10/31/93 .......... 10.43 0.44 0.63 1.07 (0.45) 0.00
Class C
Year ended 10/31/96 .......... 10.45 0.51 0.06 0.57 (0.51) 0.00
Year ended 10/31/95 .......... 9.41 0.51 1.04 1.55 (0.51) 0.00
Year ended 10/31/94 .......... 11.05 0.50 (1.38) (0.88) (0.50) (0.24)
5/3/93+ to 10/31/93 .......... 10.70 0.26 0.36 0.62 (0.27) 0.00
Insured National Portfolio
Class A
Year ended 10/31/96 .......... $10.07 $0.51 $0.22 $0.73 ($0.52) $0.00
Year ended 10/31/95 .......... 8.96 0.51 1.13 1.64 (0.51) 0.00
Year ended 10/31/94 .......... 10.76 0.53 (1.40) (0.87) (0.53) (0.39)
Year ended 10/31/93 .......... 9.87 0.56 0.96 1.52 (0.57) (0.06)
Year ended 10/31/92 .......... 9.88 0.60 0.15 0.75 (0.60) (0.16)
Year ended 10/31/91 .......... 9.39 0.61 0.49 1.10 (0.61) 0.00
Year ended 10/31/90 .......... 9.49 0.62 (0.03) 0.59 (0.62) (0.07)
Year ended 10/31/89 .......... 9.38 0.62 0.11 0.73 (0.62) 0.00
Year ended 10/31/88 .......... 8.62 0.62 0.76 1.38 (0.62) 0.00
12/29/86+ to 10/31/87 ........ 9.60 0.57 (0.98) (0.41) (0.57) 0.00
Class B
Year ended 10/31/96 .......... 10.07 0.44 0.22 0.66 (0.45) 0.00
Year ended 10/31/95 .......... 8.96 0.45 1.12 1.57 (0.45) 0.00
Year ended 10/31/94 .......... 10.76 0.46 (1.40) (0.94) (0.46) (0.39)
1/4/93+ to 10/31/93 .......... 10.10 0.40 0.66 1.06 (0.40) 0.00
Class C
Year ended 10/31/96 .......... 10.07 0.44 0.22 0.66 (0.45) 0.00
Year ended 10/31/95 .......... 8.96 0.45 1.12 1.57 (0.45) 0.00
Year ended 10/31/94 .......... 10.76 0.46 (1.40) (0.94) (0.46) (0.39)
5/3/93+ to 10/31/93 .......... 10.41 0.24 0.35 0.59 (0.24) 0.00
Arizona Portfolio
Class A
Year ended 9/30/96 ........... $10.29 $0.55 $0.14 $0.69 ($0.55) ($0.08)
Year ended 9/30/95 ........... 9.77 0.56 0.53 1.09 (0.56) 0.00
6/1/94+ to 9/30/94 ........... 10.00 0.20 (0.23) (0.03) (0.20) 0.00
Class B
Year ended 9/30/96 ........... 10.29 0.47 0.14 0.61 (0.47) (0.08)
Year ended 9/30/95 ........... 9.77 0.49 0.53 1.02 (0.49) 0.00
6/1/94+ to 9/30/94 ........... 10.00 0.18 (0.24) (0.06) (0.17) 0.00
Class C
Year ended 9/30/96 ........... 10.30 0.47 0.13 0.60 (0.47) (0.08)
Year ended 9/30/95 ........... 9.77 0.49 0.54 1.03 (0.49) 0.00
6/1/94+ to 9/30/94 ........... 10.00 0.17 (0.23) (0.06) (0.17) 0.00
California Portfolio
Class A
Year ended 10/31/96 .......... $10.45 $0.58 $0.14 $0.72 ($0.58) $0.00
Year ended 10/31/95 .......... 9.43 0.59 1.02 1.61 (0.59) 0.00
Year ended 10/31/94 .......... 10.90 0.59 (1.41) (0.82) (0.59) (0.06)
Year ended 10/31/93 .......... 10.06 0.61 0.85 1.46 (0.61) (0.01)
Year ended 10/31/92 .......... 9.97 0.65 0.13 0.78 (0.65) (0.04)
Year ended 10/31/91 .......... 9.58 0.67 0.39 1.06 (0.67) 0.00
Year ended 10/31/90 .......... 9.65 0.68 (0.03) 0.65 (0.68) (0.04)
Year ended 10/31/89 .......... 9.49 0.68 0.17 0.85 (0.69) 0.00
Year ended 10/31/88 .......... 8.73 0.70 0.75 1.45 (0.69) 0.00
12/29/86+ to 10/31/87 ........ 9.60 0.58 (0.87) (0.29) (0.58) 0.00
Class B
Year ended 10/31/96 .......... 10.45 0.51 0.14 0.65 (0.51) 0.00
Year ended 10/31/95 .......... 9.43 0.51 1.02 1.53 (0.51) 0.00
Year ended 10/31/94 .......... 10.90 0.52 (1.41) (0.89) (0.52) (0.06)
1/4/93+ to 10/31/93 .......... 10.27 0.44 0.63 1.07 (0.44) 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on pages 12 and 13.
6
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
- --------------- ------------- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 ($0.58) $10.51 6.32% $325,288 0.69%(a) 5.55% 137%
0.00 (0.58) 10.45 17.73 338,311 0.71 (a) 5.84 118
(0.03) (0.84) 9.41 (7.65) 338,814 0.62 (a) 5.61 110
0.00 (0.63) 11.05 14.94 386,484 0.65 (a) 5.69 233
0.00 (0.70) 10.19 9.60 261,895 0.83 (a) 6.35 86
0.00 (0.66) 9.96 12.55 207,167 0.75 (a) 6.81 64
0.00 (0.70) 9.47 6.52 185,832 0.60 (a) 7.06 105
0.00 (0.70) 9.56 8.55 127,149 0.38 (a) 7.25 216
0.00 (0.70) 9.48 18.87 59,357 0.40 (a) 7.71 261
0.00 (0.61) 8.61 (4.14) 20,704 0.50 (a)* 7.71* 181
0.00 (0.51) 10.51 5.61 214,994 1.40 (a) 4.85 137
0.00 (0.51) 10.45 16.91 252,357 1.42 (a) 5.13 118
(0.02) (0.76) 9.41 (8.34) 250,391 1.32 (a) 4.91 110
0.00 (0.45) 11.05 10.43 216,489 1.36 (a)* 4.59* 233
0.00 (0.51) 10.51 5.62 96,134 1.39 (a) 4.85 137
0.00 (0.51) 10.45 16.93 108,068 1.41 (a) 5.16 118
(0.02) (0.76) 9.41 (8.33) 133,249 1.31 (a) 4.89 110
0.00 (0.27) 11.05 5.84 150,953 1.36 (a)* 4.17* 233
$0.00 ($0.52) $10.28 7.43% $160,425 1.02%(b) 5.04% 157%
(0.02) (0.53) 10.07 18.72 165,548 1.01 (b) 5.37 171
(0.01) (0.93) 8.96 (8.69) 153,656 0.66 (b) 5.40 149
0.00 (0.63) 10.76 15.82 185,876 0.73 (b) 5.40 165
0.00 (0.76) 9.87 7.88 149,632 0.81 (b) 6.04 105
0.00 (0.61) 9.88 12.08 130,723 0.92 (b) 6.34 96
0.00 (0.69) 9.39 6.44 118,240 0.92 (b) 6.56 69
0.00 (0.62) 9.49 8.07 107,740 1.05 (b) 6.61 91
0.00 (0.62) 9.38 16.56 103,864 1.32 6.93 173
0.00 (0.57) 8.62 (4.48) 103,426 1.20 (b)* 6.87* 105
0.00 (0.45) 10.28 6.74 52,156 1.73 (b) 4.32 157
(0.01) (0.46) 10.07 17.91 58,990 1.72 (b) 4.65 171
(0.01) (0.86) 8.96 (9.38) 51,439 1.37 (b) 4.71 149
0.00 (0.40) 10.76 10.68 42,954 1.45 (b)* 4.31* 165
0.00 (0.45) 10.28 6.74 22,763 1.72 (b) 4.34 157
(0.01) (0.46) 10.07 17.91 22,265 1.71 (b) 4.69 171
(0.01) (0.86) 8.96 (9.38) 24,112 1.36 (b) 4.68 149
0.00 (0.24) 10.76 5.75 28,862 1.45 (b)* 3.98* 165
($0.03) ($0.66) $10.32 6.84% $4,409 0.78%(c) 5.33% 244%
(0.01) (0.57) 10.29 11.56 2,379 0.78 (c) 5.56 85
0.00 (0.20) 9.77 (0.35) 930 0.78 (c)* 5.82* 81
(0.03) (0.58) 10.32 6.10 5,199 1.48 (c) 4.62 244
(0.01) (0.50) 10.29 10.78 3,166 1.48 (c) 4.89 85
0.00 (0.17) 9.77 (0.58) 1,677 1.48 (c)* 5.13* 81
(0.03) (0.58) 10.32 6.00 710 1.48 (c) 4.61 244
(0.01) (0.50) 10.30 10.89 481 1.48 (c) 4.90 85
0.00 (0.17) 9.77 (0.58) 485 1.48 (c)* 4.70* 81
$0.00 ($0.58) $10.59 7.15% $460,444 0.77%(d) 5.57% 49%
0.00 (0.59) 10.45 17.55 478,535 0.74 (d) 5.90 39
0.00 (0.65) 9.43 (7.73) 470,308 0.64 (d) 5.78 45
0.00 (0.62) 10.90 14.90 531,293 0.74 (d) 5.74 83
0.00 (0.69) 10.06 8.05 361,661 0.59 (d) 6.38 77
0.00 (0.67) 9.97 11.42 228,755 0.39 (d) 6.80 106
0.00 (0.72) 9.58 7.03 143,557 0.39 (d) 7.04 88
0.00 (0.69) 9.65 9.25 92,000 0.53 (d) 7.03 193
0.00 (0.69) 9.49 17.14 34,112 0.40 (d) 7.45 196
0.00 (0.57) 8.73 (3.14) 7,200 0.50 (d)* 7.28* 197
0.00 (0.51) 10.59 6.37 164,895 1.47 (d) 4.87 49
0.00 (0.51) 10.45 16.64 166,759 1.45 (d) 5.19 39
0.00 (0.58) 9.43 (8.43) 160,879 1.35 (d) 5.07 45
0.00 (0.44) 10.90 10.60 126,688 1.44 (d)* 4.66* 83
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
--------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
California Portfolio (cont'd)
Class C
Year ended 10/31/96 .......... $10.45 $0.51 $0.14 $0.65 ($0.51) $0.00
Year ended 10/31/95 .......... 9.43 0.51 1.02 1.53 (0.51) 0.00
Year ended 10/31/94 .......... 10.90 0.52 (1.41) (0.89) (0.52) (0.06)
5/3/93+ to 10/31/93 .......... 10.54 0.26 0.36 0.62 (0.26) 0.00
Insured California Portfolio
Class A
Year ended 10/31/96 .......... $13.32 $0.69 $0.06 $0.75 ($0.68) $0.00
Year ended 10/31/95 .......... 11.79 0.68 1.54 2.22 (0.68) 0.00
Year ended 10/31/94 .......... 14.25 0.69 (1.99) (1.30) (0.69) (0.47)
Year ended 10/31/93 .......... 12.99 0.70 1.30 2.00 (0.71) (0.03)
Year ended 10/31/92 .......... 12.80 0.76 0.18 0.94 (0.75) 0.00
Year ended 10/31/91 .......... 12.19 0.77 0.61 1.38 (0.77) 0.00
Year ended 10/31/90 .......... 12.23 0.78 (0.04) 0.74 (0.78) 0.00
Year ended 10/31/89 .......... 12.18 0.79 0.06 0.85 (0.80) 0.00
Year ended 10/31/88 .......... 11.25 0.85 0.92 1.77 (0.84) 0.00
Ten months ended 10/31/87 .... 13.06 0.73 (1.69) (0.96) (0.73) (0.12)
Class B
Year ended 10/31/96 .......... 13.32 0.60 0.05 0.65 (0.58) 0.00
Year ended 10/31/95 .......... 11.79 0.58 1.54 2.12 (0.58) 0.00
Year ended 10/31/94 .......... 14.25 0.60 (2.00) (1.40) (0.59) (0.47)
1/4/93+ to 10/31/93 .......... 13.37 0.49 0.89 1.38 (0.50) 0.00
Class C
Year ended 10/31/96 .......... 13.32 0.60 0.05 0.65 (0.58) 0.00
Year ended 10/31/95 .......... 11.79 0.58 1.54 2.12 (0.58) 0.00
Year ended 10/31/94 .......... 14.25 0.60 (2.00) (1.40) (0.59) (0.47)
5/3/93+ to 10/31/93 .......... 13.78 0.29 0.48 0.77 (0.30) 0.00
Florida Portfolio
Class A
Year ended 9/30/96 ........... $9.58 $0.54 $0.16 $0.70 ($0.54) $0.00
Year ended 9/30/95 ........... 8.89 0.55 0.69 1.24 (0.55) 0.00
Year ended 9/30/94 ........... 10.25 0.55 (1.35) (0.80) (0.55) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.16 0.25 0.41 (0.16) 0.00
Class B
Year ended 9/30/96 ........... 9.58 0.47 0.17 0.64 (0.47) 0.00
Year ended 9/30/95 ........... 8.89 0.47 0.70 1.17 (0.47) 0.00
Year ended 9/30/94 ........... 10.25 0.48 (1.35) (0.87) (0.48) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.14 0.25 0.39 (0.14) 0.00
Class C
Year ended 9/30/96 ........... 9.58 0.47 0.17 0.64 (0.47) 0.00
Year ended 9/30/95 ........... 8.89 0.47 0.70 1.17 (0.47) 0.00
Year ended 9/30/94 ........... 10.25 0.48 (1.35) (0.87) (0.48) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.14 0.25 0.39 (0.14) 0.00
Massachusetts Portfolio
Class A
Year ended 9/30/96 ........... $10.50 $0.60 $0.44 $1.04 ($0.59) ($0.08)
Year ended 9/30/95 ........... 10.12 0.58 0.41 0.99 (0.58) 0.00
3/29/94+ to 9/30/94 .......... 10.00 0.31 0.11 0.42 (0.30) 0.00
Class B
Year ended 9/30/96 ........... 10.49 0.52 0.45 0.97 (0.52) (0.08)
Year ended 9/30/95 ........... 10.12 0.52 0.39 0.91 (0.52) 0.00
3/3/94+ to 9/30/94 ........... 10.00 0.27 0.11 0.38 (0.26) 0.00
Class C
Year ended 9/30/96 ........... 10.49 0.52 0.45 0.97 (0.52) (0.08)
Year ended 9/30/95 ........... 10.12 0.52 0.39 0.91 (0.52) 0.00
3/29/94+ to 9/30/94 .......... 10.00 0.25 0.13 0.38 (0.26) 0.00
Michigan Portfolio
Class A
Year ended 10/31/96 .......... $10.10 $0.52 $0.22 $0.74 ($0.52) ($0.17)
Year ended 10/31/95 .......... 9.35 0.52 0.78 1.30 (0.52) 0.00
2/25/94+ to 10/31/94 ......... 10.00 0.33 (0.65) (0.32) (0.33) 0.00
Class B
Year ended 10/31/96 .......... 10.10 0.45 0.22 0.67 (0.45) (0.17)
Year ended 10/31/95 .......... 9.35 0.45 0.78 1.23 (0.45) 0.00
2/25/94+ to 10/31/94 ......... 10.00 0.29 (0.65) (0.36) (0.29) 0.00
Class C
Year ended 10/31/96 .......... 10.10 0.45 0.22 0.67 (0.45) (0.17)
Year ended 10/31/95 .......... 9.35 0.45 0.78 1.23 (0.45) 0.00
2/25/94+ to 10/31/94 ......... 10.00 0.29 (0.65) (0.36) (0.29) 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on pages 12 and 13.
8
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
- --------------- ------------- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 ($0.51) $10.59 6.38% $ 90,917 1.47%(d) 4.87% 49%
0.00 (0.51) 10.45 16.64 87,793 1.44 (d) 5.22 39
0.00 (0.58) 9.43 (8.43) 103,622 1.34 (d) 5.06 45
0.00 (0.26) 10.90 5.98 117,379 1.44 (d)* 4.42* 83
$0.00 ($0.68) $13.39 5.79% $101,542 1.08% 5.19% 118%
(0.01) (0.69) 13.32 19.29 103,940 1.04 (e) 5.34 103
0.00 (1.16) 11.79 (9.73) 94,857 0.82 (e) 5.29 100
0.00 (0.74) 14.25 15.64 120,734 0.94 (e) 5.06 186
0.00 (0.75) 12.99 7.52 90,477 0.78 (e) 5.77 60
0.00 (0.77) 12.80 11.62 69,757 0.79 (e) 6.13 59
0.00 (0.78) 12.19 6.29 56,933 0.86 (e) 6.42 104
0.00 (0.80) 12.23 7.24 53,302 0.90 (e) 6.43 100
0.00 (0.84) 12.18 16.27 46,017 0.32 (e) 7.27 112
0.00 (0.85) 11.25 16.18 25,254 0.10 (e)* 7.56* 116
0.00 (0.58) 13.39 4.99 26,696 1.79 4.49 118
(0.01) (0.59) 13.32 18.35 27,816 1.74 (e) 4.61 103
0.00 (1.06) 11.79 (10.43) 24,591 1.53 (e) 4.60 100
0.00 (0.50) 14.25 10.43 21,234 1.65 (e)* 3.85* 186
0.00 (0.58) 13.39 4.99 12,826 1.78 4.49 118
(0.01) (0.59) 13.32 18.35 14,323 1.74 (e) 4.64 103
0.00 (1.06) 11.79 (10.43) 12,472 1.52 (e) 4.59 100
0.00 (0.30) 14.25 5.63 15,971 1.65 (e)* 3.74* 186
($0.01) ($0.55) $9.73 7.45% $14,297 0.73%(f) 5.52% 237%
0.00 (0.55) 9.58 14.44 11,956 0.73 (f) 5.91 146
0.00 (0.56) 8.89 (8.03) 8,227 0.38 (f) 5.70 185
0.00 (0.16) 10.25 4.10 4,145 0.00 (f)* 5.44* 82
(0.01) (0.48) 9.74 6.78 22,235 1.43 (f) 4.81 237
(0.01) (0.48) 9.58 13.56 20,660 1.42 (f) 5.22 146
0.00 (0.49) 8.89 (8.72) 18,048 1.08 (f) 4.99 185
0.00 (0.14) 10.25 3.91 9,588 0.61 (f)* 4.74* 82
(0.01) (0.48) 9.74 6.78 30,121 1.43 (f) 4.81 237
(0.01) (0.48) 9.58 13.56 30,787 1.42 (f) 5.27 146
0.00 (0.49) 8.89 (8.72) 42,405 1.08 (f) 4.97 185
0.00 (0.14) 10.25 3.91 28,249 0.61 (f)* 4.74* 82
($0.02) ($0.69) $10.85 10.25% $3,211 0.62%(g) 5.62% 246%
(0.03) (0.61) 10.50 10.19 1,337 0.60 (g) 5.67 155
0.00 (0.30) 10.12 4.14 565 0.60 (g)* 5.98* 146
(0.02) (0.62) 10.84 9.52 3,683 1.32 (g) 4.93 246
(0.02) (0.54) 10.49 9.32 1,754 1.30 (g) 4.90 155
0.00 (0.26) 10.12 3.78 725 1.30 (g)* 5.13* 146
(0.02) (0.62) 10.84 9.52 4,514 1.31 (g) 4.88 246
(0.02) (0.54) 10.49 9.32 2,556 1.30 (g) 4.85 155
0.00 (0.26) 10.12 3.78 774 1.30 (g)* 4.00* 146
($0.03) ($0.72) $10.12 7.54% $6,123 0.96%(h) 5.21% 242%
(0.03) (0.55) 10.10 14.40 5,158 1.36 (h) 5.27 151
0.00 (0.33) 9.35 (3.24) 2,473 0.93 (h)* 5.83* 222
(0.03) (0.65) 10.12 6.80 3,553 1.66 (h) 4.51 242
(0.03) (0.48) 10.10 13.58 2,424 2.06 (h) 4.57 151
0.00 (0.29) 9.35 (3.65) 1,722 1.63 (h)* 4.93* 222
(0.03) (0.65) 10.12 6.80 3,940 1.66 (h) 4.50 242
(0.03) (0.48) 10.10 13.58 2,886 2.06 (h) 4.69 151
0.00 (0.29) 9.35 (3.65) 2,778 1.63 (h)* 4.92* 222
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
--------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Minnesota Portfolio
Class A
Year ended 9/30/96 ........... $9.49 $0.53 $0.11 $0.64 ($0.53) $0.00
Year ended 9/30/95 ........... 9.19 0.53 0.32 0.85 (0.53) 0.00
Year ended 9/30/94 ........... 10.28 0.55 (1.09) (0.54) (0.55) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.15 0.28 0.43 (0.15) 0.00
Class B
Year ended 9/30/96 ........... 9.49 0.46 0.11 0.57 (0.46) 0.00
Year ended 9/30/95 ........... 9.18 0.46 0.33 0.79 (0.46) 0.00
Year ended 9/30/94 ........... 10.28 0.48 (1.10) (0.62) (0.48) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.28 0.41 (0.13) 0.00
Class C
Year ended 9/30/96 ........... 9.50 0.46 0.10 0.56 (0.46) 0.00
Year ended 9/30/95 ........... 9.19 0.46 0.33 0.79 (0.46) 0.00
Year ended 9/30/94 ........... 10.27 0.48 (1.08) (0.60) (0.48) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.27 0.40 (0.13) 0.00
New Jersey Portfolio
Class A
Year ended 9/30/96 ........... $9.65 $0.51 $0.11 $0.62 ($0.51) $0.00
Year ended 9/30/95 ........... 9.07 0.54 0.59 1.13 (0.54) 0.00
Year ended 9/30/94 ........... 10.29 0.55 (1.22) (0.67) (0.55) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.15 0.29 0.44 (0.15) 0.00
Class B
Year ended 9/30/96 ........... 9.66 0.44 0.10 0.54 (0.45) 0.00
Year ended 9/30/95 ........... 9.07 0.47 0.60 1.07 (0.47) 0.00
Year ended 9/30/94 ........... 10.28 0.48 (1.21) (0.73) (0.48) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.28 0.41 (0.13) 0.00
Class C
Year ended 9/30/96 ........... 9.66 0.44 0.10 0.54 (0.45) 0.00
Year ended 9/30/95 ........... 9.07 0.47 0.60 1.07 (0.47) 0.00
Year ended 9/30/94 ........... 10.28 0.48 (1.21) (0.73) (0.48) 0.00
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.28 0.41 (0.13) 0.00
New York Portfolio
Class A
Year ended 10/31/96 .......... $9.62 $0.55 $0.04 $0.59 ($0.55) $0.00
Year ended 10/31/95 .......... 8.72 0.55 0.90 1.45 (0.55) 0.00
Year ended 10/31/94 .......... 10.17 0.55 (1.40) (0.85) (0.55) (0.04)
Year ended 10/31/93 .......... 9.53 0.57 0.79 1.36 (0.58) (0.14)
Year ended 10/31/92 .......... 9.30 0.60 0.24 0.84 (0.60) (0.01)
Year ended 10/31/91 .......... 8.78 0.62 0.52 1.14 (0.62) 0.00
Year ended 10/31/90 .......... 8.92 0.64 (0.14) 0.50 (0.64) 0.00
Year ended 10/31/89 .......... 8.88 0.65 0.04 0.69 (0.65) 0.00
Year ended 10/31/88 .......... 8.11 0.65 0.77 1.42 (0.65) 0.00
12/29/86+ to 10/31/87 ........ 9.60 0.58 (1.49) (0.91) (0.58) 0.00
Class B
Year ended 10/31/96 .......... 9.62 0.48 0.04 0.52 (0.48) 0.00
Year ended 10/31/95 .......... 8.72 0.48 0.90 1.38 (0.48) 0.00
Year ended 10/31/94 .......... 10.17 0.48 (1.41) (0.93) (0.47) (0.04)
1/4/93+ to 10/31/93 .......... 9.61 0.41 0.56 0.97 (0.41) 0.00
Class C
Year ended 10/31/96 .......... 9.62 0.48 0.04 0.52 (0.48) 0.00
Year ended 10/31/95 .......... 8.72 0.48 0.90 1.38 (0.48) 0.00
Year ended 10/31/94 .......... 10.17 0.48 (1.41) (0.93) (0.47) (0.04)
5/3/93+ to 10/31/93 .......... 9.89 0.24 0.29 0.53 (0.25) 0.00
Ohio Portfolio
Class A
Year ended 9/30/96 ........... $9.53 $0.52 $0.11 $0.63 ($0.53) $0.00
Year ended 9/30/95 ........... 9.06 0.54 0.48 1.02 (0.54) 0.00
Year ended 9/30/94 ........... 10.26 0.55 (1.19) (0.64) (0.55) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.15 0.26 0.41 (0.15) 0.00
Class B
Year ended 9/30/96 ........... 9.54 0.46 0.09 0.55 (0.46) 0.00
Year ended 9/30/95 ........... 9.06 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94 ........... 10.26 0.48 (1.19) (0.71) (0.48) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.26 0.39 (0.13) 0.00
Class C
Year ended 9/30/96 ........... 9.54 0.46 0.09 0.55 (0.46) 0.00
Year ended 9/30/95 ........... 9.06 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94 ........... 10.26 0.48 (1.19) (0.71) (0.48) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.13 0.26 0.39 (0.13) 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the footnotes on pages 12 and 13.
10
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
- --------------- ------------- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
($0.02) ($0.55) $9.58 6.95% $ 3,165 0.72% (i) 5.54% 195%
(0.02) (0.55) 9.49 9.63 2,414 0.71 (i) 5.71 117
0.00 (0.55) 9.19 (5.35) 2,125 0.09 (i) 5.71 143
0.00 (0.15) 10.28 4.34 994 0.00 (i)* 5.20* 61
(0.02) (0.48) 9.58 6.15 8,291 1.42 (i) 4.82 195
(0.02) (0.48) 9.49 8.90 7,299 1.42 (i) 4.97 117
0.00 (0.48) 9.18 (6.15) 6,150 0.80 (i) 5.00 143
0.00 (0.13) 10.28 4.16 2,665 0.43 (i)* 4.50* 61
(0.02) (0.48) 9.58 6.03 6,553 1.41 (i) 4.82 195
(0.02) (0.48) 9.50 8.89 7,305 1.41 (i) 5.05 117
0.00 (0.48) 9.19 (5.95) 9,489 0.79 (i) 4.90 143
0.00 (0.13) 10.27 4.06 6,697 0.43 (i)* 4.50 61
($0.04) ($0.55) $9.72 6.57% $15,520 0.82% (j) 5.26% 132%
(0.01) (0.55) 9.65 12.91 11,612 0.82 (j) 5.73 86
0.00 (0.55) 9.07 (6.67) 9,257 0.20 (j) 5.65 171
0.00 (0.15) 10.29 4.44 6,679 0.00 (j)* 5.37* 47
(0.03) (0.48) 9.72 5.66 39,099 1.53 (j) 4.56 132
(0.01) (0.48) 9.66 12.15 34,695 1.53 (j) 5.03 86
0.00 (0.48) 9.07 (7.28) 30,459 0.91 (j) 4.96 171
0.00 (0.13) 10.28 4.16 15,637 0.63 (j)* 4.67* 47
(0.03) (0.48) 9.72 5.66% 22,579 1.52 (j) 4.56 132
(0.01) (0.48) 9.66 12.14 21,255 1.52 (j) 5.09 86
0.00 (0.48) 9.07 (7.28) 26,472 0.90 (j) 4.93 171
0.00 (0.13) 10.28 4.16 21,193 0.63 (j)* 4.67* 47
$0.00 ($0.55) $9.66 6.30% $179,452 0.64% (k) 5.66% 64%
0.00 (0.55) 9.62 17.10 183,987 0.75 (k) 5.93 69
(0.01) (0.60) 8.72 (8.76) 182,170 0.66 (k) 5.75 69
0.00 (0.72) 10.17 14.71 214,259 0.68 (k) 5.76 63
0.00 (0.61) 9.53 9.39 162,549 0.70 (k) 6.37 69
0.00 (0.62) 9.30 13.36 136,484 0.65 (k) 6.81 48
0.00 (0.64) 8.78 5.71 118,875 0.44 (k) 7.08 101
0.00 (0.65) 8.92 8.03 70,766 0.37 (k) 7.14 119
0.00 (0.65) 8.88 18.08 27,731 0.43 (k) 7.43 146
0.00 (0.58) 8.11 (9.77) 9,985 0.20 (k)* 7.68* 210
0.00 (0.48) 9.66 5.52 96,959 1.35 (k) 4.95 64
0.00 (0.48) 9.62 16.19 94,400 1.45 (k) 5.21 69
(0.01) (0.52) 8.72 (9.44) 81,941 1.36 (k) 5.05 69
0.00 (0.41) 10.17 10.29 58,504 1.39 (k)* 4.70* 63
0.00 (0.48) 9.66 5.52 34,562 1.34 (k) 4.95 64
0.00 (0.48) 9.62 16.19 32,259 1.44 (k) 5.24 69
(0.01) (0.52) 8.72 (9.44) 34,646 1.36 (k) 5.03 69
0.00 (0.25) 10.17 5.37 38,245 1.38 (k)* 4.42* 63
($0.02) ($0.55) $9.61 6.72% $6,054 0.75% (l) 5.47% 182%
(0.01) (0.55) 9.53 11.63 4,170 0.75 (l) 5.74 108
0.00 (0.56) 9.06 (6.44) 2,810 0.04 (l) 5.67 161
0.00 (0.15) 10.26 4.15 1,050 0.00 (l)* 5.30* 55
(0.02) (0.48) 9.61 5.82 25,334 1.46 (l) 4.77 182
(0.01) (0.48) 9.54 10.88 21,821 1.46 (l) 5.08 108
0.00 (0.49) 9.06 (7.13) 20,267 0.74 (l) 4.95 161
0.00 (0.13) 10.26 3.97 8,952 0.17 (l)* 4.60* 55
(0.02) (0.48) 9.61 5.82 17,203 1.45 (l) 4.78 182
(0.01) (0.48) 9.54 10.88 18,874 1.45 (l) 5.14 108
0.00 (0.49) 9.06 (7.13) 26,294 0.74 (l) 4.89 161
0.00 (0.13) 10.26 3.97 19,894 0.17 (l)* 4.60* 55
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
--------------------- ------------ -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania Portfolio
Class A
Year ended 9/30/96 ........... $9.64 $0.49 $0.28 $0.77 ($0.53) $0.00
Year ended 9/30/95 ........... 9.18 0.54 0.48 1.02 (0.54) 0.00
Year ended 9/30/94 ........... 10.25 0.56 (1.06) (0.50) (0.56) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.16 0.25 0.41 (0.16) 0.00
Class B
Year ended 9/30/96 ........... 9.65 0.46 0.24 0.70 (0.46) 0.00
Year ended 9/30/95 ........... 9.18 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94 ........... 10.25 0.49 (1.06) (0.57) (0.49) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.14 0.25 0.39 (0.14) 0.00
Class C
Year ended 9/30/96 ........... 9.65 0.46 0.24 0.70 (0.46) 0.00
Year ended 9/30/95 ........... 9.18 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94 ........... 10.24 0.49 (1.05) (0.56) (0.49) (0.01)
6/25/93+ to 9/30/93 .......... 10.00 0.14 0.24 0.38 (0.14) 0.00
Virginia Portfolio
Class A
Year ended 9/30/96 ........... $10.29 $0.57 $0.37 $0.94 ($0.57) ($0.08)
Year ended 9/30/95 ........... 9.69 0.56 0.61 1.17 (0.56) 0.00
4/29/94+ to 9/30/94 .......... 10.00 0.24 (0.31) (0.07) (0.24) 0.00
Class B
Year ended 9/30/96 ........... 10.29 0.50 0.36 0.86 (0.50) (0.08)
Year ended 9/30/95 ........... 9.69 0.49 0.61 1.10 (0.49) 0.00
4/29/94+ to 9/30/94 .......... 10.00 0.22 (0.32) (0.10) (0.21) 0.00
Class C
Year ended 9/30/96 ........... 10.29 0.50 0.36 0.86 (0.50) (0.08)
Year ended 9/30/95 ........... 9.70 0.49 0.60 1.09 (0.49) 0.00
4/29/94+ to 9/30/94 .......... 10.00 0.21 (0.30) (0.09) (0.21) 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations and/or distribution.
++ Net of expenses assumed and/or waived by Alliance, except in the case of
the Insured National Portfolio for the fiscal year ended October 31, 1988
and the Insured California Portfolio for the fiscal year ended October 31,
1996.
* Annualized.
(a) If the National Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.10%, 1.09%, 1.09%, 1.08%, 1.11%, 1.14%, 1.15%, 1.31%, 1.62% and
2.25% for Class A shares, 1.81%, 1.80%, 1.80% and 1.78% for Class B shares
and 1.80%, 1.78%, 1.79% and 1.78% for Class C shares.
(b) If the Insured National Portfolio had borne all expenses, the respective
expense ratios (beginning with those of the most recent fiscal period)
would have been 1.12%, 1.12%, 1.11%, 1.11%, 1.12%, 1.17%, 1.20%, 1.29% and
1.54% for Class A shares, 1.83%, 1.83%, 1.82% and 1.83% for Class B shares
and 1.82%, 1.82%, 1.81% and 1.83% for Class C shares.
(c) If the Arizona Portfolio had borne all expenses, the respective expense
ratios would have been 3.69%, 4.88% and 7.71% for Class A shares, 4.40%,
5.58% and 8.41% for Class B shares and 4.41%, 5.58% and 8.41% for Class C
shares.
(d) If the California Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.05%, 1.04%, 1.05%, 1.06%, 1.07%, 1.11%, 1.13%, 1.39%, 1.89% and
2.30% for Class A shares, 1.75%, 1.75%, 1.75% and 1.78% for Class B shares
and 1.74%, 1.75%, 1.75% and 1.78% for Class C shares.
(e) If the Insured California Portfolio had borne all expenses, the respective
expense ratios (beginning with the fiscal year ended 10/31/95) would have
been 1.09%, 1.08%, 1.08%, 1.09%, 1.20%, 1.23%, 1.37%, 1.45% and 1.36% for
Class A shares, 1.80%, 1.78% and 1.79% for Class B shares and 1.79%, 1.77%
and 1.79% for Class C shares.
12
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
- --------------- ------------- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
($0.03) ($0.56) $9.85 8.17% $21,104 1.00%(m) 5.40% 185%
(0.02) (0.56) 9.64 11.53 8,721 1.00 (m) 5.78 114
0.00 (0.57) 9.18 (5.02) 7,149 0.45 (m) 5.73 156
0.00 (0.16) 10.25 4.12 4,170 0.00 (m)* 5.67* 75
(0.03) (0.49) 9.86 7.38 30,440 1.71 (m) 4.69 185
(0.02) (0.49) 9.65 10.78 28,559 1.71 (m) 5.09 114
0.00 (0.50) 9.18 (5.72) 25,637 1.16 (m) 5.01 156
0.00 (0.14) 10.25 3.94 12,173 0.40 (m)* 4.97* 75
(0.03) (0.49) 9.86 7.37 13,996 1.70 (m) 4.69 185
(0.02) (0.49) 9.65 10.78 15,052 1.70 (m) 5.09 114
0.00 (0.50) 9.18 (5.63) 18,198 1.15 (m) 4.99 156
0.00 (0.14) 10.24 3.84 13,541 0.40 (m)* 4.97* 75
$0.00 ($0.65) $10.58 9.39% $2,455 0.67%(n) 5.39% 298%
(0.01) (0.57) 10.29 12.46 1,855 0.67 (n) 5.59 128
0.00 (0.24) 9.69 (0.71) 1,249 0.57 (n)* 5.62* 65
0.00 (0.58) 10.57 8.57 3,345 1.37 (n) 4.70 298
(0.01) (0.50) 10.29 11.67 1,193 1.37 (n) 4.80 128
0.00 (0.21) 9.69 (1.01) 224 1.27 (n)* 4.97* 65
0.00 (0.58) 10.57 8.58 642 1.37 (n) 4.73 298
(0.01) (0.50) 10.29 11.56 122 1.37 (n) 4.81 128
0.00 (0.21) 9.70 (0.91) 43 1.27 (n)* 4.67* 65
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(f) If the Florida Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.33%, 1.33%, 1.27% and 1.30% for Class A shares, 2.03%, 2.03%, 1.98%
and 2.00% for Class B shares and 2.02%, 2.03%, 1.97% and 2.00% for Class C
shares.
(g) If the Massachusetts Portfolio had borne all expenses, the respective
expense ratios (beginning with those of the most recent fiscal periods)
would have been 3.15%, 6.44% and 13.2% for Class A shares, 3.85%,7.14% and
13.9% for Class B shares and 3.84%, 7.14% and 13.9% for Class C shares.
(h) If the Michigan Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 2.77%, 3.43% and 3.97% for Class A shares, 3.48%, 4.12% and 4.67% for
Class B shares and 3.48%, 4.13% and 4.67% for Class C shares.
(i) If the Minnesota Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 2.19%, 2.30%, 2.12% and 1.89% for Class A shares, 2.89%, 3.02%, 2.83%
and 2.59% for Class B shares and 2.88%, 3.00%, 2.82% and 2.59% for Class C
shares.
(j) If the New Jersey Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.35%, 1.35%, 1.33% and 1.29% for Class A shares, 2.05%, 2.06%, 2.03%
and 1.99% for Class B shares and 2.04%, 2.06%, 2.02% and 1.99% for Class C
shares.
(k) If the New York Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.11%, 1.12%, 1.11%, 1.13%, 1.13%, 1.20%, 1.23%, 1.48%, 1.98% and
2.30% for Class A shares, 1.82%, 1.83%, 1.82% and 1.84% for Class B shares
and 1.81%, 1.82%, 1.81% and 1.84% for Class C shares.
(l) If the Ohio Portfolio had borne all expenses, the respective expense ratios
(beginning with those of the most recent fiscal period) would have been
1.48%, 1.51%, 1.42% and 1.32% for Class A shares, 2.18%, 2.21%, 2.13% and
2.02% for Class B shares and 2.16%, 2.20%, 2.12% and 2.02% for Class C
shares.
(m) If the Pennsylvania Portfolio had borne all expenses, the respective
expense ratios (beginning with those of the most recent fiscal period)
would have been 1.45%, 1.47%, 1.46% and 1.31% for Class A shares, 2.15%,
2.17%, 2.16% and 2.01% for Class B shares and 2.14%, 2.17%, 2.15% and 2.01%
for Class C shares.
(n) If the Virginia Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal periods) would have
been 5.18%, 8.96% and 12.29% for Class A shares, 5.88%, 9.66% and 12.99%
for Class B shares and 5.88%, 9.66% and 12.99% for Class C shares.
13
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
Each Portfolio is a separate pool of assets constituting, in effect, a separate
fund. Except as otherwise indicated, the Portfolios' investment policies are not
"fundamental policies" and may, therefore, be changed without a shareholder
vote. However, no Portfolio will change its investment policies without
contemporaneous written notice to its shareholders. There is no guarantee that
any Portfolio will achieve its investment objective.
INVESTMENT OBJECTIVE
The investment objective of each Portfolio (other than the Insured California
Portfolio, as discussed below) is to earn the highest level of current income,
exempt from Federal and state taxation to the extent described, that is
available without assuming what Alliance considers to be undue risk by investing
principally in high-yielding, predominantly medium-quality, intermediate and
long-term debt obligations issued by: (i) in the case of the National and
Insured National Portfolios, states, territories and possessions of the United
States and the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations and, (ii) in the case of each of the
State Portfolios, the named state, and its political subdivisions, agencies and
instrumentalities. These securities are generally known as "municipal
securities." The average weighted maturity of the securities in each Portfolio
normally will range between 10 and 25 years.
Current Federal tax law distinguishes between municipal securities issued to
finance certain "private activities" and other municipal securities. Such
private activity bonds include bonds issued to finance such projects as
airports, housing projects, resource recovery programs, solid waste disposal
facilities, student loan programs, and water and sewage projects. Interest from
such "private activity bonds" ("AMT-Subject Bonds") becomes an item of "tax
preference" which is subject to the alternative minimum tax ("AMT") when
received by a person in a tax year during which the person is subject to that
tax. Because interest on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal securities
generally will provide somewhat higher yields than other municipal securities
("AMT-Exempt Bonds") of comparable quality and maturity.
HOW THE PORTFOLIOS PURSUE THEIR OBJECTIVE
The National Portfolio invests principally in a diversified portfolio of
municipal securities, the interest from which is wholly exempt from Federal
income taxes except when received by a shareholder who will be subject to the
AMT. The National Portfolio may invest without limit in AMT-Subject Bonds. As of
October 31, 1996, 89% of the National Portfolio's total net assets was invested
in AMT-Subject Bonds.
The Insured National Portfolio invests principally in AMT-Exempt Bonds that are
insured as to the payment of principal and interest ("insured securities"). The
investment policies of the Insured National Portfolio differ from those of the
National Portfolio in two respects: (i) whereas the National Portfolio invests
principally in AMT-Subject Bonds, the Insured National Portfolio invests
principally in a diversified portfolio of AMT-Exempt Bonds; and (ii) as a matter
of fundamental policy, the Insured National Portfolio, under normal market
conditions, invests at least 65% of its total assets in insured securities. (See
page 16 for a further discussion of the insurance feature.) The Insured National
Portfolio may be suitable for an investor who will be subject to the AMT to the
extent that the after-tax yield of the National Portfolio to such an investor is
less than the yield of the Insured National Portfolio. From time to time, the
National and Insured National Portfolios may invest 25% or more of their
respective total assets in municipal securities whose issuers are located in the
same state.
Each of the twelve State Portfolios invests in a non-diversified portfolio of
municipal securities the interest from which, in the opinion of bond counsel to
the issuer, is exempt from Federal income tax and from personal income tax in
the named state, or in the case of the Florida Portfolio, from the Florida
intangible tax (Florida currently imposes no income taxes on individuals.)
Normally, substantially all of the total assets of each State Portfolio will be
invested in municipal securities of the indicated state. Each Portfolio other
than the Insured National and Insured California Portfolios may invest without
limit in AMT-Subject Bonds.
The Insured California Portfolio seeks to provide as high a level of current
income exempt from Federal income tax and California personal income tax as is
consistent with the preservation of capital. As a matter of fundamental policy,
the Insured California Portfolio normally invests at least 80% of its total
assets in municipal bonds, at least 80% of its total assets in AMT-Exempt Bonds
and at least 65% of its total assets in insured securities. The Insured
California Portfolio's current policy is to invest at least 65% of its total
assets in municipal bonds issued by California or its political subdivisions
("California Bonds"), at least 80% of its total assets in insured bonds, and not
to invest in AMT-Subject Bonds. The remainder of the Insured California
Portfolio's total assets may be invested in uninsured California Bonds.
The California Portfolio invests in AMT-Subject Bonds issued by California and
its political subdivisions. As a matter of fundamental policy, at least 80% of
the California Portfolio's total assets normally will be invested in municipal
securities and at least 65% of its total assets normally will be invested in
AMT-Subject Bonds. The California Portfolio normally will invest at least 65% of
its total assets in California Bonds. As of October 31, 1996, 73% of the
California Portfolio's total net assets was invested in AMT-Subject Bonds.
14
<PAGE>
The New York Portfolio invests in AMT-Subject Bonds issued by New York State and
its political subdivisions. As a matter of fundamental policy, at least 65% of
the New York Portfolio's total assets normally will be so invested. In addition,
the Portfolio will invest in at least 80% of its net assets in municipal
securities the interest on which is exempt from Federal income tax. As of
October 31, 1996, 76% of the Portfolio's total net assets was invested in
AMT-Subject Bonds.
As of September 30, 1996, 43% of the Arizona Portfolio's total net assets, 51%
of the Florida Portfolio's total net assets, 57% of the Massachusetts
Portfolio's total net assets, 25% of the Michigan Portfolio's total assets, 43%
of the Minnesota Portfolio's total net assets, 58% of the New Jersey Portfolio's
total net assets, 60% of the Ohio Portfolio's total net assets, 77% of the
Pennsylvania Portfolio's total net assets and 39% of the Virginia Portfolio's
total net assets were invested in AMT-Subject Bonds.
As a matter of fundamental policy, each of the Arizona, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia Portfolios will
normally invest (i) at least 65% of its total assets in municipal securities of
the named state, and (ii) at least 80% of its net assets in municipal securities
the interest on which is exempt from Federal income tax. In addition, the New
Jersey Portfolio will invest at least 80% of its net assets in securities the
interest on which is exempt from New Jersey personal income tax (i.e., New
Jersey municipal securities and obligations of the U.S. government, its agencies
and instrumentalities ("U.S. Government Securities")). Where consistent with
applicable state law, each State Portfolio may also invest in municipal
securities issued by governmental entities (for example, U.S. territories)
outside the named state if such municipal securities generate interest exempt
from Federal income tax and personal income tax (or the Florida intangible tax)
in the named state. When Alliance believes that municipal securities of the
named state that meet the Portfolio's quality standards are not available, any
State Portfolio may invest in securities whose interest payments are only
federally tax-exempt.
Municipal Securities--Further Information. The two principal classifications of
municipal securities are bonds and notes. Municipal bonds, which are intended to
meet longer-term capital needs, are typically classified as either "general
obligation" or "revenue" (or "special tax") bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. Each Portfolio may invest more than 25% of its assets
in tax-exempt private activity bonds, which in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of the
principal and interest on such private activity bonds is dependent 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. Each Portfolio may invest more than 25%
of its total assets in securities or obligations which are related in such a way
that business or political developments or changes affecting one such security
could also affect the others (for example, securities the interest on which is
paid from projects of a similar type.)
Municipal notes, which may be either "general obligation" or "revenue"
securities, are intended to fulfill short-term capital needs and generally have
original maturities not exceeding one year. They include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
tax-exempt commercial paper.
The yields of municipal securities depend on, among other things, conditions in
the municipal bond market and fixed income markets generally, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. Normally, lower-rated municipal securities provide yields superior to
those of more highly rated securities, but involve greater risks. When the
spread between the yields of lower-rated obligations and those of more highly
rated issues is relatively narrow, a Portfolio may invest in the latter since
they will provide optimal yields with somewhat less risk.
The high tax-free yields sought by the Portfolios are generally obtainable from
medium-quality municipal securities rated A or Baa by Moody's Investors Service,
Inc. ("Moody's"), or A or BBB by Standard & Poor's Ratings Services (S&P), Duff
& Phelps Credit Rating Co. ("Duff & Phelps") or Fitch Investors Service, L.P.
("Fitch"). Each Portfolio may maintain up to 25% of its net assets, in municipal
securities rated below Baa by Moody's and below BBB by S&P, Duff & Phelps and
Fitch or, if non-rated, determined by Alliance to be of comparable quality. At
least 75% of the total assets of each Portfolio will be invested in municipal
securities rated at the time of purchase Baa or higher by Moody's or BBB or
higher by S&P, Duff & Phelps or Fitch. It is expected that no Portfolio will
retain a municipal security downgraded below Caa by Moody's and CCC by S&P, Duff
& Phelps and Fitch, or if unrated, determined by Alliance to have undergone
similar credit quality deterioration.
Non-rated municipal securities may be purchased by a Portfolio when Alliance
believes that the financial condition of the issuers of such obligations and the
protection afforded by their terms limit risk to a level comparable to that of
rated securities that are consistent with the Portfolio's investment policies.
During the fiscal year ended October 31, 1996, the Insured National and Insured
California Portfolios invested all of their assets in securities rated A and
above by S&P, or if unrated by S&P, considered by Alliance to be of equivalent
quality to securities rated A or above. During the following Portfolios'
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fiscal years ended in 1996, on a weighted average basis, the percentages of the
assets invested in securities rated in particular rating categories by S&P or,
if not rated by S&P, considered by Alliance to be of equivalent quality to such
ratings, were as follows:
<TABLE>
<CAPTION>
Portfolio A and above BBB BB B
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
National 74% 21% 5% --
Arizona 73 14 13 --
California 75 9 11 5%
Florida 60 17 23 --
Massachusetts 88 12 -- --
Michigan 95 5 -- --
Minnesota 70 17 13 --
New Jersey 85 15 -- --
New York 89 10 -- 1
Ohio 66 29 5 --
Pennsylvania 76 24 -- --
Virginia 82 -- 18 --
</TABLE>
Each Portfolio may invest up to 35% of its total assets in zero coupon municipal
securities. Each Portfolio also may invest in municipal securities that have
fixed, variable, floating or inverse floating rates of interest. See "Additional
Investment Practices--Zero Coupon Securities" and "--Variable, Floating and
Inverse Floating Rate Investments." Each Portfolio normally will invest at least
65% of its total assets in income-producing securities (including zero coupon
securities).
Insurance Feature of the Insured National and Insured California Portfolios. The
Insured National and Insured California Portfolios normally will invest at least
65% and 80%, respectively, of their total assets in insured securities. At the
time of purchase by a Portfolio, insured securities are either (i) insured under
an insurance policy that relates to the specific municipal security in question
(a "Specific Issue Insurance Policy") or (ii) insured under a Mutual Fund
Insurance Policy issued to the Portfolio's Fund by an appropriate insurer. If a
municipal security is already covered by a Specific Issue Insurance Policy when
acquired by the Portfolio, then coverage will not be duplicated by a Mutual Fund
Insurance Policy. Based upon the expected composition of each of the Insured
National and Insured California Portfolios, Alliance estimates that the annual
premiums for a Mutual Fund Insurance Policy and/or Special Issue Insurance
Policy will range from .12 of 1% to .75 of 1% of the average net assets of each
Portfolio. Although the insurance feature reduces certain financial risks, the
premiums for a Mutual Fund Insurance Policy, and for many Specific Issue
Insurance Policies, which are paid from each of the Insured National and Insured
California Portfolio's assets, will reduce each Portfolio's current yield.
Insurance is not a substitute for the basic credit of an issuer, but supplements
the existing credit and provides additional security therefor. While insurance
coverage for municipal securities held by the Insured National and Insured
California Portfolios reduces credit risk by insuring that the Portfolios will
receive payment of principal and interest, it does not protect against market
fluctuations caused by changes in interest rates or other factors.
The Insured National and Insured California Portfolios may obtain insurance on
their municipal bonds or purchase insured municipal bonds covered by policies
issued by any insurer having a claims-paying ability rated AA by S&P or Aaa by
Moody's. Alliance is familiar with five such insurers, Municipal Bond Investors
Assurance Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"),
AMBAC Indemnity Corporation ("AMBAC"), Financial Security Assurance Inc. ("FSA")
and Asset Guaranty. S&P has rated AAA the claims-paying ability of MBIA, FGIC,
AMBAC, FSA and AA the claims paying ability of Asset Guaranty and the municipal
bonds insured by these organizations. Further information with respect to MBIA,
FGIC, AMBAC, FSA and Asset Guaranty is provided in the Statement of Additional
Information of Alliance Municipal Income Fund, Inc.
ADDITIONAL INVESTMENT PRACTICES
Some or all of the Portfolios may engage in the following investment practices
to the extent described in this Prospectus. See the Statement of Additional
Information of each Fund for a further discussion of the uses, risks and costs
of engaging in these practices.
Derivatives. The Portfolios may use derivatives in furtherance of their
investment objectives. Derivatives are financial contracts whose value depends
on, or is derived from, the value of an underlying asset, reference rate or
index. These assets, rates, and indices may include bonds, stocks, mortgages,
commodities, interest rates, bond indices and stock indices. Derivatives can be
used to earn income or protect against risk, or both. For example, one party
with unwanted risk may agree to pass that risk to another party who is willing
to accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Portfolios to earn income and
enhance returns, to hedge or adjust the risk profile of an investment portfolio,
and in place of more traditional direct investments. Each of the Portfolios is
permitted to use derivatives for one or more of these purposes, although most of
the Portfolios generally use derivatives primarily as direct investments in
order to enhance yields and broaden portfolio diversification. Each of these
uses entails greater risk than if derivatives were used solely for hedging
purposes. Derivatives are a valuable tool which, when used properly, can provide
significant benefit to Portfolio shareholders. A Portfolio may take a
significant position in those derivatives that are within its investment
policies if, in Alliance's judgement, this represents the most effective
response to current or anticipated market conditions.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
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<PAGE>
There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created.
o Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index) at a specified price
(the exercise price) during a period of time or on a specified date. A call
option entitles the holder to purchase, a put option entitles the holder to
sell, the underlying asset (or settle for cash an amount based on an
underlying asset, rate or index). Likewise, when an option is exercised the
writer of the option is obligated to sell (in the case of a call option) or
to purchase (in the case of a put option) the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index).
o Futures--A futures contract is an agreement that obligates the buyer to buy
and the seller to sell a specified quantity of an underlying asset (or
settle for cash the value of a contract based on an underlying asset, rate
or index) at a specific price on the contract maturity date. Futures
contracts are standardized, exchange-traded instruments and are fungible
(i.e., considered to be perfect substitutes for each other). This
fungibility allows futures contracts to be readily offset or cancelled
through the acquisition of equal but opposite positions, which is the
primary method in which futures contracts are liquidated. A cash-settled
futures contract does not require physical delivery of the underlying asset
but instead is settled for cash equal to the difference between the values
of the contract on the date it is entered into and its maturity date.
o Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or
other tangible asset for an agreed upon price at a future date. Forward
contracts are customized, privately negotiated agreements designed to
satisfy the objectives of each party. A forward contract usually results in
the delivery of the underlying asset upon maturity of the contract in
return for the agreed upon payment.
o Swaps--A swap is a customized, privately negotiated agreement that
obligates two parties to exchange a series of cash flows at specified
intervals (payment dates) based upon or calculated by reference to changes
in specified prices or rates (e.g., interest rates in the case of interest
rate swaps) for a specified amount of an underlying asset (the "notional"
principal amount). The payment flows are netted against each other, with
the difference being paid by one party to the other. The notional principal
amount is used solely to calculate the payment streams but is not
exchanged.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities."
Examples of this type of structured security include certain securities
described below under "Variable, Floating and Inverse Floating Rate
Instruments."
While the judicious use of derivatives by highly experienced investment managers
such as Alliance can be quite beneficial, derivatives also involve risks
different from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Portfolio.
o Market Risk--This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to the
Portfolio's interest.
o Management Risk--Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that
a derivative adds to a Portfolio's portfolio, and the ability to forecast
price and interest rate movements correctly.
o Credit Risk--This is the risk that a loss may be sustained by a Portfolio
as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange-traded derivatives is generally less
than for privately negotiated derivatives, since the clearing house, which
is the issuer or counterparty to each exchange-traded derivative, provides
a guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order
to reduce overall credit risk. For privately negotiated derivatives, there
is no similar clearing agency guarantee. Therefore, the Portfolios consider
the creditworthiness of each counterparty to a privately negotiated
derivative in evaluating potential credit risk.
o Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
o Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss
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<PAGE>
generally is related to a notional principal amount, even if the parties
have not made any initial investment. Certain derivatives have the
potential for unlimited loss, regardless of the size of the initial
investment.
o Other Risks--Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately negotiated derivatives,
are complex and often valued subjectively. Improper valuations can result
in increased cash payment requirements to counterparties or a loss of value
to a Portfolio. Derivatives do not always perfectly or even highly
correlate or track the value of the assets, rates or indices they are
designed to closely track. Consequently, a Portfolio's use of derivatives
may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio's investment objective.
Derivatives Used by the Portfolios. Following is a description of specific
derivatives currently used by one or more of the Portfolios.
Options on Municipal and U.S. Government Securities. In an effort to increase
current income and to reduce fluctuations in net asset value, the Portfolios
intend to write covered put and call options and purchase put and call options
on municipal securities and U.S. Government securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and purchasing of
options by the Portfolios. In purchasing an option on securities, a Portfolio
would be in a position to realize a gain if, during the option period, the price
of the underlying securities increased (in the case of a call) or decreased (in
the case of a put) by an amount in excess of the premium paid; otherwise the
Portfolio would experience a loss not greater than the premium paid for the
option. Thus, a Portfolio would realize a loss if the price of the underlying
security declined or remained the same (in the case of a call) or increased or
remained the same (in the case of a put) or otherwise did not increase (in the
case of a put) or decrease (in the case of a call) by more than the amount of
the premium. If a put or call option purchased by a Portfolio were permitted to
expire without being sold or exercised, its premium would represent a loss to
the Portfolio.
A Portfolio may write a put or call option in return for a premium, which is
retained by the Portfolio whether or not the option is exercised. Except with
respect to uncovered call options written for cross-hedging purposes, none of
the Portfolios will write uncovered call or put options. A call option written
by a Portfolio is "covered" if the Portfolio owns the underlying security, has
an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than that of the call option it
has written. A put option written by a Portfolio is covered if the Portfolio
holds a put option on the underlying securities with an exercise price equal to
or greater than that of the put option it has written.
The risk involved in writing an uncovered put option is that there could be a
decrease in the market value of the underlying securities. If this occurred, a
Portfolio could be obligated to purchase the underlying security at a higher
price than its current market value. Conversely, the risk involved in writing an
uncovered call option is that there could be an increase in the market value of
the underlying security, and a Portfolio could be obligated to acquire the
underlying security at its current price and sell it at a lower price. The risk
of loss from writing an uncovered put option is limited to the exercise price of
the option, whereas the risk of loss from writing an uncovered call option is
potentially unlimited.
A Portfolio may write a call option on a security that it does not own in order
to hedge against a decline in the value of a security that it owns or has the
right to acquire, a technique referred to as "cross-hedging." A Portfolio would
write a call option for cross-hedging purposes, instead of writing a covered
call option, when the premium to be received from the cross-hedge transaction
exceeds that to be received from writing a covered call option, while at the
same time achieving the desired hedge. The correlation risk involved in
cross-hedging may be greater than the correlation risk involved from other
hedging strategies.
The Portfolios may purchase or write privately negotiated options on securities.
A Portfolio that purchases or writes privately negotiated options on securities
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by Alliance. Alliance has adopted procedures for monitoring the
creditworthiness of such counterparties. Privately negotiated options purchased
or written by a Portfolio may be illiquid, and it may not be possible for the
Portfolio to effect a closing transaction at an advantageous time. See "Illiquid
Securities" below.
Futures Contracts and Options on Futures Contracts. Futures contracts that a
Portfolio may buy and sell may include futures contracts on municipal securities
or U.S. Government Securities and contracts based on any index of municipal
securities or U.S. Government securities.
Options on futures contracts are options that call for the delivery of futures
contracts upon exercise. Options on futures contracts written or purchased by a
Portfolio will be traded on U.S. exchanges and will be used only for hedging
purposes.
A Portfolio will not enter into a futures contract or option on a futures
contract if immediately thereafter the market values of the outstanding futures
contracts of the Portfolio and the futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of its total assets.
Forward Commitments. Each Portfolio may purchase or sell municipal securities on
a forward commitment basis. Forward commitments are forward contracts for the
purchase or sale of securities, including purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. In some
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<PAGE>
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring or approval of a proposed financing by
appropriate authorities (i.e., a "when, as and if issued" trade).
When forward commitments with respect to fixed-income securities are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation,
and no interest or dividends accrue to the purchaser prior to the settlement
date. At the time a Portfolio enters into a forward commitment, it records the
transaction and thereafter reflects the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation would be
canceled if the required conditions did not occur and the trade were canceled.
The use of forward commitments helps a Portfolio to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Portfolio might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, a Portfolio
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
a Portfolio if, as a result, the Portfolio's aggregate forward commitments under
such transactions would be more than 20% of its total assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date. The Portfolios enter into forward
commitments, however, only with the intention of actually receiving securities
or delivering them, as the case may be. If a Portfolio, however, chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
may incur a gain or loss.
Interest Rate Transactions (Swaps, Caps and Floors). Each Portfolio may enter
into interest rate swap, cap or floor transactions primarily for hedging
purposes, which may include preserving a return or spread on a particular
investment or portion of its portfolio or protecting against an increase in the
price of securities the Portfolio anticipates purchasing at a later date. The
Portfolios do not intend to use these transactions in a speculative manner.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments) computed based on a
contractually-based principal (or "notional") amount. Interest rate swaps are
entered into on a net basis (i.e., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments). Interest rate caps and floors are similar to options in that
the purchase of an interest rate cap or floor entitles the purchaser, to the
extent that a specified index exceeds (in the case of a cap) or falls below (in
the case of a floor) a predetermined interest rate, to receive payments of
interest on a notional amount from the party selling the interest rate cap or
floor. A Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or liabilities.
There is no limit on the amount of interest rate transactions that may be
entered into by a Portfolio that is permitted to enter into such transactions. A
Portfolio will not enter into an interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is then rated in the highest rating category of at least one nationally
recognized rating organization.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become well established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, unless there is a
counterparty default, the risk of loss to a Portfolio from interest rate
transactions is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make.
Zero Coupon Securities. Zero coupon securities are debt securities that have
been issued without interest coupons or stripped of their unmatured interest
coupons, and include receipts or certificates representing interests in such
stripped debt obligations and coupons. Such a security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value.
Such securities usually trade at a deep discount from their face or par value
and are subject to greater fluctuations in market value in response to changing
interest rates than debt obligations of comparable maturities and credit quality
that make current distributions of interest. On the other hand, because there
are no periodic interest payments to be reinvested prior to maturity, these
securities eliminate reinvestment risk and "lock in" a rate of return to
maturity.
Current federal tax law requires that a holder (such as a Portfolio) of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the security during the year. As a result, in order to make
the distributions necessary for a Portfolio not to be subject to federal income
or excise taxes, the Portfolio might be required to pay out as an income
distribution each year an amount, obtained by liquidation of portfolio
securities or borrowings if necessary, greater than the total amount of cash
that the Portfolio has actually received as interest during the year. Each
Portfolio believes, however, that it is highly unlikely
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<PAGE>
that it would be necessary to liquidate portfolio securities or borrow money in
order to make such required distributions or to meet its investment objective.
For a discussion of the tax treatment of zero coupon Treasury securities, see
"Dividends, Distributions and Taxes--Zero Coupon Treasury Securities" in the
Statement of Additional Information of each Fund.
Variable, Floating and Inverse Floating Rate Instruments. Municipal securities
may have fixed, variable or floating rates of interest. Variable and floating
rate securities pay interest at rates that are adjusted periodically, according
to a specified formula. A "variable" interest rate adjusts at predetermined
intervals (e.g., daily, weekly or monthly), while a "floating" interest rate
adjusts whenever a specified benchmark rate (such as the bank prime lending
rate) changes.
A Portfolio may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap." The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
Each Portfolio may invest in municipal securities, the interest rate on which
has been divided into two variable components, which when combined result in a
fixed interest rate. These are generally known as inverse floaters. Typically,
the first of the components (the "auction component") pays an interest rate that
is reset periodically through an auction process, while the second of the
components (the "residual component") pays a current residual interest rate
based on the difference between the total interest paid by the issuer on the
municipal securities and the auction rate paid on the auction component. A
Portfolio may purchase both auction and residual components. When an inverse
floater is in the residual mode (leveraged), the interest rate typically resets
in the opposite direction from the variable or floating market rate of interest
on which the floater is based. The degree of leverage inherent in inverse
floaters is associated with a greater degree of volatility in terms of market
value, such that the market values of inverse floaters will tend to decrease
more rapidly during periods of rising interest rates, and increase more rapidily
in periods of falling interest rates, than those of fixed rate municipal
securities.
Repurchase Agreements. A Portfolio may seek additional income by investing in
repurchase agreements pertaining only to U.S. Government securities. 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 a day
or a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon interest rate for the period the buyer's money is
invested in the security. Such agreements permit a Portfolio to keep all of its
assets at work while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. A Portfolio requires continual maintenance of
collateral in an amount equal to, or in excess of, the resale price. If a vendor
defaults on its repurchase obligation, a Portfolio would suffer a loss to the
extent that the proceeds from the sale of the collateral were less than the
repurchase price. If a vendor goes bankrupt, a Portfolio might be delayed in, or
prevented from, selling the collateral for its benefit. There is no percentage
restriction on any Portfolio's ability to enter into repurchase agreements. The
Portfolios may enter into repurchase agreements with member banks of the Federal
Reserve System or "primary dealers" (as designated by the Federal Reserve Bank
of New York).
Illiquid Securities. Subject to any applicable fundamental investment policy,
each Portfolio may not maintain more than 15% of its net assets in illiquid
securities. These securities include, among others, securities for which there
is no readily available market, options purchased by a Portfolio
over-the-counter, the cover for such options and repurchase agreements not
terminable within seven days.
Because of the absence of a trading market for illiquid securities, a Portfolio
may not be able to realize their full value upon sale. With respect to each
Portfolio that may invest in such securities, Alliance will monitor their
illiquidity under the supervision of the Directors or Trustees of the Fund. To
the extent permitted by applicable law, Rule 144A securities will not be treated
as "illiquid" for purposes of the foregoing restriction so long as such
securities meet liquidity guidelines established by a Fund's Directors or
Trustees.
Defensive Position. Under normal circumstances, substantially all of the total
assets of each Portfolio will be invested in the types of municipal securities
described in "How The Portfolios Pursue Their Objective" above. However, when
business or financial conditions warrant, each Portfolio may assume a temporary
defensive position and invest without limit in other municipal securities that
are in all other respects consistent with the Portfolio's investment policies.
For temporary defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P, MIG-2 (or VMIG-2)
or higher by Moody's, D-1 or higher by Duff & Phelps or FIN-2 or higher by
Fitch, or in taxable cash equivalents (limited, in the case of the Florida
Portfolio, to short-term U.S. Government Securities or repurchase agreements).
Portfolio Turnover. From time to time, the Portfolios may engage in active
short-term trading to benefit from yield disparities among different issues of
municipal securities, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. Such trading will increase a Portfolio's
rate of turnover and the incidence of short-term capital gain taxable as
ordinary income. Management anticipates that the annual turnover in each
Portfolio will not exceed 300%. An annual turnover rate of 300% occurs, for
example, when all of the securities in a Portfolio are replaced three times in a
period of one year. A high rate of portfolio turnover involves correspondingly
greater expenses than a lower rate, which expenses must be borne by a Portfolio
and its shareholders. However, the execution costs for municipal securities are
substantially less than those for equivalent dollar values of equity securities.
See "Dividends, Distributions and Taxes."
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CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Each Portfolio has adopted certain fundamental investment policies listed below,
which may not be changed without the approval of its shareholders. Additional
investment restrictions with respect to a Portfolio are set forth in the
Statements of Additional Information.
No Portfolio other than the Insured California Portfolio may: (i) invest more
than 5% of its total assets in the securities of any one issuer except the U.S.
Government, although with respect to 25% of the total assets of the National and
Insured National Portfolios and 50% of the total assets of the State Portfolios
(other than the Insured California Portfolio) each such Portfolio may invest in
any number of issuers; (ii) invest 25% or more 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 issued by governmental users
(including private activity bonds issued by governmental users), U.S. Government
Securities 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 entity with the primary responsibility for the payment of interest and
principal as the issuer); (iii) purchase more than 10% of any class of the
voting securities of any one issuer; (iv) have more than 5% of its assets
invested in repurchase agreements with the same dealer; (v) borrow money except
from banks for temporary or emergency purposes and then in amounts not exceeding
20% of its total assets; or (vi) in the case of the National, Insured National,
New York and California Portfolios, invest more than 10% of its total assets in
repurchase agreements not terminable within seven days (whether or not illiquid)
or other illiquid investments.
The Insured California Portfolio may not: (i) except when investing for
temporary defensive purposes, invest more than 35% of its total assets in
securities not covered by insurance which provides for the payment of principal
of and interest on such securities or invest more than 20% of its total assets
in securities the interest from which is subject to Federal income tax and
California personal income tax (there is no limit on the amount of securities
that may be insured by a single insurance company); (ii) invest more than 5% of
its total assets in the securities of any one issuer or invest in more than 10%
of the voting securities of any one issuer except that up to 50% of the Insured
California Portfolio's total assets may be invested without regard to this
limitation and except that this does not limit the amount of the Insured
California Portfolio's assets that may be invested in U.S. Government
Securities; (iii) invest more than 25% of its total assets in a single industry,
except that there is no limit on the amount of its assets which may be invested
in municipal securities issued by governments or political subdivisions thereof,
in a particular segment of the municipal securities market or (subject to (ii)
above) in U.S. Government Securities; (iv) invest more than 10% of its total
assets in repurchase agreements not terminable within seven days (whether or not
illiquid) or other illiquid investments; or (v) borrow money, except from banks
for temporary purposes and then in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
not in excess of 15% of its total assets at the time of such borrowing.
RISK CONSIDERATIONS
Municipal Securities. The value of each Portfolio's shares will fluctuate with
the value of its investments. The value of each Portfolio's investments will
change as the general level of interest rates fluctuates. During periods of
falling interest rates, the values of a Portfolio's securities generally rise.
Conversely, during periods of rising interest rates, the values of a Portfolio's
securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and
realization of capital losses on securities in a Portfolio's portfolio will be
unavoidable. Moreover, medium- and lower-rated securities and non-rated
securities of comparable quality may be subject to wider fluctuations in yield
and market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps and
Fitch are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may be varying
degrees of difference in credit risk of securities within each rating category.
Securities rated Aaa by Moody's and AAA by S&P, Duff & Phelps and Fitch are
considered to be of the highest quality; capacity to pay interest and repay
principal is extremely strong. Securities rated Aa by Moody's and AA by S&P,
Duff & Phelps and Fitch are considered to be high quality; capacity to repay
principal is considered very strong, although elements may exist that make risks
appear somewhat larger than exist with securities rated Aaa or AAA. Securities
rated A are considered by Moody's to possess adequate factors giving security to
principal and interest. S&P, Duff & Phelps and Fitch consider such securities to
have a strong capacity to pay interest and repay principal. Such securities are
more susceptible to adverse changes in economic conditions and circumstances
than higher-rated securities.
Securities rated Baa by Moody's and BBB by S&P, Duff & Phelps and Fitch are
considered to have an adequate capacity to pay interest and repay principal.
Such securities are
21
<PAGE>
considered to have speculative characteristics and share some of the same
characteristics as lower-rated securities. Sustained periods of deteriorating
economic conditions or of rising interest rates are more likely to lead to a
weakening in the issuer's capacity to pay interest and repay principal than in
the case of higher-rated securities. Securities rated Ba by Moody's and BB by
S&P, Duff & Phelps and Fitch are considered to have speculative characteristics
with respect to capacity to pay interest and repay principal over time; their
future cannot be considered as well-assured. Securities rated B by Moody's, S&P,
Duff & Phelps and Fitch are considered to have highly speculative
characteristics with respect to capacity to pay interest and repay principal.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Securities rated Caa by Moody's and CCC by S&P, Duff & Phelps and Fitch are of
poor standing and there is a present danger with respect to payment of principal
or interest. See the Statements of Additional Information for a description of
the ratings used by Moody's, S&P, Duff & Phelps and Fitch.
Investments in Lower-Rated Securities. Lower-rated securities, i.e., those rated
Ba and lower by Moody's or BB and lower by S&P, Duff & Phelps and Fitch
(commonly known as "junk bonds"), are subject to greater risk of loss of
principal and interest than higher rated securities. They are also generally
considered to be subject to greater market risk than higher-rated securities,
and the capacity of issuers of lower-rated securities to pay interest and repay
principal is more likely to weaken than is that of issuers of higher-rated
securities in times of deteriorating economic conditions or rising interest
rates. In addition, lower-rated securities may be more susceptible to real or
perceived adverse economic conditions than investment grade securities, although
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established
secondary market for lower-rated securities, a Portfolio may experience
difficulty in valuing such securities and, in turn, the Portfolio's assets.
Alliance will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political conditions.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Portfolio's securities than would be the case if a Portfolio did not invest in
lower-rated securities.
Non-rated Securities. Non-rated securities will also be considered for
investment by a Portfolio when Alliance believes that the financial condition of
the issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objective
and policies.
Non-diversified Status. Each of the State Portfolios is a "non-diversified"
investment company, which means the Portfolio is not limited in the proportion
of its assets that may be invested in the securities of a single issuer. Because
each State Portfolio will normally invest solely or substantially in municipal
securities of a particular state, it is more susceptible than a geographically
diversified municipal securities portfolio to local risk factors. Such risks
arise from the financial condition of the state involved and its municipalities.
To the extent such state or local governmental entities are unable to meet their
financial obligations, the income derived by the State Portfolios, their ability
to preserve or realize appreciation of their portfolio assets and their
liquidity could be impaired. The Statements of Additional Information of the
Funds provide certain information about the particular states.
Each Portfolio, however, intends to conduct its operations so as to qualify to
be taxed as a "regulated investment company" for purposes of the Internal
Revenue Code (the "Code"), which will relieve the Portfolio of any liability for
federal income tax to the extent its earnings are distributed to shareholders.
See "Dividends, Distributions and Taxes" in the Statements of Additional
Information. To so qualify, among other requirements, each Portfolio will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the Portfolio's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of its total assets,
not more than 5% of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of any such single issuer. A Portfolio's investments in U.S.
Government securities are not subject to these limitations.
- --------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You can purchase shares of any of the Portfolios at a price based on the next
calculation of their net asset value after receipt of a proper purchase order
either through broker-dealers, banks or other financial intermediaries, or
directly through Alliance Fund Distributors, Inc. ("AFD"), each Fund's principal
underwriter. The minimum initial investment in each Portfolio is $250. The
minimum for subsequent investments in each Portfolio is $50. Investments of $25
or more are allowed under the automatic investment program in each Portfolio.
Share certificates are issued only upon request. Under certain conditions, the
Funds may suspend purchases of shares. See the Subscription Application and
Statements of Additional Information for more information. In the case of the
State
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<PAGE>
Portfolios, each Portfolio is available only to residents of the indicated
state.
Existing shareholders may make subsequent purchases by electronic funds
transfer if they have completed the Telephone Transactions section of the
Subscription Application or the Shareholder Options form obtained from Alliance
Fund Services, Inc. ("AFS"), each Fund's registrar, transfer agent and dividend
disbursing agent. Telephone purchase orders can be made by calling (800)
221-5672 and may not exceed $500,000.
Each Portfolio offers three classes of shares, Class A, Class B and Class C. The
Funds may refuse any order to purchase shares. In this regard, the Funds reserve
the right to restrict purchases of Fund shares (including through exchanges)
when they appear to evidence a pattern of frequent purchases and sales made in
response to short-term considerations.
Class A Shares -- Initial Sales Charge Alternative You can purchase Class A
shares at net asset value plus an initial sales charge, as follows:
<TABLE>
<CAPTION>
Initial Sales Charge
as % of Commission to
Net Amount as % of Dealer/Agent as %
Amount Purchased Invested OfferingPrice of Offering Price
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.44% 4.25% 4.00%
- ---------------------------------------------------------------------
$100,000 to
less than $250,000 3.36 3.25 3.00
- ---------------------------------------------------------------------
$250,000 to
less than $500,000 2.30 2.25 2.00
- ---------------------------------------------------------------------
$500,000 to
less than $1,000,000 1.78 1.75 1.50
- ---------------------------------------------------------------------
</TABLE>
On purchases of $1,000,000 or more, you pay no initial sales charge but may pay
a contingent deferred sales charge ("CDSC") equal to 1% of the lesser of net
asset value at the time of redemption or original cost if you redeem within one
year; Alliance may pay the dealer or agent a fee of up to 1% of the dollar
amount purchased. Certain purchases of Class A shares may qualify for reduced or
eliminated sales charges in accordance with a Fund's Combined Purchase
Privilege, Cumulative Quantity Discount, Statement of Intention, Privilege for
Certain Retirement Plans, Reinstatement Privilege and Sales at Net Asset Value
programs. Consult the Subscription Application and the Statements of Additional
Information.
Class B Shares -- Deferred Sales Charge Alternative
You can purchase Class B shares at net asset value without an initial sales
charge. However, you may pay a CDSC if you redeem shares within three years
after purchase. The amount of the CDSC (expressed as a percentage of the lesser
of the current net asset value or original cost) will vary according to the
number of years from the purchase of the Class B shares until the redemption of
those shares, as follows:
<TABLE>
<CAPTION>
Year Since Purchase CDSC
- -------------------------------------------------
<S> <C>
First 3%
Second 2%
Third 1%
Fourth None
</TABLE>
Class B shares are subject to higher distribution fees than Class A shares for a
period of six years (at which time they convert to Class A shares). The higher
fees mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower net asset value than Class A shares.
Class C Shares -- Asset-Based Sales Charge Alternative
You can purchase Class C shares without any initial sales charge. The Portfolio
will thus receive the full amount of your purchase, and, if you hold your shares
for one year or more, you will receive the entire net asset value of your shares
upon redemption. Class C shares incur higher distribution fees than Class A
shares and do not convert to any other class of shares of the Portfolio. The
higher fees mean a higher expense ratio, so Class C shares pay correspondingly
lower dividends and may have a lower net asset value than Class A shares.
Class C shares redeemed within one year of purchase will be subject to a CDSC
equal to 1% of the lesser of their original cost or net asset value at the time
of redemption.
Application of the CDSC
Shares obtained from dividend or distribution reinvestment are not subject to
the CDSC. The CDSC is deducted from the amount of the redemption and is paid to
AFD. The CDSC will be waived on redemptions of shares following the death or
disability of a shareholder, to meet the requirements of certain qualified
retirement plans or pursuant to a monthly, bimonthly or quarterly systematic
withdrawal plan. See the Statements of Additional Information.
How The Portfolios Value Their Shares
The net asset value of each Class of shares in a Portfolio is calculated by
dividing the value of the Portfolio's net assets allocable to that Class by the
outstanding shares of that Class. Shares are valued each day the New York Stock
Exchange (the "Exchange") is open as of the close of regular trading (currently
4:00 p.m. Eastern time). The securities in a Portfolio are valued at their
current market value determined on the basis of market quotations or, if such
quotations are not readily available, such other methods as the Fund's Directors
or Trustees believe would accurately reflect fair market value.
General
The decision as to which Class is more beneficial to you depends on the amount
and intended length of your investment. If you are making a large investment,
thus qualifying for a reduced sales charge, you might consider Class A shares.
If you are making a smaller investment, you might consider Class B shares
because 100% of your purchase is invested immediately. If you are unsure of the
length of your investment, you might consider Class C shares because there is no
initial sales charge and no CDSC as long as the shares are held for one year or
more. Consult your financial agent. Dealers and agents may receive differing
compensation for selling Class A, Class B or Class C shares. There is no size
23
<PAGE>
limit on purchases of Class A shares. The maximum purchase of Class B shares is
$250,000. The maximum purchase of Class C shares is $1,000,000.
In addition to the discount or commission paid to dealers or agents, AFD from
time to time pays additional cash or other incentives to dealers or agents,
including EQ Financial Consultants, Inc., an affiliate of AFD, in connection
with the sale of shares of the Portfolios. Such additional amounts may be
utilized, in whole or in part, in some cases together with other revenues of
such dealers or agents, to provide additional compensation to registered
representatives who sell shares of the Portfolios. On some occasions, such cash
or other incentives will be conditioned upon the sale of a specified minimum
dollar amount of the shares of a Portfolio and/or other Alliance Mutual Funds
during a specific period of time. Such incentives may take the form of payment
for attendance at seminars, meals, sporting events or theater performances, or
payment for travel, lodging and entertainment incurred in connection with travel
by persons associated with a dealer or agent and their immediate family members
to urban or resort locations within or outside the United States. Such dealer or
agent may elect to receive cash incentives of equivalent amount in lieu of such
payments.
HOW TO SELL SHARES
You may "redeem", i.e., sell your shares in a Portfolio to a Fund on any day the
Exchange is open, either directly or through your financial intermediary. The
price you will receive is the net asset value (less any applicable CDSC) next
calculated after the Fund receives your request in proper form. Proceeds
generally will be sent to you within seven days. However, for shares recently
purchased by check or electronic funds transfer, a Fund will not send proceeds
until it is reasonably satisfied that the check or electronic funds transfer has
been collected (which may take up to 15 days).
Selling Shares Through Your Broker
Your broker must receive your request before 4:00 p.m. Eastern time, and your
broker must transmit your request to the Fund by 5:00 p.m. Eastern time, for you
to receive that day's net asset value (less any applicable CDSC). Your broker is
responsible for furnishing all necessary documentation to the Funds, and may
charge you for this service.
Selling Shares Directly To A Fund
Send a signed letter of instruction or stock power form to AFS along with your
certificates, if any, that represent the shares you want to sell. For your
protection, signatures must be guaranteed by a bank, a member firm of a national
stock exchange or other eligible guarantor institution. Stock power forms are
available from your financial intermediary, AFS, and many commercial banks.
Additional documentation is required for the sale of shares by corporations,
intermediaries, fiduciaries and surviving joint owners. For details contact:
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
1-800-221-5672
Alternatively, a request for redemption of shares for which no stock
certificates have been issued can also be made by telephone to 800-221-5672.
Telephone redemption requests must be made by 4 p.m. Eastern time on a Fund
business day in order to receive that day's net asset value and, except for
certain omnibus accounts, may be made only once in any 30-day period. A
shareholder who has completed the Telephone Transactions section of the
Subscription Application, or the Shareholder Options form obtained from AFS, can
elect to have the proceeds of their redemption sent to their bank via an
electronic funds transfer. Proceeds of telephone redemptions also may be sent by
check to a shareholder's address of record. Redemption requests by electronic
funds transfer may not exceed $100,000 and redemption requests by check may not
exceed $50,000. Telephone redemption is not available for shares held in nominee
or "street name" accounts or retirement plan accounts or shares held by a
shareholder who has changed his or her address of record within the previous 30
calendar days.
General
The sale of shares is a taxable transaction for federal tax purposes. Under
unusual circumstances, a Fund may suspend redemptions or postpone payment for up
to seven days or longer, as permitted by federal securities law. The Funds
reserve the right to close an account that through redemption has remained below
$200 for 90 days. Shareholders will receive 60 days' written notice to increase
the account value before the account is closed.
During drastic economic or market developments, you might have difficulty in
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephonic requests. The telephone
service may be suspended or terminated at any time without notice.
SHAREHOLDER SERVICES
AFS offers a variety of shareholder services. For more information about these
services or your account, call AFS's toll-free number, 800-221-5672. Some
services are described in the attached Application. A shareholder's manual
explaining all available services will be provided upon request. To request a
shareholder manual, call 800-227-4618.
HOW TO EXCHANGE SHARES
You may exchange your shares of any Portfolio for shares of the same class of
other Alliance Mutual Funds (which include AFD Exchange Reserves, a money market
fund managed by Alliance). Exchanges of shares are made at the net asset values
next determined, without sales or service charges. Exchanges may be made by
telephone or written request. Telephone exchange request must be received by AFS
by 4:00 p.m. Eastern time on a Fund business day in order to receive that day's
net asset value.
24
<PAGE>
Shares will continue to age without regard to exchanges for purposes of
determining the CDSC, if any, upon redemption and, in the case of Class B
shares, for the purposes of conversion to Class A shares. After an exchange,
your Class B shares will automatically convert to Class A shares in accordance
with the conversion schedule applicable to the Class B shares of the Alliance
Mutual Fund you originally purchased for cash ("original shares"). When
redemption occurs, the CDSC applicable to the original shares is applied.
Please read carefully the Prospectus of the mutual fund into which you are
exchanging before submitting the request. Call AFS at 800-221-5672 to exchange
uncertificated shares. An exchange is a taxable capital transaction for federal
tax purposes. The exchange service may be changed, suspended, or terminated on
60 days' written notice.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
ADVISER
Alliance, which is a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
advisory agreement (the "Advisory Agreement"), to provide investment advice and,
in general, to conduct the management and investment program of each Portfolio
of each Fund, subject to the general supervision and control of the Board of
Directors or Trustees of that Fund.
The employees of Alliance principally responsible for each Portfolio's
investment program are Mrs. Susan P. Keenan, Mr. David M. Dowden and Mr.
Terrance T. Hults. Mrs. Keenan has served in this capacity for each Portfolio
since it commenced operations. Messrs. Dowden and Hults have served in this
capacity for each Portfolio since 1994 and 1995, respectively. Mrs. Keenan is a
Senior Vice President of Alliance Capital Management Corporation ("ACMC"), with
which she has been associated since prior to 1990. Mr. Dowden is an Assistant
Vice President of ACMC with which he has been associated since 1994. Previously
he was an analyst in the Municipal Strategy Group at Merrill Lynch Capital
Markets. Mr. Hults has been an Assistant Vice President of ACMC since 1995.
Previously he was an associate and trader in the Municipal Derivative Products
department at Merrill Lynch Capital Markets.
Alliance is a leading international investment manager supervising client
accounts with assets as of September 30, 1996 totaling more than $173 billion
(of which approximately $59 billion represented the assets of investment
companies). Alliance's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations and
endowment funds. The 52 registered investment companies managed by Alliance
comprising 110 separate investment portfolios currently have over two million
shareholders. As of September 30, 1996, Alliance was retained as an investment
manager of employee benefit plan assets for 33 of the Fortune 100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, Alliance, is an indirect wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States, which is a wholly-owned
subsidiary of The Equitable Companies Incorporated, a holding company controlled
by AXA, a French insurance holding company. Certain information concerning the
ownership and control of Equitable by AXA is set forth in the Statements of
Additional Information under "Management of the Fund."
DISTRIBUTION SERVICES AGREEMENTS
Rule 12b-1 adopted by the Securities and Exchange Commission (the "Commission")
under the 1940 Act permits an investment company to pay expenses associated with
the distribution of its shares in accordance with a duly adopted plan. Each Fund
has adopted a Rule 12b-1 plan (the "Plan") and has entered into a Distribution
Services Agreement (the "Agreement") with AFD. Pursuant to the Plan, each
Portfolio pays to AFD a Rule 12b-1 distribution services fee, which may not
exceed an annual rate of .30% of the Portfolio's aggregate average daily net
assets attributable to the Class A shares, 1.00% of the Portfolio's aggregate
average daily net assets attributable to the Class B shares and 1.00% of the
Portfolio's aggregate average daily net assets attributable to the Class C
shares, for distribution expenses. The Plans provide that a portion of the
distribution services fee in an amount not to exceed .25% of the aggregate
average daily net assets of each Portfolio attributable to each class of shares
constitutes a service fee used for personal service and/or the maintenance of
shareholder accounts.
The Plans provide that AFD will use the distribution services fee received from
a Portfolio in its entirety for payments (i) to compensate broker-dealers or
other persons for providing distribution assistance, (ii) to otherwise promote
the sale of shares of the Portfolio, and (iii) to compensate broker-dealers,
depository institutions and other financial intermediaries for providing
administrative, accounting and other services with respect to the Portfolio's
shareholders. In this regard, some payments under the Plans are used to
compensate financial intermediaries with trail or maintenance commissions in an
amount equal to .25%, annualized, with respect to Class A shares and Class B
shares, and 1.00%, annualized, with respect to Class C shares, of the assets
maintained in a Portfolio by their customers. Distribution services fees
received from the Portfolios with respect to Class A shares will not be used to
pay any interest expenses, carrying charges or other financing costs or
allocation of overhead of AFD. Distribution services fees received from the
Portfolios, with respect to Class B and Class C shares, may be used for these
purposes. The Plans also provide that Alliance may use its own resources to
finance the distribution of each Portfolio's shares.
The Portfolios are not obligated under the Plans to pay any distribution
services fee in excess of the amounts set forth above. With respect to Class A
shares of each Portfolio,
25
<PAGE>
distribution expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Portfolio in subsequent fiscal
years.
AFD's compensation with respect to Class B and Class C shares under the Plans is
directly tied to its expenses incurred. Actual distribution expenses for Class B
and Class C shares for any given year, however, will probably exceed the
distribution services fees payable under the applicable Plan with respect to the
class involved and, in the case of Class B and Class C shares, payments received
from CDSCs. The excess will be carried forward by AFD and reimbursed from
distribution services fees payable under the Plan with respect to the class
involved and, in the case of Class B shares, payments subsequently received
through CDSCs, so long as the Plan and the Agreement are in effect.
Unreimbursed distribution expenses incurred as of the end of each Portfolio's
most recently completed fiscal year, and carried over for reimbursement in
future years in respect of the Class B and Class C shares for all Portfolios
were, as of that time, as follows:
<TABLE>
<CAPTION>
Amount of unreimbursed Distribution Expenses
Carried Over (as % of Class's Net Assets)
- -------------------------------------------------------------------------------
Class B Class C
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National $ 3,752,255 (1.75%) $ 2,193,843 (2.28%)
Insured National $ 1,813,20 (3.48%) $ 789,090 (3.47%)
Arizona $ 574,137 (11.04%) $ 102,785 (14.48%)
California $ 4,465,745 (2.71%) $ 1,852,542 (2.04%)
Insured California $ 1,344,057 (5.03%) $ 479,829 (3.74%)
Florida $ 875,269 (3.94%) $ 884,271 (2.94%)
Massachusetts $ 461,771 (12.54%) $ 430,278 (9.53%)
Michigan $ 439,303 (12.36%) $ 513,896 (13.04%)
Minnesota $ 822,187 (9.92%) $ 533,757 (8.15%)
New Jersey $ 1,664,772 (4.26%) $ 550,787 (2.44%)
New York $ 2,914,342 (3.01%) $ 880,036 (2.55%)
Ohio $ 1,216,859 (4.80%) $ 641,860 (3.73%)
Pennsylvania $ 1,173,017 (3.85%) $ 559,425 (4.00%)
Virginia $ 575,512 (17.21%) $ 113,956 (17.75%)
- -------------------------------------------------------------------------------
</TABLE>
The Plans are in compliance with rules of the National Association of Securities
Dealers, Inc. which effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to that class. The
rules also limit the aggregate of all front-end, deferred and asset-based sales
charges imposed with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of shares of that
class, plus interest at the prime rate plus 1% per annum.
The Glass-Steagall Act and other applicable laws may limit the ability of a bank
or other depository institution to become an underwriter or distributor of
securities. However, in the opinion of the Funds' management, based on the
advice of counsel, these laws do not prohibit such depository institutions from
providing services for investment companies such as the administrative,
accounting and other services referred to in the Agreements. In the event that a
change in these laws prevented a bank from providing such services, it is
expected that other service arrangements would be made and that shareholders
would not be adversely affected. The State of Texas requires that shares of the
National and Insured National Portfolio may be sold in that state only by
dealers or other financial institutions that are registered there as
broker-dealers.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
- --------------------------------------------------------------------------------
AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Portfolio will be declared on each Fund business day
from the Portfolio's net investment income. Dividends on shares for Saturdays,
Sundays and holidays will be declared on the previous business day. The Funds
pay dividends on shares of each Portfolio after the close of business on the
twentieth day of each month or, if such day is not a business day, the first
business day thereafter. At your election (which you may change at least 30 days
prior to the record date for a particular dividend or distribution), dividends
and distributions are paid in cash or reinvested without charge in additional
shares of the same class having an aggregate net asset value as of the payment
date of the dividend or distribution equal to the cash amount thereof.
If you receive an income dividend or capital gains distribution in cash, you
may, within 120 days following the date of its payment, reinvest the dividend or
distribution in additional shares of that Portfolio without charge by returning
to Alliance, with appropriate instructions, the check representing such dividend
or distribution. Thereafter, unless you otherwise specify, you will be deemed to
have elected to reinvest all subsequent dividends and distributions in shares of
that Portfolio.
There is no fixed dividend rate and there can be no assurance that a Portfolio
will pay any dividends. The amount of any dividend or distribution paid on
shares of a Portfolio must necessarily depend upon the realization of income and
capital gains from the Portfolio's investments.
TAXES
Generally. Each Portfolio intends to qualify for each taxable year to be taxed
as a regulated investment company under the Code and, as such, will not be
liable for federal income taxes on the investment company taxable income and net
capital gains distributed to its shareholders.
Distributions to shareholders out of tax-exempt interest income earned by a
Portfolio are not subject to Federal income tax. However, under current tax law,
some individuals and corporations may be subject for Federal income tax purposes
to the AMT on distributions to shareholders out of income from the AMT-Subject
Bonds in which all Portfolios (other than the Insured National and Insured
California Portfolios) principally invest. Further, under current tax law,
certain corporate taxpayers may be subject to the AMT based on their "adjusted
current earnings." Distributions from a Portfolio that are excluded from gross
income and from AMT taxable income will be included in such corporation's
"adjusted current earnings" for purposes of computation of the AMT.
Distributions out of taxable interest, other investment income, and net realized
short-term capital gains are taxable to shareholders as
26
<PAGE>
ordinary income, and distributions to shareholders of net realized long-term
capital gains are taxable to shareholders as long-term capital gains
irrespective of the length of time a shareholder has held his or her Portfolio
shares. Since a Portfolio's investment income is derived from interest rather
than dividends, no portion of such distributions is eligible for the
dividends-received deduction available to corporations.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
a Portfolio is not deductible for Federal income tax purposes. Further, persons
who are "substantial users" (or related persons) of facilities financed by
AMT-Subject Bonds should consult their tax advisers before purchasing shares of
a Portfolio.
If a shareholder holds shares for six months or less and during that time
receives a distribution taxable to such shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term capital loss to the extent of such distribution. If a shareholder
holds shares for six months or less and during that time receives a distribution
of tax-exempt interest income, any loss realized on the sale of such shares
would be disallowed to the extent of such distribution.
Substantially all of the dividends paid by a Portfolio are anticipated to be
exempt from regular federal income taxes. Shareholders may be subject to state
and local taxes on distributions from a Portfolio, including distributions which
are exempt from federal income taxes. The Funds will report annually to
shareholders the percentage and source of interest earned by a Portfolio which
is exempt from federal income tax and, except in the case of the National and
Insured National Portfolios, relevant state and local personal income taxes,
and, in the case of the Florida Portfolio, the portion of the net asset value of
such Portfolio which is exempt from Florida intangible tax.
Each investor should consult his or her own tax adviser to determine the tax
status, with regard to his or her tax situation, of distributions from the
Portfolios.
Arizona Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from the Arizona income tax imposed on
individuals, corporations, estates and trusts. Such dividends will be exempt
from Arizona income tax to the extent they are derived from Arizona municipal
securities and U.S. Government Securities. Arizona law does not permit a
deduction for interest paid or accrued on indebtedness incurred or continued to
purchase or carry obligations the interest of which is exempt from Arizona state
income taxes.
California and Insured California Portfolios. Distributions of interest income
by the California Portfolio and by the Insured California Portfolio, to the
extent derived from California tax-exempt obligations, will be exempt from
California personal income tax.
Florida Portfolio. Dividends paid by the Portfolio to individual Florida
shareholders will not be subject to Florida income tax, which is imposed only on
corporations. However, Florida currently imposes an intangible personal property
tax at the rate of $2.00 per $1,000 taxable value of certain securities, such as
shares of the Portfolio, and other intangible assets owned by Florida residents.
U.S. Government Securities and Florida municipal securities are exempt from this
intangible tax. It is anticipated that the Portfolio's shares will qualify for
exemption from the Florida intangible tax. In order to so qualify, the Portfolio
must, among other things, have its entire portfolio invested in U.S. Government
Securities and Florida municipal securities on December 31 of any year.
Exempt-interest dividends paid by the Portfolio to corporate shareholders will
be subject to Florida corporate income tax.
Massachusetts Portfolio. It is anticipated that substantially all of the
dividends paid by the Portfolio will be exempt from the Massachusetts personal
income tax. Such dividends will be exempt from Massachusetts personal income tax
to the extent attributable to interest from Massachusetts municipal securities
exempt from the Massachusetts personal income tax or U.S. Government Securities
and are so designated. Dividends designated as attributable to capital gains
will be subject to the Massachusetts personal income tax at capital gains tax
rates except to the extent designated as attributable to gains on certain
Massachusetts municipal securities. Dividends paid by the Portfolio to a
corporate shareholder will be subject to Massachusetts corporate excise tax.
Michigan Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Michigan income, intangibles and
single business taxes. Such dividends will be exempt from Michigan personal
income tax, the Michigan intangible personal property tax and the Michigan
single business tax to the extent that such distributions are derived from
Michigan municipal securities and U.S. Government Securities, and provided that
at least 50% of the total assets of the Portfolio consist of Michigan municipal
securities at the close of each quarter of the Fund's taxable year. To the
extent the distributions are not subject to Michigan income tax, they are not
subject to the uniform city income tax imposed by certain Michigan cities. For
Michigan income, intangibles and single business tax purposes, distributions
representing income derived by the Portfolio from sources other than Michigan
municipal securities and U.S. Government Securities will be included in Michigan
taxable income and will be included in the taxable bases of the Michigan single
business and intangibles taxes, except that distributions from capital gains
which are reinvested in Portfolio shares are exempt from intangibles taxes.
Minnesota Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from Minnesota personal
income tax. However, at least 95% of the exempt-interest dividends paid by the
Portfolio during a Fund fiscal year must be derived from Minnesota municipal
securities in order for any portion of the exempt-interest dividends paid by the
Portfolio to be exempt from the Minnesota personal income tax. Under current
Minnesota tax law, some individuals may be subject to the Minnesota AMT on
distributions to shareholders out of the income from AMT-Subject Bonds in which
the Portfolio invests. Exempt-interest dividends paid by the Portfolio to
shareholders that are corporations are subject to Minnesota franchise tax.
27
<PAGE>
New Jersey Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from New Jersey personal
income tax. In order to pass through tax-exempt interest for New Jersey personal
income tax purposes, the Portfolio must, among other things, invest only in
interest bearing obligations, obligations issued at a discount, and cash and
cash items including receivables and financial options, futures, forward
contracts and other similar financial instruments related to such obligations or
to bond indices. In addition, it must have not less than 80% of the aggregate
principal amount of its investments, excluding certain financial options and
similar financial instruments described above and cash and cash items, invested
in New Jersey municipal securities or U.S. Government Securities at the close of
each quarter of the tax year. Distributions attributable to gains from New
Jersey municipal securities also will be exempt from New Jersey personal income
tax, provided the Portfolio satisfies the above requirements. Exempt-interest
dividends paid by the Portfolio to a corporate shareholder will be subject to
New Jersey corporation business (franchise) tax and the New Jersey corporation
income tax.
New York Portfolio. Distributions of interest income by the Portfolio, to the
extent derived from New York State municipal securities, or from obligations
issued by the government of Puerto Rico or by its authority, will be exempt from
New York State and New York City personal income taxes.
Ohio Portfolio. Distributions of interest income and gain by the Portfolio, to
the extent such distributions are derived from Ohio municipal securities, will
be exempt from the Ohio personal income tax, Ohio school district income taxes
and Ohio municipal income taxes, and will not be includable in the net income
base of the Ohio corporate franchise tax; provided that at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio municipal
securities or similar obligations of other states or their subdivisions. Shares
of the Portfolio will be included in a corporation's tax base for purposes of
computing the Ohio corporate franchise tax on a net worth basis.
Pennsylvania Portfolio. Dividends paid by the Portfolio will not be subject to
the Pennsylvania personal income tax or the Philadelphia School District
investment net income tax to the extent that the dividends are attributable to
interest received by the Portfolio from its investments in Pennsylvania
municipal securities or U.S. Government Securities. Exempt-interest dividends
paid by the Portfolio and dividends attributable to interest on U.S. Government
securities also are not subject to the Pennsylvania Corporate Net Income Tax.
Portfolio shares are not considered exempt assets for the purposes of
determining a corporation's capital stock value subject to the Pennsylvania
Capital Stock/Franchise Tax. Shares of the Portfolio also are exempt from
Pennsylvania county personal property taxes to the extent that the Portfolio
consists of Pennsylvania municipal securities or U.S. Government Securities.
Virginia Portfolio. Shareholders may be subject to state and local taxes on
distributions from the Portfolio, including distributions which are exempt from
Federal income taxes. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Virginia income taxes. So long as the
Portfolio qualifies as a regulated investment company under the Code and at
least 50% of the value of the total assets of the Portfolio at the end of each
quarter of its taxable year consists of obligations whose interest is exempt
from Federal income taxes, dividends paid by the Portfolio will be exempt from
Virginia individual, estate, trust, and corporate income taxes to the extent
such distributions are either (i) exempt from regular Federal income tax and
attributable to interest on Virginia municipal securities or obligations issued
by Puerto Rico, the United States Virgin Islands, or Guam or (ii) attributable
to interest on obligations of the United States or any authority, commission or
instrumentality of the United States. As a general rule, distributions
attributable to gains of the Portfolio and gains recognized on the sale or other
disposition of shares of the Portfolio (including the redemption or exchange of
shares) will be subject to Virginia income taxes. Interest on indebtedness
incurred (directly or indirectly) by shareholders to purchase or carry shares of
the Portfolio generally will not be deductible for Virginia income tax purposes.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, a Fund may
consider sales of its shares of a Portfolio as a factor in the selection of
dealers to enter into portfolio transactions with the Funds.
ORGANIZATION
Alliance Municipal Income Fund, Inc. is a Maryland corporation organized on July
30, 1986. Alliance Municipal Income Fund II is a Massachusetts business trust
organized on April 2, 1993. It is anticipated that annual shareholder meetings
will not be held; shareholder meetings will be held only when required by
Federal or, in the case of Alliance Municipal Income Fund, Inc., state law.
Shareholders have available certain procedures for the removal of Directors or
Trustees.
A shareholder in a Portfolio will be entitled to share pro rata with other
holders of the same class of shares all dividends and distributions arising from
that Portfolio's assets and, upon redeeming shares, will receive the then
current net asset value of that Portfolio represented by the redeemed shares
less any applicable CDSC. The Funds are empowered to establish, without
shareholder approval, additional portfolios which may have different investment
objectives and additional classes of shares. If an additional portfolio or class
were established in a Fund, each share of the portfolio or class would normally
be entitled to one vote for all purposes. Generally, shares of each Fund vote
together as a single class on matters, such as the election of Directors or
Trustees, that affect each Portfolio in substantially the same manner. Class A,
Class B and Class C shares of a Portfolio have
28
<PAGE>
identical voting, dividend, liquidation and other rights, except that each class
bears its own distribution and transfer agency expenses. Each class of shares
votes separately with respect to a Fund's Rule 12b-1 plan and other matters for
which separate class voting is appropriate under applicable law. Shares are
freely transferable, are entitled to dividends as determined by the Board of
Directors or Trustees and, in liquidation of a Portfolio, are entitled to
receive the net assets of that Portfolio. Since this Prospectus sets forth
information about both Funds, it is theoretically possible that one Fund might
be liable for any materially inaccurate or incomplete disclosure in this
Prospectus concerning the other Fund. Based on the advice of counsel, however,
the Funds believe that the potential liability of each Fund with respect to the
disclosure in this Prospectus extends only to the disclosure relating to that
Fund. Certain additional matters relating to the organization of a Fund are
discussed in its Statement of Additional Information.
REGISTRAR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
AFS, an indirect wholly-owned subsidiary of Alliance, located at 500 Plaza
Drive, Secaucus, New Jersey 07094, acts as the Funds' registrar, transfer agent
and dividend-disbursing agent for a fee based upon the number of shareholder
accounts maintained for the Funds. The transfer agency fee with respect to the
Class B shares will be higher than the transfer agency fee with respect to the
Class A shares or Class C shares.
PRINCIPAL UNDERWRITER
AFD, an indirect wholly-owned subsidiary of Alliance, located at 1345 Avenue of
the Americas, New York, New York 10105, is the Principal Underwriter of shares
of the Funds.
PERFORMANCE INFORMATION
From time to time, the Portfolios advertise their "yield" and "total return",
which are computed separately for Class A, Class B and Class C shares. A
Portfolio's yield for any 30-day (or one-month) period is computed by dividing
the net investment income per share earned during such period by the maximum
public offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a formula
prescribed by the Commission which provides for compounding on a semi-annual
basis. The Portfolios may also state a "taxable equivalent yield" that is
calculated by assuming that net investment income per share is increased by an
amount sufficient to offset the benefit of tax exemptions at the stated income
tax rate. The Portfolios may also state in sales literature an "actual
distribution rate" for each class which is computed in the same manner as yield
except that actual income dividends declared per share during the period in
question are substituted for net investment income per share.
The actual distribution rate is computed separately for Class A, Class B and
Class C shares. Advertisements of a Portfolio's total return disclose the
Portfolio's average annual compounded total return for the periods prescribed by
the Commission. A Portfolio's total return for each such period is computed by
finding, through the use of a formula prescribed by the Commission, the average
annual compounded rate of return over the period that would equate an assumed
initial amount invested to the value of the investment at the end of the period.
For purposes of computing total return, income dividends and capital gains
distributions paid on shares of a Portfolio are assumed to have been reinvested
when paid and the maximum sales charges applicable to purchases and redemptions
of the Portfolio's shares are assumed to have been paid. These advertisements
may quote performance rankings or ratings of the Portfolios by financial
publications or independent organizations such as Lipper Analytical Services,
Inc. and Morningstar, Inc. or compare a Portfolio's performance to various
indices.
ADDITIONAL INFORMATION
This Prospectus and the Statements of Additional Information, which have been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by each Fund with the Commission under the
Securities Act. Copies of the Registration Statements may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
offices of the Commission in Washington, D.C.
This prospectus does not constitute an offering in any state in which such
offering may not lawfully be made.
This prospectus is intended to constitute an offer by each Fund only of the
securities of which it is the issuer and is not intended to constitute an offer
by a Fund of the securities of the other Fund whose securities are also offered
by this prospectus. Neither Fund intends to make any representation as to the
accuracy or completeness of the disclosure in this prospectus relating to the
other Fund. See "General Information--Organization."
29
<PAGE>
SUBSCRIPTION APPLICATION
- --------------------------------------------------------------------------------
THE ALLIANCE MUNICIPAL INCOME PORTFOLIOS
(see instructions at the front of the application)
- --------------------------------------------------------------------------------
1. YOUR ACCOUNT REGISTRATION (Please Print)
- --------------------------------------------------------------------------------
[_] INDIVIDUAL OR JOINT ACCOUNT
___________________________________________________________________________
Owner's Name (First Name) (MI) (Last Name)
_______-_____-_________
Social Security Number (Required to open account)
___________________________________________________________________________
Joint Owner's Name* (First Name) (MI) (Last Name)
*Joint Tenants with right of survivorship unless Alliance Fund Services is
informed otherwise.
[_] GIFT/TRANSFER TO A MINOR
___________________________________________________________________________
Custodian - One Name Only (First Name) (MI) (Last Name)
___________________________________________________________________________
Minor (First Name) (MI) (Last Name)
_______-_____-_________
Minor's Social Security Number (Required to open account)
Under the State of __________ (Minor's Residence) Uniform Gifts/Transfer to
Minor's Act
[_] TRUST ACCOUNT
___________________________________________________________________________
Name of Trustee
___________________________________________________________________________
Name of Trust
___________________________________________________________________________
Name of Trust (cont'd)
_____________________________ ___________________
Trust Dated Tax ID or Social Security Number
(Required to open account)
[_] OTHER
___________________________________________________________________________
Name of Corporation, Partnership, investment only retirement plan,
or other Entity
___________________ ___________________________________________________
Tax ID Number Trustee Name (Retirement Plans Only)
- --------------------------------------------------------------------------------
2. YOUR ADDRESS
- --------------------------------------------------------------------------------
___________________________________________________________________________
Street
___________________________________________________________________________
City State Zip Code
___________________________________________________________________________
If Non-U.S., Specify Country
_______-_______-_________ _______-_______-_________
Daytime Phone Evening Phone
I am a: [_] U.S. Citizen [_] Non-Resident Alien [_] Resident Alien
[_] Other
---------------------------------------------------
For Alliance Use Only
---------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
3. YOUR INITIAL INVESTMENT
- --------------------------------------------------------------------------------
THE MINIMUM INVESTMENT IS $250 PER FUND. THE MAXIMUM INVESTMENT IN CLASS B IS
$250,000; CLASS C IS $1,000,000.
I hereby subscribe for shares of the following Alliance Municipal Income Fund
Portfolio(s) and elect distribution options as indicated.
DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS: R REINVEST DISTRIBUTIONS
into my fund account.
- --------------------------
BROKER/DEALER USE ONLY C SEND MY DISTRIBUTIONS IN
WIRE CONFIRM # CASH to the address I
- -------------------------- have provided in Section
2. (Complete Section 4D
- -------------------------- for direct deposit to
your bank account.
Complete Section 4E for
payment to a third
party).
D DIRECT MY DISTRIBUTIONS
TO ANOTHER ALLIANCE FUND.
Complete the appropriate
portion of Section 4A to
direct your distributions
(dividends and capital
gains) to another
Alliance Fund (the $250
minimum investment
requirement applies to
Funds into which
distributions are
directed).
- --------------------------------------------------------------------------------
MAKE ALL CHECKS PAYABLE TO: CLASS OF SHARES
ALLIANCE FUND SERVICES ------------------------------ DISTRIBUTIONS
CONTINGENT ASSET- OPTIONS
INITIAL DEFERRED BASED *CIRCLE*
SALES SALES SALES ---------------------
CHARGE CHARGE CHARGE CAPITAL
ALLIANCE FUND NAME A B C DIVIDENDS GAINS
- --------------------------------------------------------------------------------
National Portfolio $ (84) $(284) $(384) R C D R C D
- --------------------------------------------------------------------------------
Insured National Portfolio (86) (286) (386) R C D R C D
- --------------------------------------------------------------------------------
Arizona Portfolio (114) (214) (314) R C D R C D
- --------------------------------------------------------------------------------
California Portfolio (85) (285) (385) R C D R C D
- --------------------------------------------------------------------------------
Insured California Portfolio (91) (291) (391) R C D R C D
- --------------------------------------------------------------------------------
Florida Portfolio (65) (265) (365) R C D R C D
- --------------------------------------------------------------------------------
Massachusetts Portfolio (115) (215) (315) R C D R C D
- --------------------------------------------------------------------------------
Michigan Portfolio (117) (217) (317) R C D R C D
- --------------------------------------------------------------------------------
Minnesota Portfolio (61) (261) (361) R C D R C D
- --------------------------------------------------------------------------------
New Jersey Portfolio (69) (269) (369) R C D R C D
- --------------------------------------------------------------------------------
New York Portfolio (83) (283) (383) R C D R C D
- --------------------------------------------------------------------------------
Ohio Portfolio (80) (280) (380) R C D R C D
- --------------------------------------------------------------------------------
Pennsylvania Portfolio (67) (267) (367) R C D R C D
- --------------------------------------------------------------------------------
Virginia Portfolio (121) (221) (321) R C D R C D
- --------------------------------------------------------------------------------
R C D R C D
- --------------------------------------------------------------------------------
R C D R C D
- --------------------------------------------------------------------------------
TOTAL INVESTMENT $ $ $
==========================================================
- --------------------------------------------------------------------------------
SIGNATURE CARD NAME OF FUND:
CLASS A OR CLASS C ACCOUNT #
(if known)
- --------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
- --------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE(S) -- for joint accounts, all owners, or their legal
representatives, must sign this card.
1...............................................................................
2...............................................................................
3...............................................................................
- --------------------------------------------------------------------------------
Check One Box [_] All the above signatures are required on checks written
against this account.
[_] Any one signature is acceptable on checks written
against this account.
[_] A combination of signatures is required (specify
number).
SUBJECT TO CONDITIONS PRINTED ON REVERSE SIDE.
STATE STREET BANK AND TRUST COMPANY
FOR CLASS A AND C ONLY:
To apply for checkwriting privileges, please complete the signature card to the
left. The minimum amount any check can be written for is $500. The checkwriting
privilege is not transferable to any other fund account. If the account
registration is changed, the check writing privilege terminates and must be
reapplied for.
Checkwriting may result in the imposition of a contingent deferred sales charge
against your account.
<PAGE>
MY SOCIAL SECURITY (TAX IDENTIFICATION) NUMBER IS: ___________________
- --------------------------------------------------------------------------------
4. YOUR SHAREHOLDER OPTIONS
- --------------------------------------------------------------------------------
- ---------------------------------------
A. AUTOMATIC INVESTMENT PLANS (AIP)
- ---------------------------------------
[_] WITHDRAW FROM MY BANK ACCOUNT
I authorize Alliance to draw on my bank account for investment in my fund
account(s) as indicated below (Complete Section 4D also for the bank account you
wish to use).
<TABLE>
<CAPTION>
Monthly Dollar Amount Day of Withdrawal
Fund Name ($25 minimum) (1st thru 31st) Circle "all" or applicable months
<S> <C> <C> <C>
All J F M A M J J A S O N D
- ----------------------- ---------------------------- ----------------------- -----------------------------------
All J F M A M J J A S O N D
- ----------------------- ---------------------------- ----------------------- -----------------------------------
All J F M A M J J A S O N D
- ----------------------- ---------------------------- ----------------------- -----------------------------------
All J F M A M J J A S O N D
- ----------------------- ---------------------------- ----------------------- -----------------------------------
</TABLE>
Your bank must be a member of the National Automated Clearing House Association
(NACHA).
[_] DIRECT MY DISTRIBUTIONS
As indicated in Section 3, I would like my dividends and/or capital gains
directed to another Alliance fund within the same class of shares.
<TABLE>
<CAPTION>
"From" Fund Account #
"From" Fund Name (if existing) "To" Fund Name "To" Fund Account # (if existing)
<S> <C> <C> <C>
[_] New
[_] Existing
- ----------------------- ---------------------------- ----------------------- -----------------------------------
[_] New
[_] Existing
- ----------------------- ---------------------------- ----------------------- -----------------------------------
[_] New
[_] Existing
- ----------------------- ---------------------------- ----------------------- -----------------------------------
[_] New
[_] Existing
- ----------------------- ---------------------------- ----------------------- -----------------------------------
</TABLE>
[_] EXCHANGE SHARES MONTHLY
I authorize Alliance to transact monthly exchanges within the same class of
shares between my fund accounts as listed below.
<TABLE>
<CAPTION>
"From" Fund Account # Dollar Amount Day of Exchange** "To" Fund Account #
"From" Fund Name (if existing) ($25 minimum) (1st thru 31st) "To" Fund Name (if existing)
<S> <C> <C> <C> <C> <C>
[_] New
[_] Existing
- ------------------ ----------------------- ------------------ ------------------ ------------------ --------------------
[_] New
[_] Existing
- ------------------ ----------------------- ------------------ ------------------ ------------------ --------------------
[_] New
[_] Existing
- ------------------ ----------------------- ------------------ ------------------ ------------------ --------------------
[_] New
[_] Existing
- ------------------ ----------------------- ------------------ ------------------ ------------------ --------------------
</TABLE>
** Shares exchanged will be redeemed at the net asset value on the "Day of
Exchange" (If the "Day of Exchange" is not a fund business day, the
exchange transaction will be processed on the next fund business day). The
exchange privilege is not available if stock certificates have been issued.
- -----------------------------------------
B. SYSTEMATIC WITHDRAWAL PLANS (SWP)
- -----------------------------------------
In order to establish a SWP, you must reinvest all dividends and capital gains
and own or purchase shares of the Fund having a current net asset value of at
least:
o $10,000 for monthly payments, o $5,000 for bi-monthly payments,
o $4,000 for quarterly or less frequent payments
Your bank must be a member of the National Automated Clearing House Association
(NACHA) in order for you to receive SWP proceeds directly into your checking
account.
[_] I authorize Alliance to transact periodic redemptions from my fund account
and send the proceeds to me as indicated below.
<TABLE>
<CAPTION>
Fund Name and Class of Shares Dollar Amount ($50 minimum) Circle "all" or applicable months
<S> <C> <C>
All J F M A M J J A S O N D
- --------------------------------------------------- ------------------------------ -----------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------- ------------------------------ -----------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------- ------------------------------ -----------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------- ------------------------------ -----------------------------------
</TABLE>
PLEASE SEND MY SWP PROCEEDS TO:
[_] MY CHECKING ACCOUNT (via EFT) -
(1st-31st)
I would like to have these payments occur on or about the | | of the
months circled above. (Complete Section 4D)
[_] MY ADDRESS OF RECORD (via CHECK)
[_] THE PAYEE AND ADDRESS SPECIFIED IN SECTION 4E (via CHECK)
60088GEN-MIApp
<PAGE>
- -----------------------------------------
C. PURCHASES AND REDEMPTIONS VIA EFT
- -----------------------------------------
You can call our toll-free number 1-800-221-5672 and instruct Alliance Fund
Services, Inc. in a recorded conversation to purchase, redeem or exchange shares
for your account. Purchase and redemption requests will be processed via
electronic funds transfer (EFT) to and from your bank account.
Instructions: o Review the information in the Prospectus about telephone
transaction services.
o If you select the telephone purchase or redemption
privilege, you must write "VOID" across the face of a check
from the bank account you wish to use and attach it to
Section 4D of this application.
PURCHASES AND REDEMPTIONS VIA EFT
[_] I hereby authorize Alliance Fund Services, Inc. to effect the purchase
and/or redemption of Fund shares for my account according to my telephone
instructions or telephone instructions from my Broker/Agent, and to
withdraw money or credit money for such shares via EFT from the bank
account I have selected.
In the case of shares purchased by check or EFT, redemption proceeds may
not be made available until the Fund is reasonably assured that the check
has cleared, normally 15 calendar days after the purchase date.
- ------------------------
D. BANK INFORMATION
- ------------------------
This bank account information will be used for:
[_] Distributions (Section 3) [_] Automatic Investments
(Section 4A)
[_] Systematic Withdrawals (Section 4B) [_] Telephone Transactions
(Section 4C)
Please attach a voided check:
- --------------------------------------------------------------------------------
Tape Preprinted Voided Check Here.
We Cannot Establish These Services Without it.
- --------------------------------------------------------------------------------
Your bank must be a member of the National Automated Clearing House Association
(NACHA) in order to have EFT transactions processed to your fund account.
For EFT transactions, the fund requires signatures of bank account owners
exactly as they appear on bank records.
- -----------------------------------
E. THIRD PARTY PAYMENT DETAILS
- -----------------------------------
This third party payee information will be used for:
[_] Distributions (Section 3) [_] Systematic Withdrawals (Section 4B)
__________________________________________________________________________
Name
__________________________________________________________________________
Address - Line 1
__________________________________________________________________________
Address - Line 2
__________________________________________________________________________
Address - Line 3
- -------------------------------------
F. REDUCED CHARGES (CLASS A ONLY)
- -------------------------------------
If you, your spouse or minor children own shares in other Alliance Funds, you
may be eligible for a reduced sales charge. Please complete the Right of
Accumulation section or the Statement of Intent section.
A. RIGHT OF ACCUMULATION
[_] Please link the tax identification numbers or account numbers listed below
for Right of Accumulation privileges, so that this and future purchases
will receive any discount for which they are eligible.
B. STATEMENT OF INTENT
[_] I want to reduce my sales charge by agreeing to invest the following amount
over a 13-month period:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
If the full amount indicated is not purchased within 13 months, I
understand that an additional sales charge must be paid from my account.
- ---------------------------- ---------------------------- --------------------
Tax ID or Account # Tax ID or Account # Tax ID or Account #
<PAGE>
- --------------------------------------------------------------------------------
5. SHAREHOLDER AUTHORIZATION This section MUST be completed
- --------------------------------------------------------------------------------
TELEPHONE EXCHANGES AND REDEMPTIONS BY CHECK
Unless I have checked one or both boxes below, these privileges will
automatically apply, and by signing this application, I hereby authorize
Alliance Fund Services, Inc. to act on my telephone instructions, or on
telephone instructions from any person representing himself to be an authorized
employee of an investment dealer or agent requesting a redemption or exchange on
my behalf. (NOTE: Telephone exchanges may only be processed between accounts
that have identical registrations.) Telephone redemption checks will only be
mailed to the name and address of record; and the address must have no change
within the last 30 days. The maximum telephone redemption amount is $50,000.
This service can be enacted once every 30 days.
[_] I do NOT elect the telephone exchange service.
[_] I do NOT elect the telephone redemption by check service.
I CERTIFY UNDER PENALTY OF PERJURY THAT THE NUMBER SHOWN IN SECTION 1 OF THIS
FORM IS MY CORRECT TAX IDENTIFICATION NUMBER OR SOCIAL SECURITY NUMBER AND THAT
I HAVE NOT BEEN NOTIFIED THAT THIS ACCOUNT IS SUBJECT TO BACKUP WITHHOLDING.
By selecting any of the above telephone privileges, I agree that neither the
Fund nor Alliance, Alliance Fund Distributors, Inc., Alliance Fund Services,
Inc. or other Fund Agent will be liable for any loss, injury, damage or expense
as a result of acting upon telephone instructions purporting to be on my behalf,
that the Fund reasonably believes to be genuine, and that neither the Fund nor
any such party will be responsible for the authenticity of such telephone
instructions. I understand that any or all of these privileges may be
discontinued by me or the Fund at any time. I understand and agree that the Fund
reserves the right to refuse any telephone instructions and that my investment
dealer or agent reserves the right to refuse to issue any telephone instructions
I may request.
For non-residents only: Under penalties of perjury, I certify that to the best
of my knowledge and belief, I qualify as a foreign person as indicated in
Section 2.
I am of legal age and capacity and have received and read the Prospectus and
agree to its terms.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATION REQUIRED TO AVOID BACK-UP
WITHHOLDING.
- -------------------------------- ----------------------------
Signature Date
- -------------------------------- ---------------------------- ----------------
Signature Date Acceptance Date
- --------------------------------------------------------------------------------
DEALER/AGENT AUTHORIZATION For selected Dealers or Agents ONLY.
- --------------------------------------------------------------------------------
We hereby authorize Alliance Fund Services, Inc. to act as our agent in
connection with transactions under this authorization form; and we guarantee the
signature(s) set forth in Section 5, as well as the legal capacity of the
shareholder.
- ------------------------------------------- -----------------------------------
Dealer/Agent Firm Authorized Signature
- ------------------------------------------- -------------- -------------------
Representative First Name MI Last Name
- --------------------------------------------------------------------------------
Representative Number
- --------------------------------------------------------------------------------
Branch Office Address
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------(--------)--------------------------------------
Branch Number Branch Phone
The payment of funds is authorized The Depositor(s) agrees to be
by the signature(s) appearing on subject to the rules and
the reverse side. regulations of the Bank pertaining
to this checking account as amended
If this card is signed by more than from time to time. The Bank and
one person, all checks will require "the Fund" reserve the right to
all signatures appearing on the change, modify or terminate this
reverse side unless a lesser number checking account and authorization
is indicated. If no indication is at any time.
given, all checks will require all
signatures. Each signatory Checks may not be for less than
guarantees the genuineness of the $500 or such other minimum amount
other signatures. as may from time to time be
established by "the Fund" upon
The Bank is hereby appointed agent prior written notice to its
by the person(s) signing this card shareholders. Shares purchases by
(the "Depositor[s]") and, as agent, check (including certified or
is authorized and directed to cashier's check) will not be
present checks drawn on this redeemed within 15 calendar days of
checking account to Alliance such purchase by checkwriting or
__________________________________ any other method of redemption.
("the Fund") or its transfer agent
as requests to redeem shares of No checkwriting available on
"the Fund" registered in the name Alliance World Income and Alliance
of the Depositor(s) in the amounts Corporate Bond.
of such checks and to deposit the
proceeds of such redemptions in ENCLOSE THIS CARD WITH THE
this checking account. The Bank APPLICATION FORM
shall be liable only for its own 60000GEN-SF
negligence.
<PAGE>
ALLIANCE SUBSCRIPTION APPLICATION
- --------------------------------------------------------------------------------
ALLIANCE MUNICIPAL INCOME PORTFOLIOS
NATIONAL PORTFOLIO FLORIDA PORTFOLIO NEW JERSEY PORTFOLIO
INSURED NATIONAL PORTFOLIO MASSACHUSETTS PORTFOLIO NEW YORK PORTFOLIO
ARIZONA PORTFOLIO MICHIGAN PORTFOLIO OHIO PORTFOLIO
CALIFORNIA PORTFOLIO MINNESOTA PORTFOLIO PENNSYLVANIA PORTFOLIO
INSURED CALIFORNIA PORTFOLIO VIRGINIA PORTFOLIO
- --------------------------------------------------------------------------------
INFORMATION AND INSTRUCTIONS
- --------------------------------------------------------------------------------
TO OPEN YOUR NEW ALLIANCE ACCOUNT...
Please complete the application and mail it to:
ALLIANCE FUND SERVICES, INC.
P.O. BOX 1520
SECAUCUS, NEW JERSEY 07096-1520
For certified or overnight deliveries, send to:
ALLIANCE FUND SERVICES, INC.
500 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
- -----------
SECTION 1 YOUR ACCOUNT REGISTRATION (REQUIRED)
- -----------
Complete one of the available choices. To ensure proper tax reporting to the
IRS:
-- Individuals, Joint Tenants and Gift/Transfer to a Minor:
o Indicate your name(s) exactly as it appears on your social
security card.
-- Trust/Other:
o Indicate the name of the entity exactly as it appeared on the
notice you received from the IRS when your Employer
Identification number was assigned.
- -----------
SECTION 2 YOUR ADDRESS (REQUIRED)
- -----------
Complete in full.
- -----------
SECTION 3 YOUR INITIAL INVESTMENT (REQUIRED)
- -----------
For each fund in which you are investing: 1) Write the dollar amount of your
initial purchase in the column corresponding to the class of shares you have
chosen (If you are eligible for a reduced sales charge, you must also complete
Section 4F) 2) Circle a distribution option for your dividends 3) Circle a
distribution option for your capital gains. All distributions (dividends and
capital gains) will be reinvested into your fund account unless you direct
otherwise. If you want distributions sent directly to your bank account, then
you must complete Section 4D and attach a voided check for that account. If you
want your distributions sent to a third party you must complete Section 4E.
- -----------
SECTION 4 YOUR SHAREHOLDER OPTIONS (COMPLETE ONLY THOSE OPTIONS YOU WANT)
- -----------
A. AUTOMATIC INVESTMENT PLANS (AIP) - You can make periodic investments into
any of your Alliance Funds in one of three ways. First, by a periodic
withdrawal ($25 minimum) directly from your bank account and invested into
an Alliance Fund. Second, you can direct your distributions (dividends and
capital gains) from one Alliance Fund into another Fund. Or third, you can
automatically exchange monthly ($25 minimum) shares of one Alliance Fund
for shares of another Fund. To elect one of these options, complete the
appropriate portion of Section 4A.
B. SYSTEMATIC WITHDRAWAL PLANS (SWP) - Complete this option if you wish to
periodically redeem dollars from one of your fund accounts. Payments can be
made via Electronic Funds Transfer (EFT) to your bank account or by check.
C. TELEPHONE TRANSACTIONS VIA EFT - Complete this option if you would like to
be able to transact via telephone between your fund account and your bank
account.
D. BANK INFORMATION - If you have elected any options that involve
transactions between your bank account and your fund account or have
elected cash distribution options and would like the payments sent to your
bank account, please tape a voided check of the account you wish to use to
this section of the application.
E. THIRD PARTY PAYMENT DETAILS - If you have chosen cash distributions and/or
a Systematic Withdrawal Plan and would like the payments sent to a person
and/or address other than those provided in section 1 or 2, complete this
option.
F. REDUCED CHARGES (CLASS A ONLY) - Complete if you would like to link fund
accounts that have combined balances that might exceed $100,000 so that
future purchases will receive discounts. Complete if you intend to purchase
over $100,000 within 13 months.
- -----------
SECTION 5 SHAREHOLDER AUTHORIZATION (REQUIRED)
- -----------
All owners must sign. If it is a custodial, corporate, or trust account, the
custodian, an authorized officer, or the trustee respectively must sign.
IF WE CAN ASSIST YOU IN ANY WAY, PLEASE DO NOT HESITATE TO CALL US AT: (800)
221-5672.
<PAGE>
This is filed pursuant to Rule 497(c).
Files Nos. 33-7812 and 811-4791.
<PAGE>
<PAGE>
ALLIANCE MUNICIPAL
- --------------------------------------------------------------------------------
INCOME PORTFOLIOS
- --------------------------------------------------------------------------------
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
Prospectus and Application
(Advisor Class)
June [ ], 1996
National Portfolio Michigan Portfolio
Insured National Portfolio Minnesota Portfolio
Arizona Portfolio New Jersey Portfolio
California Portfolio New York Portfolio
Insured California Portfolio Ohio Portfolio
Florida Portfolio Pennsylvania Portfolio
Massachusetts Portfolio Virginia Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
The Portfolios At A Glance ............................................. 2
Expense Information .................................................... 3
Financial Highlights ................................................... 4
Description of the Portfolios .......................................... 5
Investment Objective ................................................ 5
How the Portfolios Pursue Their Objective ........................... 5
Additional Investment Practices ..................................... 8
Certain Fundamental Investment Policies ............................. 13
Risk Considerations ................................................. 13
Purchase and Sale of Shares ............................................ 14
Management of the Funds ................................................ 16
Dividends, Distributions and Taxes ..................................... 16
General Information .................................................... 19
</TABLE>
- --------------------------------------------------------------------------------
Adviser
Alliance Capital Management L.P.
1345 Avenue Of The Americas
New York, New York 10105
The fourteen Alliance Municipal Income Portfolios, by investing principally in
high-yielding, predominantly medium-quality municipal securities, seek to
provide their shareholders with the highest level of income exempt from Federal
and state tax that is available without assuming undue risk. These securities
generally offer current yields above those of higher quality municipal
obligations.
Each Portfolio is a series of Alliance Municipal Income Fund, Inc. or Alliance
Municipal Income Fund II (each a "Fund"), which are open-end management
investment companies. This Prospectus sets forth concisely the information which
a prospective investor should know about each Fund before investing. A
"Statement of Additional Information" for each Fund which provides further
information regarding certain matters discussed in this Prospectus and other
matters which may be of interest to some investors has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. For
a free copy, write Alliance Fund Services, Inc. at the indicated address or call
the "For Literature" telephone number shown above.
This Prospectus offers the Advisor Class shares of each Portfolio which may be
purchased at net asset value without any initial or contingent deferred sales
charges and without ongoing distribution expenses. Advisor Class shares are
offered solely to (i) investors participating in fee-based programs meeting
certain standards established by Alliance Fund Distributors, Inc., each Fund's
principal underwriter, and (ii) participants in self-directed defined
contribution employee benefit plans (e.g., 401(k) plans) that meet certain
minimum standards. See "Purchase and Sale of Shares."
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Alliance(R)
Mutual funds without the Mystery(SM)
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
<PAGE>
The Portfolios At A Glance
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
- --------------------------------------------------------------------------------
ALLIANCE MUNICIPAL
INCOME PORTFOLIOS
National Portfolio
Insured National Portfolio
Arizona Portfolio
California Portfolio
Insured California Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
- --------------------------------------------------------------------------------
The Portfolios Seek...
High current tax-free income.
The National Portfolios Invest Principally in...
Diversified portfolios of medium-quality and investment grade municipal
securities.
The State Portfolios Invest Principally in...
Non-diversified portfolios of medium-quality and investment grade municipal
securities.
The Funds' Investment Manager Is...
Alliance Capital Management L.P. ("Alliance"), a global investment manager
providing diversified services to institutions and individuals through a broad
line of investments including 107 mutual funds. Since 1971, Alliance has earned
a reputation as a leader in the investment world with over $156 billion in
assets under management as of March 1, 1996. Alliance provides investment
management services to 34 of the FORTUNE 100 companies.
The Type Of Investor Who May Want To Invest In These Portfolios Is...
An investor who wants tax-free income or is interested in the advantage of
tax-free investing. An investment in one of the Portfolios may soften the "tax
bite" because the income an investor earns is tax-free. Of course, bond prices
and yields will fluctuate with market conditions, so that your shares, when
redeemed, may be worth more or less than their original cost.
A Word About Risk...
The prices of the shares of the Alliance Municipal Income Portfolios will
fluctuate as the daily prices of the individual bonds in which they invest
fluctuate, so that your shares, when redeemed, may be worth more or less than
their original cost. Price fluctuations may be caused by changes in the general
level of interest rates or changes in bond credit quality ratings. Changes in
interest rates have a greater effect on bonds with longer maturities than those
with shorter maturities. While the Portfolios invest principally in bonds and
other fixed-income securities, in order to achieve their investment objectives,
the Portfolios may at times use certain types of derivative instruments, such as
options, futures, forwards and swaps. These involve risks different from, and,
in certain cases, greater than, the risks presented by more traditional
investments. These risks are fully discussed in this Prospectus. See
"Description of the Portfolios--Additional Investment Practices" and "--Risk
Considerations."
Getting Started...
Shares of the Portfolios are available through your financial representative.
Each Portfolio offers multiple classes of shares, of which only the Advisor
Class is offered by this Prospectus. Advisor Class shares may be purchased at
net asset value without any initial or contingent deferred sales charges and
without distribution expenses. Advisor Class shares may be purchased solely by
investors (i) through accounts established under a fee-based program, sponsored
and maintained by a registered broker-dealer or other financial intermediary and
approved by Alliance Fund Distributors, Inc., each Fund's principal underwriter,
pursuant to which each investor pays an asset-based fee at an annual rate of at
least .50% of the assets in the investor's account, to the broker-dealer or
financial intermediary, or its affiliate or agent, for investment advisory or
administrative services, or (ii) through a self-directed defined contribution
employee benefit plan (e.g., a 401(k) plan) that has at least 1,000 participants
or $25 million in assets. Shares can be purchased for a minimum initial
investment of $250, and subsequent investments can be made for as little as $50.
Fee-based programs through which Advisor Class shares may be purchased may
impose different requirements with respect to minimum initial and subsequent
investment levels than described above. For detailed information about
purchasing and selling shares, see "Purchase and Sale of Shares." Be sure to ask
your financial representative about:
- --------------------------------------------------------------------------------
AUTOMATIC REINVESTMENT
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
- --------------------------------------------------------------------------------
DIVIDEND DIRECTION PLANS
- --------------------------------------------------------------------------------
AUTO EXCHANGE
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
- --------------------------------------------------------------------------------
CHECKWRITING
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
24 HOUR INFORMATION
- --------------------------------------------------------------------------------
Alliance(R)
Mutual funds without the Mystery(SM)
(R)/SM These are registered marks used under licenses from the owner, Alliance
Capital Management L.P.
2
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses are one of several factors to consider when you
invest in a Portfolio. The following table summarizes your maximum transaction
costs from investing in the Advisor Class shares of each Portfolio and annual
expenses for Advisor Class shares of each Portfolio. For each Portfolio, the
"Examples" to the right of the table below show the cumulative expenses
attributable to a hypothetical $1,000 investment in Advisor Class shares for the
periods specified.
<TABLE>
<CAPTION>
Advisor Class Shares
--------------------
<S> <C>
Maximum sales charge imposed on purchases ............. None
Sales charge imposed on dividend reinvestments ........ None
Deferred sales charge ................................. None
Exchange fee .......................................... None
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating Expenses Examples
- ---------------------------------------------------------- -----------------------------------------
National Portfolio Advisor Class Advisor Class
------------- -------------
<S> <C> <C> <C>
Management fees (after waiver) .24% After 1 year $ 4
Other expenses (a) .17% After 3 years $13
---
Total Portfolio
Operating expenses (b) .41%
===
Insured National Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .49% After 1 year $ 7
Other expenses (a) .22% After 3 years $23
---
Total Portfolio
Operating expenses (b) .71%
===
Arizona Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 5
Other expenses (after After 3 years $15
reimbursement) (a) .48%
---
Total Portfolio
Operating expenses (b) .48%
===
California Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .32% After 1 year $ 5
Other expenses (a) .12% After 3 years $14
---
Total Portfolio
Operating expenses (b) .44%
===
Insured California Portfolio Advisor Class Advisor Class
------------- -------------
Management fees .55% After 1 year $ 8
Other expenses (a) .24% After 3 years $25
---
Total Portfolio
Operating expenses (b) .79%
===
Florida Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .14% After 1 year $ 4
Other expenses (a) .29% After 3 years $14
---
Total Portfolio
Operating expenses (b) .43%
===
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page [ ] and the discussion following these
tables on page [ ].
3
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses Examples
- ---------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C>
Massachusetts Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 3
Other expenses (after After 3 years $10
reimbursement (a) .30%
---
Total Portfolio
Operating expenses (b) .30%
===
Michigan Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 7
Other expenses (after After 3 years $21
reimbursement (a) .66%
---
Total Portfolio
Operating expenses (b) .66%
===
Minnesota Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 4
Other expenses (after After 3 years $13
reimbursement (a) .41%
---
Total Portfolio
Operating expenses (b) .41%
===
New Jersey Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .20% After 1 year $ 5
Other expenses (a) .32% After 3 years $17
---
Total Portfolio
Operating expenses .52%
===
New York Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .25% After 1 year $ 5
Other expenses (a) .20% After 3 years $14
---
Total Portfolio
Operating expenses (b) .45%
===
Ohio Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 5
Other expenses (a) .45% After 3 years $14
---
Total Portfolio
Operating expenses (b) .45%
===
Pennsylvania Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .30% After 1 year $ 7
Other expenses (a) .40% After 3 years $22
---
Total Portfolio
Operating expenses (b) .70%
===
Virginia Portfolio Advisor Class Advisor Class
------------- -------------
Management fees (after waiver) .00% After 1 year $ 4
Other expenses (after After 3 years $12
reimbursement) (a) .37%
---
Total Portfolio
Operating expenses (b) .37%
===
</TABLE>
- --------------------------------------------------------------------------------
(a) These expenses include a transfer agency fee payable to Alliance Fund
Services, Inc., an affiliate of Alliance, based on a fixed dollar amount
charged to the Portfolio for each shareholder's account.
(b) Net of any voluntary fee waiver and expense reimbursement.
4
<PAGE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in a Portfolio will bear
directly or indirectly. The examples do not reflect any charges or expenses
imposed by your financial representative or your employee benefit plan. The
management fees listed in the above tables are net of voluntary fee waivers and
total expenses are, for certain funds, net of expense reimbursements. Absent
such waivers and reimbursements, (i) the management fees for the National,
Insured National, California and New York Portfolios would have been .625%,
.604%, .625% and .625% of daily average net assets, respectively, and total
portfolio operating expenses would have been .79%, .82%, .74%, .79% and .82% of
average daily net assets, respectively, (ii) the management fees for the
Arizona, Florida, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios would have been .625% of daily average net
assets for each Portfolio, and total operating expenses would have been 4.04%,
1.04%, 3.09%, 2.62%, 2.00%, 1.06%, 1.25%, 1.18% and 6.10% of average daily net
assets, respectively. "Other Expenses" are based on estimated amounts for each
Portfolio's current fiscal year. The examples set forth above assume
reinvestment of all dividends and distributions and utilize a 5% annual rate of
return as mandated by Commission regulations. The examples should not be
considered representative of future expenses; actual expenses may be greater or
less than those shown.
5
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
Each Portfolio is a separate pool of assets constituting, in effect, a separate
fund. Except as otherwise indicated, the Portfolios' investment policies are not
"fundamental policies" and may, therefore, be changed without a shareholder
vote. However, no Portfolio will change its investment policies without
contemporaneous written notice to its shareholders. There is no guarantee that
any Portfolio will achieve its investment objective.
INVESTMENT OBJECTIVE
The investment objective of each Portfolio (other than the Insured California
Portfolio, as discussed below) is to earn the highest level of current income,
exempt from Federal and state taxation to the extent described, that is
available without assuming what Alliance considers to be undue risk by investing
principally in high-yielding, predominantly medium-quality, intermediate and
long-term debt obligations issued by: (i) in the case of the National and
Insured National Portfolios, states, territories and possessions of the United
States and the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations and, (ii) in the case of each of the
State Portfolios, the named state, and its political subdivisions, agencies and
instrumentalities. These securities are generally known as "municipal
securities." The average weighted maturity of the securities in each Portfolio
normally will range between 10 and 25 years.
Current Federal tax law distinguishes between municipal securities issued to
finance certain "private activities" and other municipal securities. Such
private activity bonds include bonds issued to finance such projects as
airports, housing projects, resource recovery programs, solid waste disposal
facilities, student loan programs, and water and sewage projects. Interest from
such "private activity bonds" ("AMT-Subject Bonds") becomes an item of "tax
preference" which is subject to the alternative minimum tax ("AMT") when
received by a person in a tax year during which the person is subject to that
tax. Because interest on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal securities
generally will provide somewhat higher yields than other municipal securities
("AMT-Exempt Bonds") of comparable quality and maturity.
HOW THE PORTFOLIOS PURSUE THEIR OBJECTIVE
The National Portfolio invests principally in a diversified portfolio of
municipal securities, the interest from which is wholly exempt from Federal
income taxes except when received by a shareholder who will be subject to the
AMT. The National Portfolio may invest without limit in AMT-Subject Bonds. As of
October 31, 1995, 82% of the National Portfolio's total net assets was invested
in AMT-Subject Bonds.
The Insured National Portfolio invests principally in AMT-Exempt Bonds that are
insured as to the payment of principal and interest ("insured securities"). The
investment policies of the Insured National Portfolio differ from those of the
National Portfolio in two respects: (i) whereas the National Portfolio invests
principally in AMT-Subject Bonds, the Insured National Portfolio invests
principally in a diversified portfolio of AMT-Exempt Bonds; and (ii) as a matter
of fundamental policy, the Insured National Portfolio, under normal market
conditions, invests at least 65% of its total assets in insured securities. (See
page 14 for a further discussion of the insurance feature.) The Insured National
Portfolio may be suitable for an investor who will be subject to the AMT to the
extent that the after-tax yield of the National Portfolio to such an investor is
less than the yield of the Insured National Portfolio. From time to time, the
National and Insured National Portfolios may invest 25% or more of their
respective total assets in municipal securities whose issuers are located in the
same state.
Each of the twelve State Portfolios invests in a non-diversified portfolio of
municipal securities the interest from which, in the opinion of bond counsel to
the issuer, is exempt from Federal income tax and from personal income tax in
the named state, or in the case of the Florida Portfolio, from the Florida
intangible tax (Florida currently imposes no income taxes on individuals.)
Normally, substantially all of the total assets of each State Portfolio will be
invested in municipal securities of the indicated state. Each Portfolio other
than the Insured National and Insured California Portfolios may invest without
limit in AMT-Subject Bonds.
The Insured California Portfolio seeks to provide as high a level of current
income exempt from Federal income tax and California personal income tax as is
consistent with the preservation of capital. As a matter of fundamental policy,
the Insured California Portfolio normally invests at least 80% of its total
assets in municipal bonds, at least 80% of its total assets in AMT-Exempt Bonds
and at least 65% of its total assets in insured securities. The Insured
California Portfolio's current policy is to invest at least 65% of its total
assets in municipal bonds issued by California or its political subdivisions
("California Bonds"), at least 80% of its total assets in insured bonds, and not
to invest in AMT-Subject Bonds. The remainder of the Insured California
Portfolio's total assets may be invested in uninsured California Bonds.
The California Portfolio invests in AMT-Subject Bonds issued by California and
its political subdivisions. As a matter of fundamental policy, at least 80% of
the California Portfolio's total assets normally will be invested in municipal
securities and at least 65% of its total assets normally will be invested in
AMT-Subject Bonds. The California Portfolio normally will invest at least 65% of
its total assets in California Bonds. As of October 31, 1995, 69% of the
California Portfolio's total net assets was invested in AMT-Subject Bonds.
6
<PAGE>
The New York Portfolio invests in AMT-Subject Bonds issued by New York State and
its political subdivisions. As a matter of fundamental policy, at least 65% of
the New York Portfolio's total assets normally will be so invested. In addition,
the Portfolio will invest in at least 80% of its net assets in municipal
securities the interest on which is exempt from Federal income tax. As of
October 31, 1995, 81% of the Portfolio's total net assets was invested in
AMT-Subject Bonds.
As of September 30, 1995, 36% of the Arizona Portfolio's total net assets, 63%
of the Florida Portfolio's total net assets, 34% of the Massachusetts
Portfolio's total net assets, 25% of the Michigan Portfolio's total assets, 29%
of the Minnesota Portfolio's total net assets, 55% of the New Jersey Portfolio`s
total net assets, 40% of the Ohio Portfolio's total net assets, 52% of the
Pennsylvania Portfolio`s total net assets and 38% of the Virginia Portfolio's
total net assets were invested in AMT-Subject Bonds.
As a matter of fundamental policy, each of the Arizona, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia Portfolios will
normally invest (i) at least 65% of its total assets in municipal securities of
the named state, and (ii) at least 80% of its net assets in municipal securities
the interest on which is exempt from Federal income tax. In addition, the New
Jersey Portfolio will invest at least 80% of its net assets in securities the
interest on which is exempt from New Jersey personal income tax (i.e., New
Jersey municipal securities and obligations of the U.S. government, its agencies
and instrumentalities ("U.S. Government Securities")). Where consistent with
applicable state law, each State Portfolio may also invest in municipal
securities issued by governmental entities (for example, U.S. territories)
outside the named state if such municipal securities generate interest exempt
from Federal income tax and personal income tax (or the Florida intangible tax)
in the named state. When Alliance believes that municipal securities of the
named state that meet the Portfolio's quality standards are not available, any
State Portfolio may invest in securities whose interest payments are only
federally tax-exempt.
Municipal Securities--Further Information. The two principal classifications of
municipal securities are bonds and notes. Municipal bonds, which are intended to
meet longer-term capital needs, are typically classified as either "general
obligation" or "revenue" (or "special tax") bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. Each Portfolio may invest more than 25% of its assets
in tax-exempt private activity bonds, which in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of the
principal and interest on such private activity bonds is dependent 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. Each Portfolio may invest more than 25%
of its total assets in securities or obligations which are related in such a way
that business or political developments or changes affecting one such security
could also affect the others (for example, securities the interest on which is
paid from projects of a similar type.)
Municipal notes, which may be either "general obligation" or "revenue"
securities, are intended to fulfill short-term capital needs and generally have
original maturities not exceeding one year. They include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
tax-exempt commercial paper.
The yields of municipal securities depend on, among other things, conditions in
the municipal bond market and fixed income markets generally, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. Normally, lower-rated municipal securities provide yields superior to
those of more highly rated securities, but involve greater risks. When the
spread between the yields of lower-rated obligations and those of more highly
rated issues is relatively narrow, a Portfolio may invest in the latter since
they will provide optimal yields with somewhat less risk.
The high tax-free yields sought by the Portfolios are generally obtainable from
medium-quality municipal securities rated A or Baa by Moody's Investors Service,
Inc. ("Moody's"), or A or BBB by Standard & Poor's Ratings Services (S&P), Duff
& Phelps Credit Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc.
("Fitch"). Each Portfolio may maintain up to 25% of its net assets, in municipal
securities rated below Baa by Moody's and below BBB by S&P, Duff & Phelps and
Fitch or, if non-rated, determined by Alliance to be of comparable quality. At
least 75% of the total assets of each Portfolio will be invested in municipal
securities rated at the time of purchase Baa or higher by Moody's or BBB or
higher by S&P, Duff & Phelps or Fitch. It is expected that no Portfolio will
retain a municipal security downgraded below Caa by Moody's and CCC by S&P, Duff
& Phelps and Fitch, or if unrated, determined by Alliance to have undergone
similar credit quality deterioration.
Non-rated municipal securities may be purchased by a Portfolio when Alliance
believes that the financial condition of the issuers of such obligations and the
protection afforded by their terms limit risk to a level comparable to that of
rated securities that are consistent with the Portfolio's investment policies.
During the fiscal year ended October 31, 1995, the Insured National and Insured
California Portfolios invested all of their assets in securities rated A and
above by S&P, or if unrated by S&P, considered by Alliance to be of equivalent
quality to securities rated A or above. During the following Portfolios'
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fiscal years ended in 1995, on a weighted average basis, the percentages of the
assets invested in securities rated in particular rating categories by S&P or,
if not rated by S&P, considered by Alliance to be of equivalent quality to such
ratings, were as follows:
<TABLE>
<CAPTION>
Portfolio A and above BBB BB B
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National 84% 16% -- --
Arizona 95 5 -- --
California 81 11 7 1%
Florida 75 25 -- --
Massachusetts 91 9 -- --
Michigan 81 19 -- --
Minnesota 79 21 -- --
New Jersey 81 19 -- --
New York 92 8 -- --
Ohio 79 15 6 --
Pennsylvania 78 22 -- --
Virginia 95 5 -- --
</TABLE>
Each Portfolio may invest up to 35% of its total assets in zero coupon municipal
securities. Each Portfolio also may invest in municipal securities that have
fixed, variable, floating or inverse floating rates of interest. See "Additional
Investment Practices--Zero Coupon Securities" and "--Variable, Floating and
Inverse Floating Rate Investments." Each Portfolio normally will invest at least
65% of its total assets in income-producing securities (including zero coupon
securities).
Insurance Feature of the Insured National and Insured California Portfolios. The
Insured National and Insured California Portfolios normally will invest at least
65% and 80%, respectively, of their total assets in insured securities. At the
time of purchase by a Portfolio, insured securities are either (i) insured under
an insurance policy that relates to the specific municipal security in question
(a "Specific Issue Insurance Policy") or (ii) insured under a Mutual Fund
Insurance Policy issued to the Portfolio's Fund by an appropriate insurer. If a
municipal security is already covered by a Specific Issue Insurance Policy when
acquired by the Portfolio, then coverage will not be duplicated by a Mutual Fund
Insurance Policy. Based upon the expected composition of each of the Insured
National and Insured California Portfolios, Alliance estimates that the annual
premiums for a Mutual Fund Insurance Policy and/or Special Issue Insurance
Policy will range from .12 of 1% to .75 of 1% of the average net assets of each
Portfolio. Although the insurance feature reduces certain financial risks, the
premiums for a Mutual Fund Insurance Policy, and for many Specific Issue
Insurance Policies, which are paid from each of the Insured National and Insured
California Portfolio's assets, will reduce each Portfolio's current yield.
Insurance is not a substitute for the basic credit of an issuer, but supplements
the existing credit and provides additional security therefor. While insurance
coverage for municipal securities held by the Insured National and Insured
California Portfolios reduces credit risk by insuring that the Portfolios will
receive payment of principal and interest, it does not protect against market
fluctuations caused by changes in interest rates or other factors.
The Insured National and Insured California Portfolios may obtain insurance on
their municipal bonds or purchase insured municipal bonds covered by policies
issued by any insurer having a claims-paying ability rated AA by S&P or Aaa by
Moody's. Alliance is familiar with five such insurers, Municipal Bond Investors
Assurance Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"),
AMBAC Indemnity Corporation ("AMBAC"), Financial Security Assurance Inc. ("FSA")
and Capital Guaranty Insurance Company ("CGIC"). S&P has rated AAA the
claims-paying ability of MBIA, FGIC, AMBAC, FSA and CGIC, and the municipal
bonds insured by these organizations. Further information with respect to MBIA,
FGIC, AMBAC, FSA and CGIC is provided in the Statement of Additional Information
of Alliance Municipal Income Fund, Inc.
ADDITIONAL INVESTMENT PRACTICES
Some or all of the Portfolios may engage in the following investment practices
to the extent described in this Prospectus. See the Statement of Additional
Information of each Fund for a further discussion of the uses, risks and costs
of engaging in these practices.
Derivatives. The Portfolios may use derivatives in furtherance of their
investment objectives. Derivatives are financial contracts whose value depends
on, or is derived from, the value of an underlying asset, reference rate or
index. These assets, rates, and indices may include bonds, stocks, mortgages,
commodities, interest rates, bond indices and stock indices. Derivatives can be
used to earn income or protect against risk, or both. For example, one party
with unwanted risk may agree to pass that risk to another party who is willing
to accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Portfolios to earn income and
enhance returns, to hedge or adjust the risk profile of an investment portfolio,
and in place of more traditional direct investments. Each of the Portfolios is
permitted to use derivatives for one or more of these purposes, although most of
the Portfolios generally use derivatives primarily as direct investments in
order to enhance yields and broaden portfolio diversification. Each of these
uses entails greater risk than if derivatives were used solely for hedging
purposes. Derivatives are a valuable tool which, when used properly, can provide
significant benefit to Portfolio shareholders. A Portfolio may take a
significant position in those derivatives that are within its investment
policies if, in Alliance's judgement, this represents the most effective
response to current or anticipated market conditions.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created.
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<PAGE>
o Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index) at a specified price
(the exercise price) during a period of time or on a specified date. A call
option entitles the holder to purchase, while a put option entitles the
holder to sell, the underlying asset (or settle for cash an amount based on
an underlying asset, rate or index). Likewise, when an option is exercised
the writer of the option would be obligated to sell (in the case of a call
option) or to purchase (in the case of a put option) the underlying asset
(or settle for cash an amount based on an underlying asset, rate or index).
o Futures--A futures contract is an agreement that obligates the buyer to buy
and the seller to sell a specified quantity of an underlying asset (or
settle for cash the value of a contract based on an underlying asset, rate
or index) at a specific price on the contract maturity date. Futures
contracts are standardized, exchange-traded instruments and are fungible
(i.e., considered to be perfect substitutes for each other). This
fungibility allows futures contracts to be readily offset or cancelled
through the acquisition of equal but opposite positions, which is the
primary method in which futures contracts are liquidated. A cash-settled
futures contract does not require physical delivery of the underlying asset
but instead is settled for cash equal to the difference between the values
of the contract on the date it is entered into and its maturity date.
o Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or
other tangible asset for an agreed upon price at a future date. Forward
contracts are customized, privately negotiated agreements designed to
satisfy the objectives of each party. A forward contract usually results in
the delivery of the underlying asset upon maturity of the contract in
return for the agreed upon payment.
o Swaps--A swap is a customized, privately negotiated agreement that
obligates two parties to exchange a series of cash flows at specified
intervals (payment dates) based upon or calculated by reference to changes
in specified prices or rates (e.g., interest rates in the case of interest
rate swaps) for a specified amount of an underlying asset (the "notional"
principal amount). The payment flows are netted against each other, with
the difference being paid by one party to the other. The notional principal
amount is used solely to calculate the payment streams but is not
exchanged.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities."
Examples of this type of structured security include certain securities
described below under "Variable, Floating and Inverse Floating Rate
Instruments."
While the judicious use of derivatives by highly experienced investment managers
such as Alliance can be quite beneficial, derivatives also involve risks
different from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Portfolio.
o Market Risk--This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to the
Portfolio's interest.
o Management Risk--Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that
a derivative adds to a Portfolio's portfolio and the ability to forecast
price and interest rate movements correctly.
o Credit Risk--This is the risk that a loss may be sustained by a Portfolio
as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange-traded derivatives is generally less
than for privately negotiated derivatives, since the clearing house, which
is the issuer or counterparty to each exchange-traded derivative, provides
a guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order
to reduce overall credit risk. For privately negotiated derivatives, there
is no similar clearing agency guarantee. Therefore, the Portfolios consider
the creditworthiness of each counterparty to a privately negotiated
derivative in evaluating potential credit risk.
o Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
o Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is
related to a notional principal amount, even if the parties have not made
any initial investment. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment.
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<PAGE>
o Other Risks--Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of
derivatives to correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately negotiated derivatives,
are complex and often valued subjectively. Improper valuations can result
in increased cash payment requirements to counterparties or a loss of value
to a Portfolio. Derivatives do not always perfectly or even highly
correlate or track the value of the assets, rates or indices they are
designed to closely track. Consequently, a Portfolio's use of derivatives
may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio's investment objective.
Derivatives Used by the Portfolios. Following is a description of specific
derivatives currently used by one or more of the Portfolios.
Options on Municipal and U.S. Government Securities. In an effort to increase
current income and to reduce fluctuations in net asset value, the Portfolios
intend to write covered put and call options and purchase put and call options
on municipal securities and U.S. Government securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and purchasing of
options by the Portfolios. In purchasing an option on securities, a Portfolio
would be in a position to realize a gain if, during the option period, the price
of the underlying securities increased (in the case of a call) or decreased (in
the case of a put) by an amount in excess of the premium paid; otherwise the
Portfolio would experience a loss not greater than the premium paid for the
option. Thus, a Portfolio would realize a loss if the price of the underlying
security declined or remained the same (in the case of a call) or increased or
remained the same (in the case of a put) or otherwise did not increase (in the
case of a put) or decrease (in the case of a call) by more than the amount of
the premium. If a put or call option purchased by a Portfolio were permitted to
expire without being sold or exercised, its premium would represent a loss to
the Portfolio.
A Portfolio may write a put or call option in return for a premium, which is
retained by the Portfolio whether or not the option is exercised. Except with
respect to uncovered call options written for cross-hedging purposes, none of
the Portfolios will write uncovered call or put options. A call option written
by a Portfolio is "covered" if the Portfolio owns the underlying security, has
an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than that of the call option it
has written. A put option written by a Portfolio is covered if the Portfolio
holds a put option on the underlying securities with an exercise price equal to
or greater than that of the put option it has written.
The risk involved in writing an uncovered put option is that there could be a
decrease in the market value of the underlying securities. If this occurred, a
Portfolio could be obligated to purchase the underlying security at a higher
price than its current market value. Conversely, the risk involved in writing an
uncovered call option is that there could be an increase in the market value of
the underlying security, and a Portfolio could be obligated to acquire the
underlying security at its current price and sell it at a lower price. The risk
of loss from writing an uncovered put option is limited to the exercise price of
the option, whereas the risk of loss from writing an uncovered call option is
potentially unlimited.
A Portfolio may write a call option on a security that it does not own in order
to hedge against a decline in the value of a security that it owns or has the
right to acquire, a technique referred to as "cross-hedging." A Portfolio would
write a call option for cross-hedging purposes, instead of writing a covered
call option, when the premium to be received from the cross-hedge transaction
exceeds that to be received from writing a covered call option, while at the
same time achieving the desired hedge. The correlation risk involved in
cross-hedging may be greater than the correlation risk involved from other
hedging strategies.
The Portfolios may purchase or write privately negotiated options on securities.
A Portfolio that purchases or writes privately negotiated options on securities
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by Alliance, and Alliance has adopted procedures for monitoring the
creditworthiness of such counterparties. Privately negotiated options purchased
or written by a Portfolio may be illiquid, and it may not be possible for the
Portfolio to effect a closing transaction at an advantageous time. See "Illiquid
Securities" below.
Futures Contracts and Options on Futures Contracts. Futures contracts that a
Portfolio may buy and sell may include futures contracts on municipal securities
or U.S. Government Securities and contracts based on any index of municipal
securities or U.S. Government securities.
Options on futures contracts are options that call for the delivery upon
exercise of futures contracts. Options on futures contracts written or purchased
by a Portfolio will be traded on U.S. exchanges and will be used only for
hedging purposes.
A Portfolio will not enter into a futures contract or option on a futures
contract if immediately thereafter the market values of the outstanding futures
contracts of the Portfolio and the futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of its total assets.
Forward Commitments. Each Portfolio may purchase or sell municipal securities on
a forward commitment basis. Forward commitments are forward contracts for the
purchase or sale of securities, including purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. In some cases, a forward
commitment may be conditioned upon the occurrence of a subsequent event, such as
approval and consummation of a merger, corporate reorganization or debt
10
<PAGE>
restructuring or approval of a proposed financing by appropriate authorities
(i.e., a "when, as and if issued" trade).
When forward commitments with respect to fixed-income securities are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation,
and no interest or dividends accrue to the purchaser prior to the settlement
date. At the time a Portfolio enters into a forward commitment, it records the
transaction and thereafter reflects the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation would be
canceled if the required conditions did not occur and the trade were canceled.
The use of forward commitments helps a Portfolio to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Portfolio might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, a Portfolio
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
a Portfolio if, as a result, the Portfolio's aggregate forward commitments under
such transactions would be more than 20% of its total assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date. The Portfolios enter into forward
commitments, however, only with the intention of actually receiving securities
or delivering them, as the case may be. If a Portfolio, however, chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
may incur a gain or loss.
Interest Rate Transactions (Swaps, Caps and Floors). Each Portfolio may enter
into interest rate swap, cap or floor transactions primarily for hedging
purposes, which may include preserving a return or spread on a particular
investment or portion of its portfolio or protecting against an increase in the
price of securities the Portfolio anticipates purchasing at a later date. The
Portfolios do not intend to use these transactions in a speculative manner.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments) computed based on a
contractually-based principal (or "notional") amount. Interest rate swaps are
entered into on a net basis (i.e., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments). Interest rate caps and floors are similar to options in that
the purchase of an interest rate cap or floor entitles the purchaser, to the
extent that a specified index exceeds (in the case of a cap) or falls below (in
the case of a floor) a predetermined interest rate, to receive payments of
interest on a notional amount from the party selling the interest rate cap or
floor. A Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or liabilities.
There is no limit on the amount of interest rate transactions that may be
entered into by a Portfolio that is permitted to enter into such transactions. A
Portfolio will not enter into an interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is then rated in the highest rating category of at least one nationally
recognized rating organization.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become well established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, unless there is a
counterparty default, the risk of loss to a Portfolio from interest rate
transactions is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make.
Zero Coupon Securities. Zero coupon securities are debt securities that have
been issued without interest coupons or stripped of their unmatured interest
coupons, and include receipts or certificates representing interests in such
stripped debt obligations and coupons. Such a security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value.
Such securities usually trade at a deep discount from their face or par value
and are subject to greater fluctuations in market value in response to changing
interest rates than debt obligations of comparable maturities and credit quality
that make current distributions of interest. On the other hand, because there
are no periodic interest payments to be reinvested prior to maturity, these
securities eliminate reinvestment risk and "lock in" a rate of return to
maturity.
Current federal tax law requires that a holder (such as a Portfolio) of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the security during the year. As a result, in order to make
the distributions necessary for a Portfolio not to be subject to federal income
or excise taxes, the Portfolio might be required to pay out as an income
distribution each year an amount, obtained by liquidation of portfolio
securities or borrowings if necessary, greater than the total amount of cash
that the Portfolio has actually received as interest during the year. Each
Portfolio believes, however, that it is highly unlikely
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that it would be necessary to liquidate portfolio securities or borrow money in
order to make such required distributions or to meet its investment objective.
For a discussion of the tax treatment of zero coupon Treasury securities, see
"Dividends, Distributions and Taxes--Zero Coupon Treasury Securities" in the
Statement of Additional Information of each Fund.
Variable, Floating and Inverse Floating Rate Instruments. Municipal securities
may have fixed, variable or floating rates of interest. Variable and floating
rate securities pay interest at rates that are adjusted periodically, according
to a specified formula. A "variable" interest rate adjusts at predetermined
intervals (e.g., daily, weekly or monthly), while a "floating" interest rate
adjusts whenever a specified benchmark rate (such as the bank prime lending
rate) changes.
A Portfolio may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap." The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
Each Portfolio may invest in municipal securities, the interest rate on which
has been divided into two different and variable components, which together
result in a fixed interest rate. These are generally known as inverse floaters.
Typically, the first of the components (the "auction component") pays an
interest rate that is reset periodically through an auction process, while the
second of the components (the "residual component") pays a current residual
interest rate based on the difference between the total interest paid by the
issuer on the municipal securities and the auction rate paid on the auction
component. A Portfolio may purchase both auction and residual components. When
an inverse floater is in the residual mode the interest rate typically resets in
the opposite direction from the variable or floating market rate of interest on
which the inverse floater is based. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in such variable or floating rate of
interest. The degree of leverge inherent in inverse floaters is associated with
a greater degree of volatility in terms of market value, such that the market
values of inverse floaters will tend to decrease more rapidly during periods of
rising interest rates, and increase more rapidily in periods of falling interest
rates, than those of fixed rate municipal securities.
Repurchase Agreements. A Portfolio may seek additional income by investing in
repurchase agreements pertaining only to U.S. Government securities. 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 a day
or a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon interest rate for the period the buyer's money is
invested in the security. Such agreements permit a Portfolio to keep all of its
assets at work while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. A Portfolio requires continual maintenance of
collateral in an amount equal to, or in excess of, the resale price. If a vendor
defaults on its repurchase obligation, a Portfolio would suffer a loss to the
extent that the proceeds from the sale of the collateral were less than the
repurchase price. If a vendor goes bankrupt, a Portfolio might be delayed in, or
prevented from, selling the collateral for its benefit. There is no percentage
restriction on any Portfolio's ability to enter into repurchase agreements. The
Portfolios may enter into repurchase agreements with member banks of the Federal
Reserve System or "primary dealers" (as designated by the Federal Reserve Bank
of New York).
Illiquid Securities. Subject to any applicable fundamental investment policy,
each Portfolio may not maintain more than 15% of its net assets in illiquid
securities. These securities include, among others, securities for which there
is no readily available market, options purchased by a Portfolio
over-the-counter, the cover for such options and repurchase agreements not
terminable within seven days.
Because of the absence of a trading market for illiquid securities, a Portfolio
may not be able to realize their full value upon sale. With respect to each
Portfolio that may invest in such securities, Alliance will monitor their
illiquidity under the supervision of the Directors or Trustees of the Fund. To
the extent permitted by applicable law, Rule 144A securities will not be treated
as "illiquid" for purposes of the foregoing restriction so long as such
securities meet liquidity guidelines established by a Fund's Directors or
Trustees.
Defensive Position. Under normal circumstances, substantially all of the total
assets of each Portfolio will be invested in the types of municipal securities
described in "How The Portfolios Pursue Their Objective" above. However, when
business or financial conditions warrant, each Portfolio may assume a temporary
defensive position and invest without limit in other municipal securities that
are in all other respects consistent with the Portfolio's investment policies.
For temporary defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P, MIG-2 (or VMIG-2)
or higher by Moody's, D-1 or higher by Duff & Phelps or FIN-2 or higher by
Fitch, or in taxable cash equivalents (limited, in the case of the Florida
Portfolio, to short-term U.S. Government Securities or repurchase agreements).
Portfolio Turnover. From time to time, the Portfolios may engage in active
short-term trading to benefit from yield disparities among different issues of
municipal securities, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. Such trading will increase a Portfolio's
rate of turnover and the incidence of short-term capital gain taxable as
ordinary income. Management anticipates that the annual turnover in each
Portfolio will not exceed 250%. An annual turnover rate of 200% occurs, for
example, when all of the securities in a Portfolio are replaced twice in a
period of one year. A high rate of portfolio turnover involves correspondingly
greater expenses than a lower rate, which expenses must be borne by a Portfolio
and its shareholders.
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However, the execution costs for municipal securities are substantially less
than those for equivalent dollar values of equity securities. See "Dividends,
Distributions and Taxes."
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Each Portfolio has adopted certain fundamental investment policies listed below,
which may not be changed without the approval of its shareholders. Additional
investment restrictions with respect to a Portfolio are set forth in the
Statements of Additional Information.
No Portfolio other than the Insured California Portfolio may: (i) invest more
than 5% of its total assets in the securities of any one issuer except the U.S.
Government, although with respect to 25% of the total assets of the National and
Insured National Portfolios and 50% of the total assets of the State Portfolios
(other than the Insured California Portfolio) each such Portfolio may invest in
any number of issuers; (ii) invest 25% or more 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 issued by governmental users
(including private activity bonds issued by governmental users), U.S. Government
Securities 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 entity with the primary responsibility for the payment of interest and
principal as the issuer); (iii) purchase more than 10% of any class of the
voting securities of any one issuer; (iv) have more than 5% of its assets
invested in repurchase agreements with the same dealer; (v) borrow money except
from banks for temporary or emergency purposes and then in amounts not exceeding
20% of its total assets; or (vi) in the case of the National, Insured National,
New York and California Portfolios, invest more than 10% of its total assets in
repurchase agreements not terminable within seven days (whether or not illiquid)
or other illiquid investments.
The Insured California Portfolio may not: (i) except when investing for
temporary defensive purposes, invest more than 35% of its total assets in
securities not covered by insurance which provides for the payment of principal
of and interest on such securities or invest more than 20% of its total assets
in securities the interest from which is subject to Federal income tax and
California personal income tax (there is no limit on the amount of securities
that may be insured by a single insurance company); (ii) invest more than 5% of
its total assets in the securities of any one issuer or invest in more than 10%
of the voting securities of any one issuer except that up to 50% of the Insured
California Portfolio's total assets may be invested without regard to this
limitation and except that this does not limit the amount of the Insured
California Portfolio's assets that may be invested in U.S. Government
Securities; (iii) invest more than 25% of its total assets in a single industry,
except that there is no limit on the amount of its assets which may be invested
in municipal securities issued by governments or political subdivisions thereof,
in a particular segment of the municipal securities market or (subject to (ii)
above) in U.S. Government Securities; (iv) invest more than 10% of its total
assets in repurchase agreements not terminable within seven days (whether or not
illiquid) or other illiquid investments; or (v) borrow money, except from banks
for temporary purposes and then in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
not in excess of 15% of its total assets at the time of such borrowing.
RISK CONSIDERATIONS
Municipal Securities. The value of each Portfolio's shares will fluctuate with
the value of its investments. The value of each Portfolio's investments will
change as the general level of interest rates fluctuates. During periods of
falling interest rates, the values of a Portfolio's securities generally rise.
Conversely, during periods of rising interest rates, the values of a Portfolio's
securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and
realization of capital losses on securities in a Portfolio's portfolio will be
unavoidable. Moreover, medium- and lower-rated securities and non-rated
securities of comparable quality may be subject to wider fluctuations in yield
and market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps and
Fitch are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may be varying
degrees of difference in credit risk of securities within each rating category.
Securities rated Aaa by Moody's and AAA by S&P, Duff & Phelps and Fitch are
considered to be of the highest quality; capacity to pay interest and repay
principal is extremely strong. Securities rated Aa by Moody's and AA by S&P,
Duff & Phelps and Fitch are considered to be high quality; capacity to repay
principal is considered very strong, although elements may exist that make risks
appear somewhat larger than exist with securities rated Aaa or AAA. Securities
rated A are considered by Moody's to possess adequate factors giving security to
principal and interest. S&P, Duff & Phelps and Fitch consider such securities to
have a strong capacity to pay interest and repay principal. Such securities are
more susceptible to
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adverse changes in economic conditions and circumstances than higher-rated
securities.
Securities rated Baa by Moody's and BBB by S&P, Duff & Phelps and Fitch are
considered to have an adequate capacity to pay interest and repay principal.
Such securities are considered to have speculative characteristics and share
some of the same characteristics as lower-rated securities. Sustained periods of
deteriorating economic conditions or of rising interest rates are more likely to
lead to a weakening in the issuer's capacity to pay interest and repay principal
than in the case of higher-rated securities. Securities rated Ba by Moody's and
BB by S&P, Duff & Phelps and Fitch are considered to have speculative
characteristics with respect to capacity to pay interest and repay principal
over time; their future cannot be considered as well-assured. Securities rated B
by Moody's, S&P, Duff & Phelps and Fitch are considered to have highly
speculative characteristics with respect to capacity to pay interest and repay
principal. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Securities rated Caa by Moody's and CCC by S&P, Duff & Phelps and Fitch are of
poor standing and there is a present danger with respect to payment of principal
or interest. See the Statements of Additional Information for a description of
the ratings used by Moody's, S&P, Duff & Phelps and Fitch.
Investments in Lower-Rated Securities. Lower-rated securities, i.e., those rated
Ba and lower by Moody's or BB and lower by S&P, Duff & Phelps and Fitch
(commonly known as "junk bonds"), are subject to greater risk of loss of
principal and interest than higher rated securities. They are also generally
considered to be subject to greater market risk than higher-rated securities,
and the capacity of issuers of lower-rated securities to pay interest and repay
principal is more likely to weaken than is that of issuers of higher-rated
securities in times of deteriorating economic conditions or rising interest
rates. In addition, lower-rated securities may be more susceptible to real or
perceived adverse economic conditions than investment grade securities, although
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established
secondary market for lower-rated securities, a Portfolio may experience
difficulty in valuing such securities and, in turn, the Portfolio's assets.
Alliance will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political conditions.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Portfolio's securities than would be the case if a Portfolio did not invest in
lower-rated securities.
Non-rated Securities. Non-rated securities will also be considered for
investment by a Portfolio when Alliance believes that the financial condition of
the issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objective
and policies.
Non-diversified Status. Each of the State Portfolios is a "non-diversified"
investment company, which means the Portfolio is not limited in the proportion
of its assets that may be invested in the securities of a single issuer. Because
each State Portfolio will normally invest solely or substantially in municipal
securities of a particular state, it is more susceptible than a geographically
diversified municipal securities portfolio to local risk factors. Such risks
arise from the financial condition of the state involved and its municipalities.
To the extent such state or local governmental entities are unable to meet their
financial obligations, the income derived by the State Portfolios, their ability
to preserve or realize appreciation of their portfolio assets and their
liquidity could be impaired. The Statements of Additional Information of the
Funds provide certain information about the particular states.
Each Portfolio, however, intends to conduct its operations so as to qualify to
be taxed as a "regulated investment company" for purposes of the Internal
Revenue Code, which will relieve the Portfolio of any liability for federal
income tax to the extent its earnings are distributed to shareholders. See
"Dividends, Distributions and Taxes" in the Statements of Additional
Information. To so qualify, among other requirements, each Portfolio will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the Portfolio's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of its total assets,
not more than 5% of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of any such single issuer. A Portfolio's investments in U.S.
Government securities are not subject to these limitations.
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PURCHASE AND SALE OF SHARES
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HOW TO BUY SHARES
Each Portfolio offers multiple classes of shares, of which only the Advisor
Class is offered by this Prospectus. Advisor Class shares of each Portfolio may
be purchased through your financial representative at net asset value without
any initial or contingent deferred sales charges and without distribution
expenses. Advisor Class shares may be purchased solely by investors (i) through
accounts established under a fee-based
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program, sponsored and maintained by a registered broker-dealer or other
financial intermediary and approved by Alliance Fund Distributors, Inc. ("AFD"),
each Fund's principal underwriter, pursuant to which each investor pays an
asset-based fee at an annual rate of at least .50% of the assets in the
investor's account, to the broker-dealer or financial intermediary, or its
affiliate or agent, for investment advisory or administrative services, or (ii)
through a self directed defined contribution employee benefit plan (e.g., a
401(k) plan) that has at least 1,000 participants or $25 million in assets. The
minimum initial investment in each Portfolio is $250. The minimum for subsequent
investments in each Portfolio is $50. Investments of $25 or more are allowed
under the automatic investment program in each Portfolio and under a 403(b)(7)
retirement plan. Share certificates are issued only upon request. Under certain
conditions, the Funds may suspend purchases of shares. See the Subscription
Application and Statements of Additional Information for more information. In
the case of the State Portfolios, each Portfolio is available only to residents
of the indicated state.
The Portfolios may refuse any order to purchase Advisor Class shares. In this
regard, the Portfolios reserve the right to restrict purchases of Advisor Class
shares (including exchanges) when there appears to be evidenced of a pattern of
frequent purchases and sales made in response to short-term fluctuations in
share price.
How The Portfolios Value Their Shares
The net asset value of Advisor Class shares of a Portfolio is calculated by
dividing the value of the Portfolio's net assets allocable to the Advisor Class
by the outstanding shares of the Advisor Class. Shares are valued each day the
New York Stock Exchange (the "Exchange") is open as of the close of regular
trading (currently 4:00 p.m. Eastern time). The securities in a Portfolio are
valued at their current market value determined on the basis of market
quotations or, if such quotations are not readily available, such other methods
as the Fund's Directors or Trustees believe would accurately reflect fair market
value.
HOW TO SELL SHARES
You may "redeem", i.e., sell your shares in a Portfolio to a Fund on any day the
Exchange is open, either directly or through your financial representative. The
price you will receive is the net asset value next calculated after the Fund
receives your request in proper form. Proceeds generally will be sent to you
within seven days. However, for shares recently purchased by check or electronic
funds transfer, a Fund will not send proceeds until it is reasonably satisfied
that the check or electronic funds transfer has been collected (which may take
up to 15 days). If you are in doubt about what documents are required by your
fee-based program or employee retirement plan, you should consult your financial
representative.
Selling Shares Through Your Financial Representative
Your financial representative must receive your request before 4:00 p.m. Eastern
time, and your financial representative must transmit your request to the Fund
by 5:00 p.m. Eastern time, for you to receive that day's net asset value. Your
financial representative is responsible for furnishing all necessary
documentation to the Funds, and may charge you for this service.
Selling Shares Directly To A Fund
Send a signed letter of instruction or stock power form to Alliance Fund
Serivces, Inc. ("AFS") along with your certificates, if any, that represent the
shares you want to sell. For your protection, signatures must be guaranteed by a
bank, a member firm of a national stock exchange or other eligible guarantor
institution. Stock power forms are available from your financial representative,
AFS, and many commercial banks. Additional documentation is required for the
sale of shares by corporations, intermediaries, fiduciaries and surviving joint
owners. For details contact:
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
1-800-221-5672
Alternatively, a request for redemption of shares for which no stock
certificates have been issued can also be made by telephone to 800-221-5672.
Telephone redemption requests must be made by 4 p.m. Eastern time on a Fund
business day in order to receive that day's net asset value and, except for
certain omnibus accounts, may be made only once in any 30-day period. A
shareholder who has completed the Telephone Transactions section of the
Subscription Application, or the Shareholder Options form obtained from AFS, can
elect to have the proceeds of their redemption sent to their bank via an
electronic funds transfer. Proceeds of telephone redemptions also may be sent by
check to a shareholder's address of record. Except for certain omnibus accounts,
redemption requests by electronic funds transfer may not exceed $100,000 and
redemption requests by check may not exceed $50,000. Telephone redemption is not
available for shares held in nominee or "street name" accounts or retirement
plan accounts or shares held by a shareholder who has changed his or her address
of record within the previous 30 calendar days.
General
The sale of shares is a taxable transaction for federal tax purposes. Under
unusual circumstances, a Fund may suspend redemptions or postpone payment for up
to seven days or longer, as permitted by federal securities law. The Funds
reserve the right to close an account that through redemption has remained below
$200 for 90 days. Shareholders will receive 60 days' written notice to increase
the account value before the account is closed.
During drastic economic or market developments, you might have difficulty in
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephonic requests. The telephone
service may be suspended or terminated at any time without notice.
SHAREHOLDER SERVICES
AFS offers a variety of shareholder services. For more information about these
services or your account, call AFS's toll-free number, 800-221-5672.
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HOW TO EXCHANGE SHARES
You may exchange your Advisor Class shares of any Portfolio for Advisor Class
shares of other Alliance Mutual Funds (which include AFD Exchange Reserves, a
money market fund managed by Alliance). Exchanges of shares are made at the net
asset values next determined, without sales or service charges. Exchanges may be
made by telephone or written request. Telephone exchange request must be
received by AFS by 4:00 p.m. Eastern time on a Fund business day in order to
receive that day's net asset value.
Please read carefully the Prospectus of the mutual fund into which you are
exchanging before submitting the request. Call AFS at 800-221-5672 to exchange
uncertificated shares. An exchange is a taxable capital transaction for federal
tax purposes. The exchange service may be changed, suspended, or terminated on
60 days' written notice.
GENERAL
If you are a Fund shareholder through an account established under a fee-based
program, your fee-based program may impose requirements with respect to the
purchase, sale or exchange of Advisor Class shares of a Fund that are different
from those described in this Prospectus. A transaction fee may be charged by
your financial representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Each Portfolio offers three classes of shares other than the Advisor Class,
which are Class A, Class B and Class C. All classes of shares of a Portfolio
have a common investment objective and investment portfolio. Class A shares are
offered with an initial sales charge and pay a distribution services fee. Class
B shares have a contingent deferred sales charge (a "CDSC") and also pay a
distribution services fee. Class C shares have no initial sales charge or CDSC
but pay a distribution services fee. Because Advisor Class shares have no
initial sales charge or CDSC and pay no distribution services fee, Advisor Class
shares are expected to have different performance from Class A, Class B or Class
C shares. You may obtain more information about Class A, Class B and Class C
shares, which are not offered by this Prospectus, by contacting AFS by telephone
at 1-800-221-5672 or by contacting your financial representative.
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MANAGEMENT OF THE FUNDS
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ADVISER
Alliance, which is a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
advisory agreement (the "Advisory Agreement"), to provide investment advice and,
in general, to conduct the management and investment program of each Portfolio
of each Fund, subject to the general supervision and control of the Board of
Directors or Trustees of that Fund.
The employees of Alliance principally responsible for each Portfolio's
investment program are Mrs. Susan P. Keenan, Mr. David M. Dowden and Mr.
Terrance T. Hults. Mrs. Keenan has served in this capacity for each Portfolio
since it commenced operations. Messrs. Dowden and Hults have served in this
capacity for each Portfolio since 1994 and 1995, respectively. Mrs. Keenan is a
Senior Vice President of Alliance Capital Management Corporation ("ACMC"), with
which she has been associated since prior to 1990. Mr. Dowden is an Assistant
Vice President of ACMC with which he has been associated since 1994. Previously
he was an analyst in the Municipal Strategy Group at Merrill Lynch Capital
Markets. Mr. Hults has been an Assistant Vice President of ACMC since 1995.
Previously he was an associate and trader in the Municipal Derivative Products
department at Merrill Lynch Capital Markets.
Alliance is a leading international investment manager supervising client
accounts with assets as of March 1, 1996 totaling more than $156 billion (of
which approximately $48 billion represented the assets of investment companies).
Alliance's clients are primarily major corporate employee benefit funds, public
employee retirement systems, investment companies, foundations and endowment
funds. The 50 registered investment companies managed by Alliance comprising 107
separate investment portfolios currently have over two million shareholders. As
of March 1, 1996, Alliance was retained as an investment manager for 34 of the
Fortune 100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, Alliance, is an indirect wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States, which is a wholly-owned
subsidiary of The Equitable Companies Incorporated, a holding company controlled
by AXA, a French insurance holding company. Certain information concerning the
ownership and control of Equitable by AXA is set forth in the Statements of
Additional Information under "Management of the Fund."
DISTRIBUTION SERVICES AGREEMENTS
Each Fund has entered into a Distribution Services Agreement with AFD with
respect to Advisor Class shares. The Glass-Steagall Act and other applicable
laws may limit the ability of a bank or other depository institution to become
an underwriter or distributor of securities. However, in the opinion of the
Funds' management, based on the advice of counsel, these laws do not prohibit
such depository institutions from providing services for investment companies
such as the administrative, accounting and other services referred to in the
Agreements. In the event that a change in these laws prevented a bank from
providing such services, it is expected that other service arrangements would be
made and that shareholders would not be adversely affected. The State of Texas
requires that shares of the National and Insured National Portfolio may be sold
in that state only by dealers or other financial institutions that are
registered there as broker-dealers.
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DIVIDENDS, DISTRIBUTIONS
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AND TAXES
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DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Portfolio will be declared on each Fund business day
from the Portfolio's net investment income.
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Dividends on shares for Saturdays, Sundays and holidays will be declared on the
previous business day. The Funds pay dividends on shares of each Portfolio after
the close of business on the twentieth day of each month or, if such day is not
a business day, the first business day thereafter. At your election (which you
may change at least 30 days prior to the record date for a particular dividend
or distribution), dividends and distributions are paid in cash or reinvested
without charge in additional shares of the same class having an aggregate net
asset value as of the payment date of the dividend or distribution equal to the
cash amount thereof.
If you receive an income dividend or capital gains distribution in cash, you
may, within 120 days following the date of its payment, reinvest the dividend or
distribution in additional shares of that Portfolio without charge by returning
to Alliance, with appropriate instructions, the check representing such dividend
or distribution. Thereafter, unless you otherwise specify, you will be deemed to
have elected to reinvest all subsequent dividends and distributions in shares of
that Portfolio.
There is no fixed dividend rate and there can be no assurance that a Portfolio
will pay any dividends. The amount of any dividend or distribution paid on
shares of a Portfolio must necessarily depend upon the realization of income and
capital gains from the Portfolio's investments.
TAXES
Generally. Each Portfolio intends to qualify for each taxable year to be taxed
as a regulated investment company under the Internal Revenue Code (the "Code")
and, as such, will not be liable for federal income and excise taxes on the
investment company taxable income and net capital gains distributed to its
shareholders.
Distributions to shareholders out of tax-exempt interest income earned by a
Portfolio are not subject to Federal income tax. However, under current tax law,
some individuals and corporations may be subject for Federal income tax purposes
to the AMT on distributions to shareholders out of income from the AMT-Subject
Bonds in which all Portfolios (other than the Insured National and Insured
California Portfolios) principally invest. Further, under current tax law,
certain corporate taxpayers may be subject to the AMT based on their "adjusted
current earnings." Distributions from a Portfolio that are excluded from gross
income and from AMT taxable income will be included in such corporation's
"adjusted current earnings" for purposes of computation of the AMT.
Distributions out of taxable interest, other investment income, and net realized
short-term capital gains are taxable to shareholders as ordinary income, and
distributions to shareholders of net realized long-term capital gains are
taxable to shareholders as long-term capital gains irrespective of the length of
time a shareholder has held his or her Portfolio shares. Since a Portfolio's
investment income is derived from interest rather than dividends, no portion of
such distributions is eligible for the dividends-received deduction available to
corporations.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
a Portfolio is not deductible for Federal income tax purposes. Further, persons
who are "substantial users" (or related persons) of facilities financed by
AMT-Subject Bonds should consult their tax advisers before purchasing shares of
a Portfolio.
If a shareholder holds shares for six months or less and during that time
receives a distribution taxable to such shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term capital loss to the extent of such distribution. If a shareholder
holds shares for six months or less and during that time receives a distribution
of tax-exempt interest income, any loss realized on the sale of such shares
would be disallowed to the extent of such distribution.
Substantially all of the dividends paid by a Portfolio are anticipated to be
exempt from regular federal income taxes. Shareholders may be subject to state
and local taxes on distributions from a Portfolio, including distributions which
are exempt from federal income taxes. The Funds will report annually to
shareholders the percentage and source of interest earned by a Portfolio which
is exempt from federal income tax and, except in the case of the National and
Insured National Portfolios, relevant state and local personal income taxes,
and, in the case of the Florida Portfolio, the portion of the net asset value of
such Portfolio which is exempt from Florida intangible tax.
Each investor should consult his or her own tax adviser to determine the tax
status, with regard to his or her tax situation, of distributions from the
Portfolios.
Arizona Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from the Arizona income tax imposed on
individuals, corporations, estates and trusts. Such dividends will be exempt
from Arizona income tax to the extent they are derived from Arizona municipal
securities and U.S. Government Securities. Arizona law does not permit a
deduction for interest paid or accrued on indebtedness incurred or continued to
purchase or carry obligations the interest of which is exempt from Arizona state
income taxes.
California and Insured California Portfolios. Distributions of interest income
by the California Portfolio and by the Insured California Portfolio, to the
extent derived from California tax-exempt obligations, will be exempt from
California personal income tax.
Florida Portfolio. Dividends paid by the Portfolio to individual Florida
shareholders will not be subject to Florida income tax, which is imposed only on
corporations. However, Florida currently imposes an intangible personal property
tax at the rate of $2.00 per $1,000 taxable value of certain securities, such as
shares of the Portfolio, and other intangible assets owned by Florida residents.
U.S. Government Securities and Florida municipal securities are exempt from this
intangible tax. It is anticipated that the Portfolio's shares will qualify for
exemption from the Florida intangible tax. In order to so qualify, the Portfolio
must, among other things, have its entire portfolio invested in U.S. Government
Securities and Florida municipal securities on December 31 of any year.
Exempt-interest dividends paid by the
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Portfolio to corporate shareholders will be subject to Florida corporate income
tax.
Massachusetts Portfolio. It is anticipated that substantially all of the
dividends paid by the Portfolio will be exempt from the Massachusetts personal
income tax. Such dividends will be exempt from Massachusetts personal income tax
to the extent attributable to interest from Massachusetts municipal securities
exempt from the Massachusetts personal income tax or U.S. Government Securities
and are so designated. Dividends designated as attributable to capital gains
will be subject to the Massachusetts personal income tax at capital gains tax
rates except to the extent designated as attributable to gains on certain
Massachusetts municipal securities. Dividends paid by the Portfolio to a
corporate shareholder will be subject to Massachusetts corporate excise tax.
Michigan Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Michigan income, intangibles and
single business taxes. Such dividends will be exempt from Michigan personal
income tax, the Michigan intangible personal property tax and the Michigan
single business tax to the extent that such distributions are derived from
Michigan municipal securities and U.S. Government Securities, and provided that
at least 50% of the total assets of the Portfolio consist of Michigan municipal
securities at the close of each quarter of the Fund's taxable year. To the
extent the distributions are not subject to Michigan income tax, they are not
subject to the uniform city income tax imposed by certain Michigan cities. For
Michigan income, intangibles and single business tax purposes, distributions
representing income derived by the Portfolio from sources other than Michigan
municipal securities and U.S. Government Securities will be included in Michigan
taxable income and will be included in the taxable bases of the Michigan single
business and intangibles taxes, except that distributions from capital gains
which are reinvested in Portfolio shares are exempt from intangibles taxes.
Minnesota Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from Minnesota personal
income tax. However, at least 95% of the exempt-interest dividends paid by the
Portfolio during a Fund fiscal year must be derived from Minnesota municipal
securities in order for any portion of the exempt-interest dividends paid by the
Portfolio to be exempt from the Minnesota personal income tax. Under current
Minnesota tax law, some individuals may be subject to the Minnesota AMT on
distributions to shareholders out of the income from AMT-Subject Bonds in which
the Portfolio invests. Exempt-interest dividends paid by the Portfolio to
shareholders that are corporations are subject to Minnesota franchise tax.
New Jersey Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from New Jersey personal
income tax. In order to pass through tax-exempt interest for New Jersey personal
income tax purposes, the Portfolio must, among other things, invest only in
interest bearing obligations, obligations issued at a discount, and cash and
cash items including receivables and financial options, futures, forward
contracts and other similar financial instruments related to such obligations or
to bond indices. In addition, it must have not less than 80% of the aggregate
principal amount of its investments, excluding certain financial options and
similar financial instruments described above and cash and cash items, invested
in New Jersey municipal securities or U.S. Government Securities at the close of
each quarter of the tax year. Distributions attributable to gains from New
Jersey municipal securities also will be exempt from New Jersey personal income
tax, provided the Portfolio satisfies the above requirements. Exempt-interest
dividends paid by the Portfolio to a corporate shareholder will be subject to
New Jersey corporation business (franchise) tax and the New Jersey corporation
income tax.
New York Portfolio. Distributions of interest income by the Portfolio, to the
extent derived from New York State municipal securities, or from obligations
issued by the government of Puerto Rico or by its authority, will be exempt from
New York State and New York City personal income taxes.
Ohio Portfolio. Distributions of interest income and gain by the Portfolio, to
the extent such distributions are derived from Ohio municipal securities, will
be exempt from the Ohio personal income tax, Ohio school district income taxes
and Ohio municipal income taxes, and will not be includable in the net income
base of the Ohio corporate franchise tax; provided that at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio municipal
securities or similar obligations of other states or their subdivisions. Shares
of the Portfolio will be included in a corporation's tax base for purposes of
computing the Ohio corporate franchise tax on a net worth basis.
Pennsylvania Portfolio. Dividends paid by the Portfolio will not be subject to
the Pennsylvania personal income tax or the Philadelphia School District
investment net income tax to the extent that the dividends are attributable to
interest received by the Portfolio from its investments in Pennsylvania
municipal securities or U.S. Government Securities. Exempt-interest dividends
paid by the Portfolio and dividends attributable to interest on U.S. Government
securities also are not subject to the Pennsylvania Corporate Net Income Tax.
Portfolio shares are not considered exempt assets for the purposes of
determining a corporation's capital stock value subject to the Pennsylvania
Capital Stock/Franchise Tax. Shares of the Portfolio also are exempt from
Pennsylvania county personal property taxes to the extent that the Portfolio
consists of Pennsylvania municipal securities or U.S. Government Securities.
Virginia Portfolio. Shareholders may be subject to state and local taxes on
distributions from the Portfolio, including distributions which are exempt from
Federal income taxes. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Virginia income taxes. So long as the
Portfolio qualifies as a regulated investment company under the Code and at
least 50% of the value of the total assets of the
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Portfolio at the end of each quarter of its taxable year consists of obligations
whose interest is exempt from Federal income taxes, dividends paid by the
Portfolio will be exempt from Virginia individual, estate, trust, and corporate
income taxes to the extent such distributions are either (i) exempt from regular
Federal income tax and attributable to interest on Virginia municipal securities
or obligations issued by Puerto Rico, the United States Virgin Islands, or Guam
or (ii) attributable to interest on obligations of the United States or any
authority, commission or instrumentality of the United States. As a general
rule, distributions attributable to gains of the Portfolio and gains recognized
on the sale or other disposition of shares of the Portfolio (including the
redemption or exchange of shares) will be subject to Virginia income taxes.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry shares of the Portfolio generally will not be deductible for
Virginia income tax purposes.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
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PORTFOLIO TRANSACTIONS
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, a
Fund may consider sales of its shares of a Portfolio as a factor in the
selection of dealers to enter into portfolio transactions with the Funds.
ORGANIZATION
Alliance Municipal Income Fund, Inc. is a Maryland corporation organized on July
30, 1986. Alliance Municipal Income Fund II is a Massachusetts business trust
organized on April 2, 1993. It is anticipated that annual shareholder meetings
will not be held; shareholder meetings will be held only when required by
Federal or, in the case of Alliance Municipal Income Fund, Inc., state law.
Shareholders have available certain procedures for the removal of Directors or
Trustees.
A shareholder in a Portfolio will be entitled to his pro rata share of all
dividends and distributions arising from that Portfolio's assets and, upon
redeeming shares, will receive the then current net asset value of that
Portfolio represented by the redeemed shares. The Funds are empowered to
establish, without shareholder approval, additional portfolios which may have
different investment objectives and additional classes of shares. If an
additional portfolio or class were established in a Fund, each share of the
portfolio or class would normally be entitled to one vote for all purposes.
Generally, shares of each Fund vote together as a single class on matters, such
as the election of Directors or Trustees, that affect each Portfolio in
substantially the same manner. Advisor Class, Class A, Class B and Class C
shares of a Portfolio have identical voting, dividend, liquidation and other
rights, except that each class bears its own transfer agency expenses and each
of Class A, Class B and Class C shares bears its own distribution expenses. Each
class of shares votes separately with respect to matters for which separate
class voting is appropriate under applicable law. Shares are freely
transferable, are entitled to dividends as determined by the Board of Directors
or Trustees and, in liquidation of a Portfolio, are entitled to receive the net
assets of that Portfolio. Since this Prospectus sets forth information about
both Funds, it is theoretically possible that one Fund might be liable for any
materially inaccurate or incomplete disclosure in this Prospectus concerning the
other Fund. Based on the advice of counsel, however, the Funds believe that the
potential liability of each Fund with respect to the disclosure in this
Prospectus extends only to the disclosure relating to that Fund. Certain
additional matters relating to the organization of a Fund are discussed in its
Statement of Additional Information.
REGISTRAR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
AFS, an indirect wholly-owned subsidiary of Alliance, located at 500 Plaza
Drive, Secaucus, New Jersey 07094, acts as the Funds' registrar, transfer agent
and dividend-disbursing agent for a fee based upon the number of shareholder
accounts maintained for the Funds.
PRINCIPAL UNDERWRITER
AFD, an indirect wholly-owned subsidiary of Alliance, located at 1345 Avenue of
the Americas, New York, New York 10105, is the Principal Underwriter of shares
of the Funds.
PERFORMANCE INFORMATION
From time to time, the Portfolios advertise their "yield" and "total return",
which are computed separately for each class of shares, including Advisor Class
shares. A Portfolio's yield for any 30-day (or one-month) period is computed by
dividing the net investment income per share earned during such period by the
maximum public offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a formula
prescribed by the Commission which provides for compounding on a semi-annual
basis. The Portfolios may also state a "taxable equivalent yield" that is
calculated by assuming that net investment income per share is increased by an
amount sufficient to offset the benefit of tax exemptions at the stated income
tax rate. The Portfolios may also state in sales literature an "actual
distribution rate" for each class which is computed in the same manner as yield
except that actual income dividends declared per share during the period in
question are substituted for net investment income per share.
The actual distribution rate is computed separately for each class of shares,
including Advisor Class shares. Advertisements of a Portfolio's total return
disclose the Portfolio's average annual compounded total return for the periods
prescribed by the Commission. A Portfolio's total return for each such period is
computed by finding, through the use of a formula prescribed by the Commission,
the average annual compounded rate of return over the period that would equate
an assumed initial amount invested to the value of the investment at the end of
the
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period. For purposes of computing total return, income dividends and capital
gains distributions paid on shares of a Portfolio are assumed to have been
reinvested when paid and the maximum sales charges applicable to purchases and
redemptions of the Portfolio's shares are assumed to have been paid.
Advertisements may quote performance rankings or ratings of the Portfolios by
financial publications or independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc. or compare a Portfolio's performance to
various indices.
ADDITIONAL INFORMATION
This Prospectus and the Statements of Additional Information, which have been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by each Fund with the Commission under the
Securities Act. Copies of the Registration Statements may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
offices of the Commission in Washington, D.C.
This prospectus does not constitute an offering in any state in which such
offering may not lawfully be made.
This prospectus is intended to constitute an offer by each Fund only of the
securities of which it is the issuer and is not intended to constitute an offer
by a Fund of the securities of the other Fund whose securities are also offered
by this prospectus. Neither Fund intends to make any representation as to the
accuracy or completeness of the disclosure in this prospectus relating to the
other Fund. See "General Information--Organization."
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This is filed pursuant to Rule 497(c).
Files Nos. 33-7812 and 811-4791.
<PAGE>
(LOGO) ALLIANCE MUNICIPAL INCOME FUND, INC.
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
February 3, 1997
________________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the current
Prospectus for the National Portfolio, Insured National
Portfolio, California Portfolio, Insured California Portfolio and
New York Portfolio (the "Portfolios") of the Alliance Municipal
Income Fund, Inc. (the "Fund") that offers the Class A, Class B
and Class C shares of the Portfolios and if the Portfolios begin
to offer Advisor Class shares the Prospectus for the Portfolios
that offers the Advisor Class shares of the Portfolios (the
"Advisor Class Prospectus" and, together with the Prospectus for
the Portfolios that offers the Class A, Class B and Class C
shares, the "Prospectuses"). The Portfolios currently do not
offer Advisor Class shares. Copies of such Prospectus(es) may be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown above.
TABLE OF CONTENTS
Page
Investment Policies and Restrictions........................ 2
Management of the Fund .......................... 54
Expenses of the Fund .......................... 61
Purchase of Shares .......................... 66
Redemption and Repurchase of Shares......................... 86
Shareholder Services .......................... 90
Net Asset Value .......................... 96
Dividends, Distributions and Taxes.......................... 97
Brokerage and Portfolio Transactions........................ 100
General Information .......................... 102
Report of Independent Auditors and Financial
Statements .......................... 109
Appendix A: Bond and Commercial Paper Ratings............... A-1
Appendix B: Futures Contracts and Related Options........... B-1
Appendix C: Options on Municipal and U.S.
Government Securities .......................... C-1
__________________________
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
<PAGE>
_______________________________________________________________
INVESTMENT POLICIES AND RESTRICTIONS
_______________________________________________________________
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information regarding the investment objectives, policies and
restrictions of each Portfolio set forth in the Fund's
Prospectus. Except as otherwise noted, each Portfolio's
investment policies are not fundamental and may be changed by the
Board of Directors of the Fund with respect to a Portfolio
without approval of the shareholders of such Portfolio; however,
such shareholders will be notified prior to a material change in
such policies.
Alternative Minimum Tax
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 alternative minimum tax ("AMT")
imposed on individuals and corporations, though 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"),
which include industrial development bonds and bonds issued to
finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage
projects, 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 AMT-Subject Bonds 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
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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 Fund assets
may be invested.
National Portfolio
This Portfolio pursues its investment objective by
investing principally in a diversified portfolio of municipal
securities the interest income from which is wholly exempt from
federal income taxes except, as discussed below, when received by
a shareholder in a taxable year for which he will be subject, for
federal income tax purposes, to the AMT.
Because interest income on AMT-Subject Bonds is taxable
to certain investors, it is expected, although there can be no
assurance, that such municipal securities generally will provide
somewhat higher yields than other municipal securities ("AMT-
Exempt Bonds") of comparable quality and maturity.
Insured National Portfolio
The investment policies of the Insured National
Portfolio differ from those of the National Portfolio in two
respects: i) whereas the National Portfolio invests principally
in AMT-Subject Bonds, the Insured National Portfolio invests
principally in AMT-Exempt Bonds which generate income not subject
to the AMT; and ii) the Insured National Portfolio invests in
municipal securities insured as to payment of principal and
interest. As a matter of fundamental policy, the Insured
National Portfolio invests at least 65% of its total assets in
municipal securities insured as to the payment of principal and
interest. The Insured National Portfolio may be suitable for an
investor who will be subject to the AMT to the extent that the
after-tax yield of the National Portfolio to such an investor is
less than the yield of the Insured National Portfolio.
Risk 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 the 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 on state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors
should be aware of certain factors that might affect the
financial condition of issuers of municipal securities, consider
the greater risk of the concentration of a Portfolio versus the
safety that comes with a less concentrated investment portfolio
and compare yields available in portfolios of the relevant
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state's issues with those of more diversified portfolios,
including out-of-state issues, before making an investment
decision.
Municipal securities in which a Portfolio's assets are
invested may include debt obligations of the municipalities and
other subdivisions of the relevant state issued to obtain funds
for various public purposes, including the construction of a wide
range of public facilities such as airports, bridges, highways,
schools, streets and water and sewer works. Other purposes for
which municipal securities may be issued include the obtaining of
funds to lend to public or private institutions for the
construction of facilities such as educational, hospital,
housing, and solid waste disposal facilities. The latter,
including most AMT-Subject Bonds, are generally payable from
private sources which, in varying degrees, may depend on local
economic conditions, but are not necessarily affected by the
ability of the state and its political subdivisions to pay their
debts. It is not possible to provide specific detail on each of
these obligations in which Portfolio assets may be invested.
However, all such securities, the payment of which is not a
general obligation of an issuer having general taxing power, must
satisfy, at the time of an acquisition by the Portfolio, the
minimum rating(s) described in the "Description of the
Portfolios: Municipal Securities - Further Information" in the
Prospectus. See also "Appendix A: Bond and Commercial Paper
Ratings" for a description of ratings and rating criteria. Some
municipal securities may be rated based on a "moral obligation"
contract which allows the municipality to terminate its
obligation by deciding not to make an appropriation. Generally,
no legal remedy is available against the municipality that is a
party to the "moral obligation" contract in the event of such
non-appropriation.
The following brief summaries are included for the
purpose of providing certain information regarding the economic
climate and financial condition of the states of New York and
California, and are based primarily on information from official
statements made available in October 1995 with respect to New
York and September and October 1995 with respect to California in
connection with the issuance of certain securities and other
documents and sources and does not purport to be complete. The
Fund has not undertaken to verify independently such information
and the Fund assumes no responsibility for the accuracy of such
information. These summaries do not provide information
regarding most securities in which the Portfolios are permitted
to invest and in particular do not provide specific information
on the issuers or types of municipal securities in which the
Portfolio invests or the private business entities whose
obligations support the payments on AMT-Subject Bonds in which
the Portfolios will invest. Therefore, the general risk factors
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<PAGE>
as to the credit of the state or its political subdivisions
discussed herein may not be relevant to the Portfolio. Although
revenue obligations of a state or its political subdivisions may
be payable from a specific project or source, there can be no
assurance that future economic difficulties and the resulting
impact on state and local government finances will not adversely
affect the market value of the Portfolio or the ability of the
respective obligors to make timely payments of principal and
interest on such obligations. In addition, a number of factors
may adversely affect the ability of the issuers of municipal
securities to repay their borrowings that are unrelated to the
financial or economic condition of a state, and that, in some
cases, are beyond their control. Furthermore, issuers of
municipal securities are generally not required to provide
ongoing information about their finances and operations to
holders of their debt obligations, although a number of cities,
counties and other issuers prepare annual reports.
NEW YORK PORTFOLIO
The following is based on information obtained from an
Official Statement, dated July 26, 1996, relating to $75,630,000
Accelerated Capacity and Transportation Improvements of the
Nineties Bonds and Rebuild New York Through Transportation
Infrastructure Renewal Bonds.
New York Local Government Assistance Corporation
In 1990, as part of a New York State (the "State")
fiscal reform program, legislation was enacted creating the New
York Local Government Assistance Corporation (the "LGAC"), a
public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal
borrowing. The legislation authorized LGAC to issue its bonds
and notes in an amount not in excess of $4.7 billion (exclusive
of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal
borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt
service on these bonds. The legislation imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net
proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the
legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it
is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping
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the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to
provide net proceeds of $4.7 billion completing the program. The
impact of LGAC's borrowing is that the State is able to meet its
cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowings. The 1996-97 State Financial Plan
includes no seasonal borrowing. This reflects the success of the
LGAC program in permitting the State to accelerate local aid
payments from the first quarter of the current fiscal year to the
fourth quarter of the previous fiscal year.
Recent Developments
The national economy has resumed a more robust rate of
growth after a "soft landing" in 1995, with over 11 million jobs
added nationally since early 1992. The State economy has
continued to expand, but growth remains somewhat slower than in
the nation. Although the State has added approximately 240,000
jobs since late 1992, employment growth in the State has been
hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, defense, and
banking industries. Government downsizing has also moderated
these job gains.
The New York State Division of the Budget (the "DOB")
forecasts that national economic growth will be quite strong in
the first half of calendar 1996, but will moderate considerably
as the year progresses. The overall growth rate of the national
economy during calendar year 1996 is expected to be just slightly
below the "consensus" of a widely followed survey of national
economic forecasters. Growth in real Gross Domestic Product
during 1996 is projected to be moderate at 2.1 percent, with
anticipated declines in federal spending and net exports more
than offset by increases in consumption and investment.
Inflation, as measured by the Consumer Price Index, is projected
to be contained at about 3 percent due to moderate wage growth
and foreign competition. Personal income and wages are projected
to increase by about 5 percent.
The forecast of the State's economy shows modest
expansion during the first half of calendar 1996, but some
slowdown is projected during the second half of the year.
Although industries that export goods and services are expected
to continue to do well, growth is expected to be slowed by
government cutbacks at all levels and by tight fiscal constraints
on health and social services. On an average annual basis,
employment growth in the State is expected to be up slightly from
the 1995 rate. Personal income is expected to record moderate
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gains in 1996. Bonus payments in the securities industry are
expected to increase further from last year's record level.
The forecast for continued slow growth, and any
resultant impact on the State's 1996-97 Financial Plan, contains
some uncertainties. Stronger-than-expected gains in employment
could lead to a significant improvement in consumption spending.
Investments could also remain robust. Conversely, the prospect
of a continuing deadlock on federal budget deficit reduction or
fears of excessively rapid economic growth could create upward
pressures on interest rates. In addition, the State economic
forecast could over- or underestimate the level of future bonus
payments or inflation growth, resulting in forecasted average
wage growth that could differ significantly from actual growth.
Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the
direction of employment change that is likely to accompany
telecommunications deregulation.
1996-97 Fiscal Year
The State's current fiscal year commenced on April 1,
1996, and ends on March 31, 1997, and is referred to herein as
the State's 1996-97 fiscal year. The State's budget for the
1996-97 fiscal year was enacted by the Legislature and signed
into law by the Governor. The 1996-97 State Financial Plan will
be updated in October and January.
After adjustments for comparability between fiscal
years, the adopted 1996-97 budget projects a year-over-year
increase in General Fund disbursements of 0.2 percent. Adjusted
State Funds (excluding federal grants) disbursements are
projected to increase by 1.6 percent from the prior fiscal year.
All Governmental Funds projected disbursements increase by 4.1
percent over the prior fiscal year, after adjustments for
comparability.
The 1996-97 State Financial Plan is projected to be
balanced on a cash basis. As compared to the Governor's proposed
budget as revised on March 20, 1996, the State's adopted budget
for 1996-97 increases General Fund spending by $842 million,
primarily from increases for education, special education and
higher education ($563 million). The balance represents funding
increases to a variety of other programs, including community
projects and increased assistance to fiscally distressed cities.
Resources used to fund these additional expenditures include $540
million in increased revenues projected for 1996-97 based on
higher-than-projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new
State tax amnesty program, and other resources including certain
non-recurring resources. The total amount of non-recurring
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resources included in the 1996-97 State budget is projected by
DOB to be $1.3 billion, or 3.9 percent of total General Fund
receipts.
The economic and financial condition of the State may be
affected by various financial, social, economic and political
factors. Those factors can be very complex, may vary from fiscal
year to fiscal year, and are frequently the result of actions
taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal
government, that are not under the control of the State. In
addition, the State Financial Plan is based upon forecasts of
national and State economies. DOB believes that its projections
of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are
reasonable. Actual results, however, could differ materially and
adversely from the projections set forth herein. There are also
risks and uncertainties concerning the future-year impact of
actions taken in the 1996-97 budget.
1995-96 Fiscal Year
The State ended its 1995-96 fiscal year on March 31,
1996 with a General Fund cash surplus. DOB reported that
revenues exceeded projections by $270 million, while spending for
social service programs was lower than forecast by $120 million
and all other spending was lower by $55 million. From the
resulting benefit of $445 million, a $65 million voluntary
deposit was made into the Tax Stabilization Reserve Fund (the
"TSRF"), and $380 million was used to reduce 1996-97 Financial
Plan liabilities by accelerating 1996-97 payments, deferring
1995-96 revenues, and making a deposit to the tax refund reserve
account.
The General Fund closing fund balance was $287 million,
an increase of $129 million from 1994-95 levels. The $120
million change in fund balance is attributable to the $65 million
voluntary deposit to the TSRF, a $15 million required deposit to
the TSRF, a $40 million deposit to the Contingency Reserve Fund
(the "CRF"), and a $9 million deposit to the Revenue Accumulation
Fund. The closing fund balance includes $237 million on deposit
in the TSRF, to be used in the event of any future General Fund
deficit as provided under the State Constitution and State
Finance Law. In addition, $41 million is on deposit in the CRF.
The CRF was established in State fiscal year 1993-94 to assist
the State in financing the costs of extraordinary litigation.
The remaining $9 million reflects amounts on deposit in the
Revenue Accumulation Fund. This fund was created to hold certain
tax receipts temporarily before the deposit to other accounts.
In addition, $678 million was on deposit in the tax refund
reserve account, of which $521 million was necessary to complete
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the restructuring of the State's cash flow under the LGAC
program.
General Fund receipts totaled $32.81 billion, a decrease
of 1.1 percent from 1994-95 levels. This decrease reflects the
impact of tax reductions enacted and effective in both 1994 and
1995. General Fund disbursements totaled $32.68 billion for the
1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a
management review undertaken in October at the direction of the
Governor, yielded savings from Medicaid utilization controls,
office space consolidation, overtime and contractual expense
reductions, and statewide productivity improvements achieved by
State agencies. Together with decreased social services
spending, this management review accounts for the bulk of the
decline in spending.
1994-95 Fiscal Year
The State ended its 1994-95 fiscal year with the General
Fund in balance. The $241 million decline in the fund balance
reflects the planned use of $264 million from the CRF, partially
offset by the required deposit of $23 million to the TSRF. In
addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the
process of restructuring the State's cash flow as part of the
LGAC program. The closing fund balance of $158 million reflects
$157 million in the TSRF and $1 million in the CRF.
General Fund receipts totaled $33.16 billion, an
increase of 2.9 percent from 1993-94 levels. General Fund
disbursements totaled $33.40 billion for the 1994-95 fiscal year,
an increase of 4.7 percent for the previous fiscal year. The
increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF,
offset by $188 million in spending reductions initiated in
January 1995 to avert a potential gap in the 1994-95 State
Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the
suspension of non-essential capital projects.
1993-94 Fiscal Year
The State ended its 1993-94 fiscal year with a General
Fund cash surplus, primarily the result of an improving national
economy, State employment growth, tax collections that exceeded
earlier projections and disbursements that were below
expectations. A deposit of $268 million was made to the CRF,
with a withdrawal during the year of $3 million, and a deposit of
$67 million was made to the TSRF. These three transactions
resulted in the change in fund balance of $332 million. In
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addition, a deposit of $1.14 billion was made to the tax refund
reserve account, of which $1.03 billion was available for
budgetary purposes in the 1994-95 fiscal year. The remaining
$114 million was redeposited in the tax refund reserve account at
the end of the State's 1994-95 fiscal year to continue the
process of restructuring the State's cash flow as part of the
LGAC program. The General Fund closing balance was $399 million,
of which $265 million was on deposit in the CRF and $134 million
in the TSRF. The CRF was initially funded with a transfer of
$100 million attributable to a positive margin recorded in the
1992-93 fiscal year.
General Fund receipts totaled $32.23 billion, an
increase of 2.6 percent from 1992-93 levels. General Fund
disbursements totaled $31.90 billion for the 1993-94 fiscal year,
3.5 percent higher than the previous fiscal year. Receipts were
higher in part due to improved tax collections from renewed State
economic growth, although the State continued to lag behind the
national economic recovery. Disbursements were higher due in
part to increased local assistance costs for school aid and
social services, accelerated payment of certain Medicaid
expenses, and the cost of an additional payroll for State
employees.
State Financial Practices: GAAP Basis
Historically, the State has accounted for, reported and
budgeted its operations on a cash basis. The State currently
formulates a financial plan which includes all funds required by
generally accepted accounting principles ("GAAP"). The State, as
required by law, continues to prepare its financial plan and
financial reports on the cash basis of accounting as well.
The State completed its 1995-96 fiscal year with a
combined Governmental Funds operating surplus of $432 million,
which included an operating surplus in the General Fund of $380
million, in the Capital Projects Funds of $276 million and in the
Debt Service Funds of $185 million. There was an operating
deficit of $409 million in the Special Revenue Funds. The
State's Combined Balance Sheet as of March 31, 1996 showed an
accumulated deficit in its combined Governmental Funds of $1.23
billion, reflecting liabilities of $14.59 billion and assets of
$13.35 billion. This accumulated Governmental Funds deficit
includes a $2.93 billion accumulated deficit in the General Fund
and an accumulated deficit of $712 million in the Capital
Projects Fund type as partially offset by accumulated surpluses
of $468 million and $1.94 billion in the Special Revenue and Debt
Service fund types, respectively.
The State reported a General Fund operating surplus of
$380 million for the 1995-96 fiscal year, as compared to an
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operating deficit of $1.43 billion for the prior fiscal year.
The 1995-96 fiscal year surplus reflects several major factors,
including the cash-basis surplus and the benefit of $529 million
in LGAC bond proceeds which were used to fund various local
assistance programs. This was offset in part by a $437 million
increase in tax refund liability primarily resulting from the
effect of ongoing tax reductions and (to a lesser extent) changes
in accrual measurement policies, and increases in various other
expenditure accruals.
Revenues increased $530 million (nearly 1.7 percent)
over the prior fiscal year with an increase in personal income
taxes and miscellaneous revenues offset by decreases in business
and other taxes. Personal income taxes grew $715 million, an
increase of 4.3 percent. The increase in personal income taxes
was caused by moderate employment and wage growth and the strong
financial markets during 1995. Business taxes declined $295
million or 5.8 percent, resulting primarily from changes in the
tax law that modified the distribution of taxes between the
General Fund and other fund types, and reduced business tax
liability. Miscellaneous revenues increased primarily because of
an increase in receipts from medical provider assessments.
Expenditures decreased $716 million (2.2 percent) from
the prior fiscal year with the largest decrease occurring in
State aid for social services program and State operations
spending. Social services expenditures decreased $739 million
(7.5 percent) due mainly to implementation of cost containment
strategies by the State and local governments, and reduced
caseloads. General purpose and health and environment
expenditures grew $139 million (20.2 percent) and $121 million
(33.3 percent), respectively. Health and environment spending
increased as a result of increases enacted with the 1995-96
Budget. In State operations, personal service costs and fringe
benefits declined $241 million (3.8 percent) and $55 million (3.6
percent), respectively, due to staffing reductions. The decline
in non-personal service costs of $170 million (8.6 percent) was
caused by a decline in the litigation accrual. Pension
contributions increased $103 million (66.4 percent) as a result
of the return to the aggregate cost method used to determine
employer contributions.
Net other financing sources nearly tripled, increasing
$561 million, due primarily to an increase in bonds issued by
LGAC, a transfer from the Mass Transportation Operating
Assistance Fund and transfers from public benefit corporations.
An operating deficit of $409 million was reported for
Special Revenue Funds for the 1995-96 fiscal year which decreased
the accumulated fund balance to $468 million. Revenues increased
$1.45 billion over the prior fiscal year (5.8 percent) as a
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result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of
increased costs for social services programs and an increase in
the distribution of lottery proceeds to school districts. Other
financing uses increased $693 million (25.1 percent) primarily
because of an increase in federal reimbursements transferred to
other funds.
Debt Service Funds ended the 1995-96 fiscal year with an
operating surplus of over $185 million and, as a result the
accumulated fund balance, increased to $1.94 billion. Revenues
increased $10 million (0.5 percent) because of increases in both
dedicated taxes and mental hygiene patient fees. Debt Service
expenditures increased $201 million (9.5 percent). Net other
financial sources increased threefold to $299 million, due
primarily to increases in patient reimbursement revenues.
An operating surplus of $276 million was reported in the
Capital Projects Funds for the State's 1995-96 fiscal year and,
as a result, the accumulated deficit fund balance in this fund
type decreased to $712 million. Revenues increased $260 million
(14.9 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated
Highway and Bridge Trust Fund, and by an increase in federal
grant revenues for transportation and local waste water treatment
projects. Capital Projects Funds expenditures increased $194
million (5.7 percent) in State fiscal year 1995-96 because of
increased expenditures for education and health and environmental
projects. Net other financing sources increased by $577 million
as a result of an increased in proceeds from financing
arrangements.
The State completed its 1994-95 fiscal year with a
combined Governmental Funds operating deficit of $1.79 billion,
which included operating deficits in the General Fund of $1.43
billion, in the Capital Projects Funds of $366 million, and in
the Debt Service Funds of $38 million. There was an operating
surplus in the Special Revenue Funds of $39 million.
Economic Overview
New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's
economy is diverse, with a comparatively large share of the
nation's finance, insurance, transportation, communications and
services employment, and a very small share of the nation's
farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made
it an important link in international commerce. Travel and
tourism constitute an important part of the economy. Like the
rest of the nation, the State has a declining proportion of its
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workforce engaged in manufacturing, and an increasing proportion
engaged in service industries.
The services sector, which includes entertainment,
personal services, such as health care and auto repairs, and
business-related services, such as information processing, law
and accounting, is the State's leading economic sector. The
service sector accounts for more than three of every ten
nonagricultural jobs in New York. New York's economy is somewhat
more reliant than the rest of the nation on this sector; this
sector has added more jobs (825,000) than has the State's economy
as a whole (665,000) since 1980.
Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's
economy is less reliant on this sector than is the nation.
Manufacturing's share of total employment declined from 20.1 to
12.0 percent between 1980 and 1995. The principal manufacturing
industries in recent years produced printing and publishing
materials, instruments and related products, machinery, apparel
and finished fabric products, electronic and other electric
equipment, food and related products, chemicals and allied
products, and fabricated metal products.
Wholesale and retail trade is the second largest sector
in terms of nonagricultural jobs in New York but is considerably
smaller when measured by income share. Trade consists of
wholesale businesses and retail businesses such as department
stores and eating and drinking establishments.
New York City is the nation's leading center of banking
and finance, and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs
in the State, it contributes one-seventh of all nonfarm labor and
proprietors' income.
Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part
of total State output. Principal agricultural products of the
State include milk and dairy products, greenhouse and nursery
products, apples and other fruits, and fresh vegetables. New
York ranks among the national's leaders in the production of
these commodities.
Federal, State and local government account for almost
18 percent of nonagricultural State employment and 16 percent of
nonfarm labor income.
The State is likely to be less affected than the nation
as a whole during an economic recession that is concentrated in
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manufacturing and construction, but likely to be more affected
during a recession that is concentrated more in the service-
producing section.
During the 1982-83 recession, overall economic activity
in the State declined less than that of the nation as a whole.
However, in the calendar years 1984 through 1995, the State's
rate of economic growth was somewhat slower than that of the
nation. In the 1990-91 recession and post-recession period, the
economy of the State, and that of the rest of the Northeast, was
more heavily damaged than that of the nation as a whole and has
been slower to recover. The total employment growth rate in the
State has been below the national average since 1987. The
unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991; since
then, it has been higher. According to data published by the
U.S. Bureau of Economic Analysis, during the past ten years,
total personal income in the State rose slightly faster than the
national average only from 1986 through 1988.
State per capita personal income has historically been
significantly higher than the national average, although the
ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region,
state personal income measured on a residence basis understates
the relative importance of the State to the national economy and
the size of the base to which State taxation applies.
In 1995, the State enacted a tax-reduction program
designed to reduce receipts from the personal income tax by 20
percent over three years. Prior to 1995, the tax had remained
substantially unchanged since 1989 as a result of annual
deferrals of tax reductions originally enacted in 1987. The tax-
reduction program is estimated to reduce receipts by $2.3 billion
in the 1996-97 fiscal year, compared to what tax receipts would
have been under the pre-1995 rate structure. The maximum rate
was reduced from the 7.875 percent in effect between 1989 and
1994 to 7.59375 percent for 1995, to 7.125 percent for 1996, and
is scheduled under current law to be reduced to 6.85 percent for
1997 and thereafter. In addition to the significant reductions
in overall tax rates, the program also includes increases in the
standard deduction, widening tax brackets to increase the income
thresholds to which higher tax rates apply, and modification of
certain tax credits.
The projected yield of the tax for the 1996-97 fiscal
year is $17.1 billion, an increase of $103 million from reported
collections in the States 1995-96 fiscal year. The increase
reflects both the effects of the reductions noted above and the
fact that reported collections in the preceding year were
affected by the net refund and tax refund reserve account
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transactions that depressed collections in 1995-96 by $500
million. Without these statutory and administrative changes, the
yield of the tax would have grown by more than $1 billion (nearly
7 percent), reflecting liability growth for the 1996 tax year
projected at approximately the same rate. The income base for
the tax is projected to rise approximately 5 percent for the 1996
tax year.
State Authorities
The fiscal stability of the State is related, in part,
to the fiscal stability of its public benefit corporations (the
"Authorities"). Authorities, which have responsibility for
financing, constructing and operating revenue providing public
facilities, are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself and may
issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorizations. The State's
access to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially adversely
affected, if any of its Authorities were to default on their
respective obligations. As of September 30, 1995, the date of
the latest data available, there were 17 Authorities that had
outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of these Authorities
was $73.45 billion. As of March 31, 1995, aggregate Authority
debt outstanding as State-supported debt was $27.9 billion and as
State-related debt was $36.1 billion.
Moral obligation financing generally involves the
issuance of debt by an Authority to finance a revenue-producing
project or other activity. The debt is secured by project
revenues and includes statutory provisions requiring the State,
subject to appropriation by the Legislature, to make up any
deficiencies which may occur in the issuer's debt service reserve
fund. There has never been a default on any moral obligation
debt of any public authority. The State does not intend to
increase statutory authorizations for moral obligation bond
programs. From 1976 through 1987, the State was called upon to
appropriate and make payments totaling $162.8 million to make up
deficiencies in the debt service reserve funds of the Housing
Finance Agency pursuant to moral obligation provisions. In the
same period, the State also expended additional funds to assist
the Project Finance Agency, the New York State Urban Development
Corporation and other public authorities which had moral
obligation debt outstanding. The State has not been called upon
to make any payments pursuant to any moral obligations since the
1986-87 fiscal year and no such requirements are anticipated
during the 1996-97 fiscal year.
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In addition to the moral obligation financing
arrangements described above, State law provides for the creation
of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities.
The Municipal Assistance Corporation For The City of New York
("MAC") was created in 1975 to provide financing assistance to
the City. To enable MAC to pay debt service on its obligations,
MAC receives, subject to annual appropriation by the Legislature,
receipts from the 4 percent New York State sales tax for the
benefit of the City, the State-imposed stock transfer tax and,
subject to certain prior liens, certain local assistance payments
otherwise payable to the City. The legislation creating MAC also
includes a moral obligation provision. Under its enabling
legislation, MAC's authority to issue moral obligation bonds and
notes (other than refunding bonds and notes) expired on
December 31, 1984.
The State also provides for contingent
contractual-obligation financing for the Secured Hospital Program
pursuant to legislation enacted in 1985. Under this financing
method, the State contracts to pay debt service, subject to
annual appropriations, on bonds issued by the New York State
Medical Care Facilities Finance Agency and now issued by the
Dormitory Authority of the State of New York in the event there
are shortfalls of revenues from other sources. The State has
never been required to make any payments pursuant to this
financing arrangement, nor does it anticipate being required to
do so during the 1996-97 fiscal year.
Authorities' operating expenses and debt service costs
are generally paid by revenues generated by the projects financed
or operated, such as tolls charged for the use of highways,
bridges or tunnels, rentals charged for housing units, and
charges for occupancy at medical care facilities. In addition,
State legislation authorizes several financing techniques for
Authorities. Also, there are statutory arrangements providing
for State local assistance payments, otherwise payable to
localities, to be made under certain circumstances to
Authorities. Although the State has no obligation to provide
additional assistance to localities whose local assistance
payments have been paid to Authorities under these arrangements,
if local assistance payments are so diverted, the affected
localities could seek additional State assistance. Some
Authorities also receive moneys from State appropriations to pay
for the operating costs of certain of their programs.
The Metropolitan Transportation Authority (the "MTA")
oversees the City's subway and bus lines by its affiliates, the
New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the "TA").
The MTA operates certain commuter rail and bus lines in the New
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York metropolitan area through MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an
MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated-agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll
bridges and tunnels. Because fare revenues are not sufficient to
finance the mass transit portion of these operations, the MTA has
depended and will continue to depend for operating support upon a
system of State, local government and TBTA support and, to the
extent available, Federal operating assistance, including loans,
grants and operating subsidies. If current revenue projections
are not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required to seek
additional state assistance, raise fares or take other actions.
Since 1980, the State has enacted several
taxes--including a surcharge on the profits of banks, insurance
corporations and general business corporations doing business in
the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1% regional sales and use
tax--that provide revenues for mass transit purposes, including
assistance to the MTA. In addition, since 1987, state law has
required that the proceeds of a one-quarter of 1% mortgage
recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993, the State
dedicated a portion of the State petroleum business tax to fund
operating or capital assistance to the MTA. For the 1996-1997
fiscal year, total State assistance to the MTA is estimated at
approximately $1.09 billion.
State legislation accompanying the 1996-97 adopted State
budget authorized the MTA, TBTA and TA to issue an aggregate of
$6.5 billion in bonds to finance a portion of a new $11.98
billion MTA capital plan for the 1995 through 1999 calendar years
(the "1995-99 Capital Program"), and authorized the MTA to submit
the 1995-99 Capital Program to the Capital Program Review Board
for approval. This plan will supersede the overlapping portion
of the MTA's 1992-96 Capital Program. This is the fourth capital
plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is
designed to upgrade the performance of the MTA's transportation
systems by investing in new following stock, maintaining
replacement schedules for existing assets and bringing the MTA
system to a state of good repair. The 1995-99 Capital Program
assumes the issuance of an estimated $5.1 billion in bonds under
this $6.5 billion aggregate bonding authority. The remainder of
the plan is projected to be financed through assistance from the
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State, the federal government, and the City of New York, and from
various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary
governmental actions for the 1995-99 Capital Program or future
capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the
1995-99 Capital Program, or parts thereof, will not be delayed or
reduced. Should funding levels fall below current projections,
the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or
reduced, ridership and fare revenues may decline, which could,
among other things, impair the MTA's ability to meet its
operating expenses without additional State assistance.
Certificates of Participation
The State also participates in the issuance of
certificates of participation ("COPs") in a pool of leases
entered into by the State's Office of General Services on behalf
of several State departments and agencies interested in acquiring
operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the
Director of the Budget, over the issuance of COPs representing
the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to
make installment or lease-purchase payments for the State's
acquisition of such equipment or real property.
New York City
The fiscal health of the State may also be affected by
the fiscal health of the City, which continues to require
significant financial assistance from the State. The City
depends on State aid both to enable the City to balance its
budget and to meet its cash requirements. The City has achieved
balanced operating results from each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP
standards.
In response to the City's fiscal crisis in 1975, the
State took action to assist the City in returning to fiscal
stability. Among those actions, the State established the MAC to
provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the
City's financial affairs; the Office of the State Deputy
Comptroller for the City of New York ("OSDC") to assist the
Control Board in exercising its powers and responsibilities. A
"Control Period" existed from 1975 to 1986 during which the City
was subject to certain statutorily-prescribed fiscal controls.
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Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending
certain Control Board powers, the Control Board, upon the
occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including, but not limited to, a
City operating budget deficit of more than $100 million, is
required by law to reimpose a Control Period. Currently, the
City and its Covered Organizations (i.e., those which receive or
may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the
"Financial Plan") which the City prepares annually and
periodically updates. The City's Financial Plan includes its
capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps.
The City's projections set forth in the Financial Plan
are based on various assumptions and contingencies, some of which
are uncertain and may not materialize. Unforeseen developments
and changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and
to meet its annual cash flow and financing requirements.
The State could be affected by the ability of the City
and certain Covered Organizations to market their securities
successfully in the public credit markets. The City issues
securities to finance, refinance and rehabilitate infrastructure
and other capital needs, as well as for seasonal financing needs.
The City currently projects that if no action is taken, it will
exceed its State Constitutional general debt limit beginning in
City fiscal year 1998. The current Financial Plan includes
certain alternative methods of financing a portion of the City's
capital program which require State or other outside approval.
Future developments concerning the City or certain of the Covered
Organizations, and public discussion of such developments, as
well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued
by the City or such Covered Organizations and may also affect the
market for their outstanding securities.
OSDC and Control Board Reports
The staffs of the Control Board, OSDC and the City
Comptroller issue periodic reports on the City's Financial Plans
which analyze the City's forecasts of revenues and expenditures,
cash flow, and debt service requirements for, and Financial Plan
compliance by, the City and its Covered Organizations. According
to recent staff reports, the City's economy has experienced weak
employment and moderate wage and income growth throughout the
mid-1990s. Although this trend is expected to continue for the
rest of the decade, there is the risk of a slowdown in the City's
economy in the next few years, which would depress revenue growth
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and put further strains on the City's budget. These reports have
also indicated that recent City budgets have been balanced in
part through the use of non-recurring resources; that the City's
Financial Plan tends to rely on actions outside its direct
control; that the City has not yet brought its expenditure growth
in line with recurring revenue growth; and that the City is
therefore likely to continue to face substantial future budget
gaps that must be closed with reduced expenditures and/or
increased revenues.
Financing Requirements
The City requires significant amounts of financing for
seasonal and capital purposes. The City issued $880 million
notes for seasonal financing purposes in fiscal year 1995. The
City's capital financing program projects long-term financing
requirements of approximately $17 billion for the City's fiscal
years 1995 through 1998. The major capital requirements include
expenditures for the City's water supply and sewage disposal
systems, roads, bridges, mass transit, schools, hospitals and
housing.
The State's budget for the State's 1996-97 fiscal year,
commencing on April 1, 1996, was enacted by the Legislature on
July 13, 1996. The State Financial Plan for the 1996-97 fiscal
year was formulated on July 25, 1996 and is based on the State's
budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the
current fiscal year. The 1996-97 State Financial Plan is
projected to be balanced on a cash basis. Total General Fund
receipts and transfers from other funds are projected to be
$33.17 billion, while total General Fund disbursements and
transfers to other funds are projected to be $33.12 billion. As
compared to the Governor's proposed budget as revised on
March 20, 1996, the State's adopted budget for 1996-97 increases
General Fund spending by $842 million, primarily from increases
for education, special education and higher education ($563
million). Resources used to fund these additional expenditures
include $540 million in increased revenues projected for 1996-97
based on higher than projected tax collections during the first
half of calendar 1996, $110 million in projected receipts from a
new State tax amnesty program, and other resources including
certain non-recurring resources.
In connection with the Financial Plan, the City has
outlined a gap-closing program for the 1998 through 2000 fiscal
years to substantially reduce the remaining $1.7 billion, $2.7
billion and $3.4 billion projected budget gaps for such fiscal
years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase
revenues by $674 million, $959 million and $1.1 billion in the
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1998 through 2000 fiscal years, respectively; additional
reductions in entitlement costs of $400 million, $750 million and
$1.0 billion in the 1998 through 2000 fiscal years, respectively;
additional savings of $250 million, $300 million and $500 million
in the 1998 through 2000 fiscal years, respectively, resulting
from restructuring City government by consolidating operations,
privatization and mandate management and other initiatives;
additional proposed Federal and State aid of $105 million, $200
million and $300 million in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of
$155 million, $350 million and $400 million in the 1998 through
2000 fiscal years, respectively; and the availability in each of
the 1998 through 2000 fiscal years of $100 million of the General
Reserve.
Other Localities
Certain localities outside the City have experienced
financial problems and have requested additional State assistance
during the last several State fiscal years. The potential impact
on the State of any future requests by localities is not included
in the projections of the State's receipts and disbursements for
the State's 1996-97 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
resulted in the re-establishment of the Financial Control Board
for the City of Yonkers by the State in 1984. That Board is
charged with oversight of the fiscal affairs of Yonkers. Future
actions taken by the State to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be
determined.
Beginning in 1990, the City of Troy experienced a series
of budgetary deficits that resulted in the establishment of a
Supervisory Board for the City of Troy in 1994. The Supervisory
Board's powers were increased in 1995, when Troy MAC was created
to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from
seeking federal bankruptcy protection while Troy MAC bonds are
outstanding.
Seventeen municipalities received extraordinary
assistance during the 1996 legislative session through
$50 million in special appropriations targeted for distressed
cities.
Certain Municipal Indebtedness
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1994, the
total indebtedness of all localities in the State other than the
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City was approximately $17.7 billion. A small portion
(approximately $82.9 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant
to State enabling legislation. State law requires the
Comptroller to review and make recommendations concerning the
budgets of those local government units other than the City
authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at
the close of their fiscal year ending in 1994.
From time to time, Federal expenditure reductions could
reduce, or in some cases eliminate, Federal funding of some local
programs and accordingly might impose substantial increased
expenditure requirements on affected localities. If the State,
the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds
issued by localities within the State could be adversely
affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures
and other economic trends could adversely affect localities and
require increasing State assistance in the future.
Litigation
The State is a defendant in legal proceedings involving
State finances, State programs and miscellaneous tort, real
property and contract claims where the monetary damages sought
are substantial. These proceedings could affect adversely the
financial condition of the State in the 1996-97 fiscal year or
thereafter.
Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the
State to maintain a balanced 1996-97 State Financial Plan. The
State believes that the 1996-97 State Financial Plan includes
sufficient reserves for the payment of judgments that may be
required during the 1996-97 fiscal year. There can be no
assurance, however, that an adverse decision in any of these
proceedings would not exceed the amount of the 1996-97 State
Financial Plan. In its General Purpose Financial Statements, the
State reports its estimated liability in subsequent fiscal years
for awarded anticipated unfavorable judgments.
Although other litigation is pending against the State,
no current litigation involves the State's authority, as a matter
of law, to contract indebtedness, issue its obligations, or pay
such indebtedness when it matures, or affects the State's power
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or ability, as a matter of law, to impose or collect significant
amounts of taxes and revenues.
CALIFORNIA PORTFOLIO
The following is based on information obtained from an
Official Statement dated October 22, 1996 relating to
$500,000,000 State of California Various Purpose General
Obligation Bonds.
Constitutional Limits on Spending and Taxes
Certain California (the "State") constitutional
amendments, legislative measures, executive orders, civil actions
and voter initiatives could adversely affect the ability of
issuers of the State's municipal securities to pay interest and
principal on municipal securities.
Article XIII B. On November 6, 1979, the State's voters
approved Proposition 4, which added Article XIII B to the State
Constitution. Pursuant to Article XIII B, the State is subject
to an annual appropriations limit (the "Appropriations Limit").
Article XIII B was modified substantially by
Propositions 98 and 111 in 1988 and 1990, respectively. (See
"Proposition 98" below.) "Appropriations subject to limitation,"
with respect to the State, are authorizations to spend "proceeds
of taxes," which consist of tax revenues, and certain other
funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed "the cost
reasonably borne by the entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state
subsidies to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such
as reasonable user charges or fees, and certain other non-tax
funds.
Not included in the Appropriations Limit are
appropriations for the debt service costs of bonds existing or
authorized by January 1, 1979, or subsequently authorized by the
voters, appropriations required to comply with mandates of courts
or the federal government, appropriations for qualified capital
outlay projects, appropriations of revenues derived from any
increase in gasoline taxes and motor vehicle weight fees above
January 1, 1990 levels, and appropriation of certain special
taxes imposed by initiative (e.g., cigarette and tobacco taxes).
The Appropriations Limit may also be exceeded in cases of
emergency.
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The State's yearly Appropriations Limit is based on the
limit for the prior year with annual adjustments for changes in
California per capita personal income and population and any
transfers of financial responsibility of providing services to or
from another unit of government.
As originally enacted in 1979, the Appropriations Limit
was based on 1978-79 fiscal year authorizations to expend
proceeds of taxes and was adjusted annually to reflect changes in
cost of living and population (using different definitions, which
were modified by Proposition 111). Starting in the 1991-92
Fiscal Year, the Appropriations Limit was recalculated by taking
the actual 1986-87 limit and applying the annual adjustments as
if Proposition 111 had been in effect.
Proposition 98. On November 8, 1988, voters approved
Proposition 98, a combined initiative constitutional amendment
and statute called the "Classroom Instructional Improvement and
Accountability Act." Proposition 98 changed State funding of
public education below the university level, and the operation of
the State Appropriations Limit, primarily by guaranteeing local
schools and community colleges ("K-14 schools") a minimum share
of General Fund revenues. Under Proposition 98 (as modified by
"Proposition 111" which was enacted on June 5, 1990), K-14
schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues (the "first test"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted
for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment
(the "second test"), or (c) a third test, which would replace the
second test in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in State per capita
personal income. Under the third test, schools would receive the
amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If the third test is used in
any year, the difference between the third test and the second
test would become a "credit" to schools which would be the basis
of payments in future years when per capita General Fund revenue
growth exceeds per capita personal income growth. Legislation
adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee
under the first test to be 40.3 percent of the General Fund Tax
revenues, based on 1986-87 appropriations. However, that amount
has been adjusted to 34 percent to account for a subsequent
redirection of local property taxes, since such redirection
directly affects the share of General Fund revenues to schools.
During the recession, General Fund revenues for several
years were less than originally projected, so that the original
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Proposition 98 appropriations turned out to be higher than the
minimum percentage provided in the law. The Legislature responded
to these developments by designating the "extra" Proposition 98
payments in one year as a "loan" from future years' entitlements.
By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California
Teachers' Association v. Gould, which challenged the validity of
these off-budget loans. As part of the negotiations leading to
the 1995-96 Budget Act, an oral agreement was reached to settle
this case. The settlement required adoption of legislation
satisfactory to the parties to implement its terms, which has
occurred. The court gave final approval of the settlement in
late July, 1996.
The settlement provides, among other things, that both
the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans,
the State will repay $935 million by forgiveness of the amount
owed, while schools will repay $825 million. The State share of
the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of
the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from "below" the
current base. Repayments are spread over the eight-year period of
1994-95 through 2001-02 to mitigate any adverse fiscal impact.
The Director of Finance has certified that a settlement has
occurred, allowing approximately $351 million in appropriations
from the 1995-96 Fiscal Year to be disbursed to schools in August
1996.
Short-Term Borrowing of California
As part of its cash management program, the State has
regularly issued short-term obligations to meet cash flow needs.
Between spring 1992 and summer 1994, the State had depended upon
external borrowing, including borrowings extending into the
subsequent fiscal year, to meet its cash needs, including
repayment of maturing Notes and Warrants. The State did not have
to resort to such cross-year borrowing during the 1995-96 Fiscal
Year.
The State Treasurer is working closely with the State
Controller and the Department of Finance to manage the State's
cash flow on a regular basis, with the goal of reducing the
State's external cash flow borrowing. The three offices are also
working to develop programs to use commercial paper in whole or
in part for the State's cash flow borrowing needs, and for
construction period financing for both general obligation
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bond-funded and lease-revenue bond-funded projects. The first
commercial paper program, for general obligation bonds, was
implemented in April, 1996.
The State issued $3.0 billion of revenue anticipation
notes for the 1996-97 Fiscal Year on August 6, 1996, which mature
on June 30, 1997.
The State has always paid the principal of and interest
on its general obligation bonds, lease-purchase debt, and
short-term obligations, including revenue anticipation notes and
revenue anticipation warrants when due.
1995-96 Fiscal Year
As a result of the improving economy, with
resulting improved revenue and caseload estimates, the State
entered the 1995-96 Budget negotiations with the smallest
nominal "budget gap" to be closed in many years.
Nonetheless, serious policy differences between the Governor
and Legislature prevented timely enactment of the budget.
The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year.
The Budget Act projected General Fund revenues and transfers
of $44.1 billion, a 3.5 percent increase from the prior
year. Expenditures were budgeted at $43.4 billion, a 4
percent increase. The Department of Finance projected that,
after repaying the last of the carryover budget deficit,
there would be a positive balance of $28 million in the
budget reserve, the Special Fund for Economic Uncertainties
("SFEU"), at June 30, 1996. The Budget Act also projected
Special Fund revenues of $12.7 billion and appropriated
Special Fund expenditures of $13.0 billion.
The Department of Finance's May revision to the
1996-97 Governor's Budget, released on May 21, 1996, updated
the projections for the 1995-96 Fiscal Year, so that
revenues and transfers were estimated to be $46.1 billion,
some 2 billion over the original fiscal year estimate, which
was attributed to the strong economic recovery.
Expenditures also increased, to an estimated $45.4 billion
as a result of the requirement to expend revenues for
schools under Proposition 98, and, among other things,
failure of the federal government to enact welfare reform
and to budget new aid for illegal immigrant costs, both of
which the Administration had counted on to allow reductions
in State costs. The Special Fund for Economic Uncertainties
was projected to have a small negative balance of about $70
million at June 30, 1996, all but eliminating the
accumulated budget deficit from the early 1990's. The
Department also estimated that on June 30, 1996, available
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internal borrowable resources (available cash, after payment
of all obligations due) would be about $4 billion,
representing a significant improvement in the State's cash
position, and ending the need for the deficit borrowing over
the end of the fiscal year. The State's improved cash
position allowed it to repay the $4.0 billion Revenue
Anticipation Warrant issue on April 25, 1996, and to issue
only $2.0 billion of revenue anticipation notes during the
fiscal year, which matured on June 28, 1996.
1996-97 Fiscal Year
The 1996-97 Governor's Budget, released January 10,
1996, projected General Fund revenues and transfers of $45.6
billion, a 1.3% increase over 1995-96. Although an expected
strong economy would generate larger revenue growth, the
Governor proposed two major initiatives, a 15% personal and
corporate income tax cut and a revision of the trial court
funding program, which would have the effect of reducing
General Fund revenues. The Governor's Budget proposed
General Fund expenditures of $45.2 billion. The Governor's
Budget also proposed Special Fund revenues equal to
expenditures, at a level of $13.3 billion.
The May Revision of the Governor's Budget, released
on May 21, 1996 ("May Revision"), updated revenue estimates
for the 1996-97 Fiscal Year, reflecting stronger economic
activity in the State and thus greater revenue growth. The
revised estimate was for $47.1 billion of revenues, still
assuming the Governor's tax cut would be enacted, and $46.5
billion of expenditures.
The 1996-97 Budget Act was signed by the Governor
on July 15, 1996, along with various implementing bills.
The Governor vetoed about $82 million of appropriations
(both General Fund and Special Fund). With signing of the
Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of
Revenue Anticipation Notes to mature on June 30, 1997. The
Budget Act appropriates a modest budget reserve in the SFEU
of $305 million, as of June 30, 1997. The Department of
Finance projects that, on June 30, 1997, the State's
available internal borrowable (cash) resources will be $2.9
billion, after payment of all obligations due by that date,
so that no cross-fiscal year borrowing will be needed.
Revenues The Legislature rejected the Governor's
proposed 15% cut in personal income taxes (to be phased over
three years), bud did approve a 5% cut in bank and
corporation taxes, to be effective for income years starting
on January 1, 1997. As a result, revenues for the Fiscal
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Year will be an estimated $550 million higher than projected
in the May Revision, and and are now estimated to total
$47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. Special Fund revenues are
estimated to be $13.3 billion.
Expenditures The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent
increase over the final estimated 1995-96 expenditures.
Special Fund expenditures are budgeted at $12.6 billion.
The following are the principal features of the
1996-97 Budget Act:
1. Proposition 98 funding for schools and
community college districts increased by almost $1.6 billion
(General Fund) and $1.65 billion total above revised 1995-96
levels. Almost half of this money was budgeted to fund
class-size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living
allowance (3.2 percent) was funded. The Proposition 98
increases have brought K-12 expenditures to almost $4,800
per pupil, an almost 15% increase over the level prevailing
during the recession years. Community colleges will receive
an increase in funding of $157 million of 1996-97 out of
this $1.6 billion total.
Because of the higher than projected revenues in
1995-96, an additional $1.1 billion was appropriated and
retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over
$4,600 per pupil. These new funds were appropriated for a
variety of purposes, including block grants, allocations for
each school site, facilities for class size reduction, and a
reading initiative. Similar retroactive increases totaling
$230 million, based on final figures on revenues and State
population growth, were made to the 1991-92 and the 1994-95
Proposition 98 guarantees, most of which was allocated to
each school site.
2. The Budget Act assumed savings of approximately
$660 million in health and welfare costs which required
changes in federal law, including federal welfare reform.
The Budget Act further assumed federal law changes in August
1996 which would allow welfare cash grant levels to be
reduced by October 1, 1996. These cuts totaled
approximately $163 million of the anticipated $660 million
savings.
On August 22, 1996, President Clinton signed into
law The Personal Responsibility and Work Opportunity Act,
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which made significant reforms to the current welfare
system. The law provides California approximately $3.7
billion in block grant funds for fiscal year 1996-97. The
law allows states to implement new plans as soon as possible
and receive a prorated block grant effective the date of
application. The California State Plan is to be submitted
in time to allow grant reductions to be implemented
effective January 1, 1997 (allowing $92 million of the $163
million, referred to above, to be saved) and to allow the
State to capture approximately $267 million in additional
federal block grant funds over the currently budgeted level.
None of the other federal changes needed to achieve the
balance of the $660 million cost savings were enacted.
Thus, in lieu of the $660 million savings initially assumed
to be saved, it is now projected that savings will total
approximately $360 million.
3. A 4.9 percent increase in funding for the
University of California ($130 million General Fund) and the
California State University system ($101 million General
Fund), with no increases in student fees, maintaining the
second year of the Governor's four-year "Compact" with the
State's higher education units.
4. The Budget Act assumed the federal government
will provide approximately $700 million in new aid for
incarceration and health care costs of illegal immigrants.
These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund. (For
purposes of cash flow projections, the Department of Finance
expects $540 million of this amount to be received during
the 1996-97 fiscal year).
5. General Fund support for the Department of
corrections increased by about 7 percent over the prior
year, reflecting estimates of increased prison population.
6. With respect to aid to local governments, the
principal new programs included in the Budget Act are $100
million in grants to cities and counties for law enforcement
purposes, and budgeted $50 million for competitive grants to
local governments for programs to combat juvenile crime.
The Budget Act did not contain any tax increases.
As noted, there was a reduction in corporate taxes. In
addition, the Legislature approved another one-year
suspension of the Renters Tax Credit, saving $520 million in
expenditures.
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Economic Overview
California's economy is the largest among the 50
states and one of the largest in the world. The State has a
diverse economy, with major employment in the agriculture,
manufacturing, high technology, services, trade,
entertainment and construction sectors. The total state
gross domestic product of about $890 billion in 1995 was
larger than all but six nations in the world.
After suffering through a severe recession,
California's economy has been on a steady recovery since the
start of 1994. Employment has grown by over 500,000 in 1994
and 1995, and the pre-recession level of total employment is
expected to be matched by early 1996. The strongest growth
has been in export-related industries, business services,
electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in
aerospace and defense-related industries (which accounted
for two-thirds of the job losses), finance and insurance.
Residential housing construction, with new permits for under
100,000 annual new units issued in 1994 and 1995, is weaker
than in previous recoveries, but has been growing slowly
since 1993.
The California Employment Development Department's
wage and salary job figures reflecting the entire universe
of employers indicate that employment bottomed in the spring
of 1993, and after a period of stability, began a sustained
recovery later that year. Job gains in these high-wage
service industries are helping to cushion the ongoing losses
in aerospace.
The Department of finance, as set forth in the
May 21, 1996 revision of the 1996-97 Governor's Budget
estimates that personal income will grow by 6.1 percent in
1996 and 6.0 percent in 1997. The Department also estimates
nonfarm and salary employment to increase by 2.7 percent in
1996 and 2.6 percent in 1997, while housing permits are
expected to rise 2.7 percent in 1996 and 3.1 percent in
1997.
The State's Employment Development Department
reports that the State's unemployment rate dropped from 9.4
percent in 1993 to 8.6 percent in 1994 and 7.8 percent in
1995. This rate is still running above the national
unemployment rate, which averaged 5.6 percent in 1995.
Retail sales continued to gain momentum throughout
1995. Sales in total for 1995 showed gains of 3.9 percent
from 1994, but still lagged behind national sales, which
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gained 4.9 percent over the same period. The Department of
Finance estimates that the California consumer price index
should average 2.7 percent in 1996 and 3.1 percent in 1997.
Subtracting inflation from the rise in personal income, real
personal income is expected to increase 3.4 percent in 1996
and 2.9 percent in 1997.
Orange County Bankruptcy
On December 6, 1994, Orange County, California (the
"County"), together with its pooled investment funds (the
"Pools") filed for protection under Chapter 9 of the federal
Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a
liquidity crisis for the Pools and the County. More than
200 other public entities, most of which, but not all, are
located in the County, were also depositors in the Pools.
The County has reported the Pools' loss at about $1.69
billion, or about 23% of their initial deposits of
approximately 7.5 billion. Many of the entities which
deposited moneys in the Pools, including the County, faced
interim and/or extended cash flow difficulties because of
the bankruptcy filing and may be required to reduce programs
or capital projects. The county has embarked on a fiscal
recovery plan based on sharp reductions in services and
personnel, and rescheduling of outstanding short-term debt
using certain new revenues transferred to the County from
other local governments pursuant to special legislation
enacted in October 1995.
The State has no existing obligation with respect
to any outstanding obligations or securities of the County
or any of the other participating entities.
Litigation
In the consolidated state case of Malibu Video
Systems, et al. v. Kathleen Brown and Abramovitz, et al. v.
Wilson, et al., a stipulated judgment has been entered
requiring return of $119 million plus interest to specified
special funds over a period of up to five years beginning in
fiscal year 1996-97. The federal cases will be dismissed.
In Parr v. State of California the parties entered
into a Settlement Agreement, which has been approved by the
Court, and is reflected in a judgment entered by the Court.
Under the terms of the judgment, a maximum of $1.3 million
will be paid to eligible separated State employees and
approximately $1 million will be paid in statutory
attorney's fees and costs. In addition, eligible current
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State employees will receive employee leave, in an amount
presently not quantified.
The State has settled Pearce Investment, Ltd. et
al. v. Franchise Tax Board and related cases for $20
million, and the litigation has been dismissed.
The State is presently involved in certain legal
proceedings that, if decided against the State, may require
the State to make significant future expenditures or may
impair future revenue sources.
Insured California Portfolio
The Insured California Portfolio seeks to provide as
high a level of current income exempt from federal income tax and
California personal income tax as is consistent with preservation
of capital. As a matter of fundamental policy, the Portfolio
will seek to achieve its objective by investing under normal
market conditions at least 80% of its total assets in municipal
bonds, at least 80% of its total assets in AMT-Exempt Bonds and
at least 65% of its total assets in municipal bonds insured as to
payment of principal and interest. The above policy
notwithstanding, the Board of Directors of the Fund has
determined that it will be the Portfolio's current policy
(changeable by the Board of Directors upon prior notice to
investors) to invest at least 65% of its total assets in
California Bonds, at least 80% of its total assets in insured
municipal bonds and not to invest in any AMT-Subject Bonds. The
remaining portion of the Portfolio's total assets may be invested
in uninsured municipal bonds. There can be no assurance that the
investment objective of the Portfolio will be achieved. Please
refer to the Portfolio's Prospectus under "Investment Objective
and Policies." Shares of the Insured California Portfolio are
available only to California residents.
Certain additional information relating to California
municipal securities is set forth under "California Portfolio."
Insurance Feature
The insurance feature is generally described in the
Prospectus under "Insurance Feature of the Insured National and
Insured California Portfolios". Insured securities are either
(i) insured under an insurance policy that relates to the
specific municipal security in question (a "Specific Issue
Insurance Policy") or (ii) insured under a Mutual Fund Insurance
Policy issued to the Fund by an appropriate insurer. Although
the Insured National and Insured California Portfolios may
purchase municipal notes that are insured, municipal notes
generally are not insured under Specific Issue Insurance
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Policies, and neither of the Portfolios generally expects to
cover municipal notes under its Mutual Fund Insurance Policy.
Accordingly, the Insured National and Insured California
Portfolios do not presently expect that any significant portion
of the municipal notes they purchase will be covered by
insurance. Securities other than municipal bonds and notes
purchased by the Portfolios will not be covered by insurance.
In order to be considered as eligible insurance by the
Insured National and Insured California Portfolios, such
insurance policies must guarantee the timely payment of all
principal and interest on the municipal securities as they become
due. However, such insurance may provide that in the event of
non-payment of interest or principal when due, the insurer is not
obligated to make such interest or principal payment until a
specified time period (which may be 30 days or more) after it has
been notified by the Portfolio that such non-payment has
occurred. The notice requirement applies to each missed payment
of principal or interest. For purposes of insurance coverage, a
payment of principal is due (and any required notice of
non-payment may be given to the insurers) only at final maturity
of the municipal security and not at the time any earlier sinking
fund payment is due. The insurance does not guarantee the market
value of the municipal securities or the value of the shares of
the Portfolios and except as described below, has no effect on
the price or redemption value of the shares.
The Insured California and Insured National Portfolios
may obtain insurance on their municipal bonds or purchase insured
municipal bonds covered by policies issued by monoline companies
provided any such company has a claims-paying ability rated "AAA"
by S&P or "Aaa" by Moody's. The Adviser is aware of five such
insurers, Municipal Bond Insurance Association Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC"), AMBAC
Indemnity Corporation ("AMBAC"), Financial Security Assurance
Inc. ("FSA"), a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("FSA Holdings"), and Financial Security
Assurance of Maryland, Inc. ("FSA Maryland"), a wholly-owned
subsidiary of FSA. Moody's and S&P ratings reflect the
respective rating agency's current assessment of the
creditworthiness of each insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the
significance of the ratings may be obtained only from the
applicable rating agency. The ratings are not recommendations to
buy, sell or hold the Bonds, and such ratings may be subject to
revision or withdrawal at any time by the rating agencies. Any
downward revision or withdrawal of either or both ratings may
have an adverse effect on the market price of the Bonds.
It should be noted that insurance is not a substitute
for the basic credit of an issuer, but supplements the existing
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credit and provides additional security therefor. Moreover,
while insurance coverage for the municipal securities held by the
Portfolio reduces credit risk by ensuring that the Portfolio will
receive payment of principal and interest within 30 days of
receipt of notice that non-payment has occurred, it does not
protect against market fluctuations caused by changes in interest
rates and other factors. The notice requirement applies to each
missed payment of principal or interest.
Specific Issue Insurance Policies will have been
obtained by the issuers of certain municipal bonds and all
premiums respecting such bonds for the lives thereof will have
been paid in advance by such issuers. Such policies are
generally non-cancelable and will continue in force so long as
the municipal bonds are outstanding and the insurer remains in
business. Since such Specific Issue Insurance Policies remain in
effect as long as the bonds are outstanding, the insurance may
have an effect on the resale value of the bonds. Therefore, such
Specific Issue Insurance Policies may be considered to represent
an element of market value in regard to municipal bonds thus
insured, but the exact effect, if any, of this insurance on such
market value cannot be estimated.
The information relating to MBIA, FGIC, AMBAC, FSA and
FSA Maryland contained below has been furnished by such
companies, respectively. No representation is made herein as to
the accuracy or adequacy of such information or as to the absence
of material adverse changes in such information.
MBIA. MBIA is the principal operating subsidiary of the
Municipal Bond Insurance Association, Inc. ("MBIA Inc.").
Neither MBIA Inc. nor its shareholders are obligated to pay the
debts of or claims against MBIA. MBIA is a limited liability
corporation rather than a several liability association. MBIA
was incorporated and is domiciled in the state of New York and is
licensed to do business in all 50 states, the District of
Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin
Islands and Puerto Rico. As of December 31, 1994, MBIA had total
assets of $3,420.6 million, and total statutory surplus of
$1,731.0 million, prepared in accordance with statutory
accounting practices prescribed or permitted by insurance
regulatory authorities. Copies of MBIA's financial statements
prepared in accordance with statutory accounting practices are
available from MBIA. The address of MBIA is 113 King Street,
Armonk, New York 10504.
On January 5, 1990, MBIA acquired all of the outstanding
stock of Bond Investors Group, Inc. ("BIG"). Through a
reinsurance agreement, BIG has ceded all of its net insured
risks, as well as its unearned premium and contingency reserves,
to MBIA and MBIA has reinsured BIG's net outstanding exposure.
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FGIC. FGIC is a wholly-owned subsidiary of General
Electric Capital Corp. ("GECC"). GECC is not obligated to pay
the debts of or the claims against FGIC. FGIC is domiciled in
the State of New York and is subject to regulation by the State
of New York Insurance Department. As of December 31, 1994, the
total capital and surplus of FGIC was approximately $893.7
million. As of December 31, 1994, FGIC had total admitted assets
of $2,130.6 million and total liabilities of $1,236.9 million
prepared in accordance with statutory accounting practices. The
address of FGIC is 115 Broadway, New York, New York 10006.
AMBAC. AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in all 50 states, the
District of Columbia and Puerto Rico, with admitted assets of
approximately $2,145.0 million and qualified capital of $1,218.2
million, both on a statutory basis, as of December 31, 1994.
Qualified statutory capital consists of the contingency reserve
and policyholders' surplus. The address of AMBAC's
administrative offices is One State Street Plaza, 17th Floor, New
York, New York 10004.
FSA. FSA is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance
Department. As of September 30, 1995, FSA's total policyholders'
surplus and contingency reserves were approximately $495,030,000
and its total unearned premium reserve was approximately
$250,536,000 in accordance with statutory accounting principles.
As of September 30, 1995, FSA's total shareholders' equity was
approximately $590,473,000 and its total net unearned premium
reserve was approximately $216,931,000 in accordance with
generally accepted accounting principles. The registered office
of FSA is located at 350 Park Avenue, New York, New York 10022.
FSA Maryland. On December 20, 1995, Capital Guaranty
Corporation ("CGC") merged with a subsidiary of FSA Holdings and
Capital Guaranty Insurance Company ("CGIC"), CGC's principal
operating subsidiary, changed its name to Financial Security
Assurance of Maryland Inc. ("FSA Maryland") and became a
wholly-owned subsidiary of FSA. CGIC was a financial guaranty
issuer of municipal bonds. Pursuant to an intercompany
agreement, liabilities on financial guaranty insurance written or
reinsured from third parties by FSA and FSA Maryland are
reinsured among FSA and its domestic operating insurance company
subsidiaries on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. The registered
office of FSA Maryland is located at 350 Park Avenue, New York,
New York 10022.
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Additional Investment Policies
Except as otherwise noted, the following investment
policies apply to all Portfolios of the Fund.
General. Municipal securities include municipal bonds
as well as short-term (i.e., maturing in under one year to as
much as three years) municipal notes, demand notes and tax-exempt
commercial paper. In the event a Portfolio invests in demand
notes, the Adviser will continually monitor the ability of the
obligor under such notes to meet its obligations. Typically,
municipal bonds are issued to obtain funds used to construct a
wide range of public facilities, such as schools, hospitals,
housing, mass transportation, airports, highways and bridges. The
funds may also be used for general operating expenses, refunding
of outstanding obligations and loans to other public institutions
and facilities.
Municipal bonds have two principal classifications:
general obligation bonds and revenue or special obligation bonds.
General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal
and interest. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source but not from
general tax and other unrestricted revenues of the issuer. The
term "issuer" means the agency, authority, instrumentality or
other political subdivision whose assets and revenues are
available for the payment of principal of and interest on the
bonds. Certain types of private activity bonds are also
considered municipal bonds if the interest thereon is exempt from
federal income tax. Private activity bonds are issued by or on
behalf of public authorities to obtain funds for various
privately-operated manufacturing facilities, airports, housing
projects, resource recovery programs, solid waste disposal
facilities, student loan programs and water and sewage disposal
facilities.
Private activity bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the
principal and interest on such private activity 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.
Each Portfolio may invest a portion of its assets in
municipal securities that pay interest at a coupon rate equal to
a base rate plus additional interest for a certain period of time
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if short-term interest rates rise above a predetermined level or
"cap." Although the specific terms of these municipal securities
may differ, the amount of any additional interest payment
typically is calculated pursuant to a formula based upon an
applicable short-term interest rate index multiplied by a
designated factor. The additional interest component of the
coupon rate of these municipal securities generally expires
before the maturity of the underlying instrument. These
municipal securities may also contain provisions that provide for
conversion at the option of the issuer to constant interest rates
in addition to standard call features.
A portfolio may invest a maximum of 35% of its total
assets in zero coupon securities, which are debt obligations that
do not entitle the holder to any periodic payments prior to
maturity and are issued and traded at a discount from their face
amounts. The discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. The market
prices of zero coupon securities are generally more volatile than
the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a
greater degree than do securities having similar maturities and
credit quality that do pay periodic interest.
Each Portfolio may also invest in municipal securities,
the interest rate on which has been divided into two different
and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the
"Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of
the components (the "Residual Component") pays a current residual
interest rate based on the difference between the total interest
paid by the issuer on the municipal securities and the auction
rate paid on the Auction Component. A Portfolio may purchase
both Auction and Residual Components.
Because the interest rate paid to holders of Residual
Components is generally determined by subtracting the interest
rate paid to the holders of Auction Components from a fixed
amount, the interest rate paid to Residual Component holders will
decrease the Auction Component's rate increases and increase as
the Auction Component's rate decreases. Moreover, the extent of
the increases and decreases in market value of Residual
Components may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal
security having similar credit quality, redemption provisions and
maturity.
Municipal notes in which a Portfolio may invest include
demand notes, which are tax-exempt obligations that have stated
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maturities in excess of one year, but permit the holder to sell
back the security (at par) to the issuer within 1 to 7 days
notice. The payment of principal and interest by the issuer of
these obligations will ordinarily be guaranteed by letters of
credit offered by banks. The interest rate on a demand note may
be based upon a known lending rate, such as a bank's prime rate,
and may be adjusted when such rate changes, or the interest rate
on a demand note may be a market rate that is adjusted at
specified intervals.
Other short-term obligations constituting municipal
notes include tax anticipation notes, revenue anticipation notes
and bond anticipation notes, and tax-exempt commercial paper.
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 ad
valorem, income, sales, use and business taxes. 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. Bond anticipation notes are
issued to provide interim financing until long-term financing can
be arranged. In most such cases, the long-term bonds provide the
money for the repayment of the notes.
Tax-exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less (however, issuers
typically do not issue such obligations with maturities longer
than seven days). Such obligations are issued by state and local
municipalities to finance seasonal working capital needs or as
short-term financing in anticipation of longer-term financing.
There are, of course, variations in the terms of, and
the security underlying, municipal securities, both within a
particular rating classification and between such
classifications, depending on many factors. The ratings of
Moody's, S&P and Fitch represent their opinions of the quality of
the municipal securities rated by them. It should be emphasized
that such ratings are general and are not absolute standards of
quality. Consequently, municipal securities with the same
maturity, coupon and rating may have different yields, while the
municipal securities of the same maturity and coupon, but with
different ratings, may have the same yield. The Adviser
appraises independently the fundamental quality of the securities
included in the Fund's portfolios.
Yields on municipal securities are dependent on a
variety of factors, including the general conditions of the
municipal securities market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. An
increase in interest rates generally will reduce the market value
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of portfolio investments, and a decline in interest rates
generally will increase the value of portfolio investments.
Municipal securities with longer maturities tend to produce
higher yields and are generally subject to greater price
movements than obligations with shorter maturities. Under normal
circumstances the average weighted maturity of the securities in
each Portfolio will range between 10 and 25 years. However, no
Portfolio has any restrictions on the maturity of municipal
securities in which it may invest. Since the Portfolios'
objective is to provide high current income, they will emphasize
income rather than stability of net asset values, and the average
maturity of the Portfolios will vary depending on anticipated
market conditions. The Portfolios will seek to invest in
municipal securities of such maturities that, in the judgment of
the Adviser, will provide a high level of current income
consistent with liquidity requirements and market conditions and,
in the case of the Insured National and Insured California
Portfolios, after taking into account the cost of any insurance
obtainable on such municipal securities. The achievement of the
Fund's investment objectives depends in part on the continuing
ability of the issuers of municipal securities in which the Fund
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 from time to time there
have been proposals which would require registration in the
future.
After purchase by a Portfolio, a municipal security may
cease to be rated or its rating may be reduced below the minimum
required for purchase by such Portfolio. Neither event requires
sales of such security by such Portfolio, but the Adviser will
consider such event in its determination of whether such
Portfolio should continue to hold the security. To the extent
that the ratings given by Moody's, S&P or Fitch may change as a
result of changes in such organizations or their rating systems,
the Adviser will attempt to use such changed ratings in a manner
consistent with the Fund's quality criteria as described in the
Prospectus for each of its Portfolios.
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
Federal 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,
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the ability of any issuer to pay, when due, the principal or the
interest on its municipal bonds may be materially affected.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
securities. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the
availability of municipal securities for investment by the Fund
and the value of the Fund's Portfolios would be affected.
Additionally, the Fund would reevaluate its investment objectives
and policies.
Defensive Position. Under normal circumstances,
substantially all of the total assets of each Portfolio will be
invested in the types of securities described in "Investment
Objective and Policies" in the Prospectus. For temporary
defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P,
MIG-2 (or VMIG-2) or higher by Moody's, or FIN-2 or higher by
Fitch, or in taxable cash equivalents, including (i) short-term
obligations of the U.S. Government and its agencies or
instrumentalities ("U.S. Government Securities"), (ii)
certificates of deposit bankers' acceptances and interest-bearing
savings deposits of banks having total assets or more than $1
billion and which are members of the Federal Deposit Insurance
Corporation, (iii) commercial paper of prime quality rated A-1 or
higher by S&P, Prime-1 or higher by Moody's, or Fitch-1 or higher
by Fitch or, if not rated, issued by companies which have an
outstanding debt issue rated AA or higher by S&P or Fitch or Aa
or higher by Moody's and (iv) repurchase agreements.
Apart from temporary defensive purposes, each Portfolio
may at any time elect to invest up to 20% of its total assets in
taxable cash equivalents and repurchase agreements. Nonetheless,
it is anticipated that under normal circumstances substantially
all of the assets of the Portfolios will be invested in municipal
securities generating tax-exempt income.
Non-Diversified Status. Each of the California, Insured
California and New York Portfolios is non-diversified, which
means that these Portfolios are not subject to any statutory
restriction under the Investment Company Act of 1940, as amended
(the "Act") with respect to the investment of their assets in the
securities of a relatively few municipal issuers. As a non-
diversified investment company, each of these Portfolios may
present greater risks than a diversified company. Nevertheless,
in order to qualify as a "regulated investment company" for
Federal income tax purposes, each Portfolio will be restricted in
that, among other limitations, at the close of each quarter of
the taxable year, at least 50% of the value of each Portfolio's
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total assets must be represented by cash, government securities,
and other securities limited in respect of any one issuer to not
more than 5% in value of the total assets of each Portfolio, and
to not more than 10% of the outstanding voting securities of any
one issuer. In addition, at the close of each quarter of its
taxable year, not more than 25% in value of each Portfolio's
total assets may be invested in securities of one issuer.
Futures Contracts and Options on Futures Contracts.
Each Portfolio may enter into contracts for the purchase or sale
for future delivery of municipal securities or obligations of the
U.S. Government Securities or contracts based on financial
indices, including an index of municipal securities or U.S.
Government Securities ("futures contracts") and may purchase and
write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities
called for by the contract at a specified price on a specified
date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current
contract value") and the price at which the contract was
originally struck. No physical delivery of the fixed-income
securities underlying the index is made. Options on futures
contracts written or purchased by a Portfolio will be traded on
U.S. exchanges or over-the-counter. These investment techniques
will be used only to hedge against anticipated future changes in
interest rates which otherwise might either adversely affect the
value of the securities held by a Portfolio or adversely affect
the prices of securities which a Portfolio intends to purchase at
a later date.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, a Portfolio will not enter into any futures
contracts or options on futures contracts if immediately
thereafter the aggregate of the market value of the Portfolio's
outstanding futures contracts and the market value of the futures
contracts subject to outstanding options written by the Portfolio
would exceed 50% of the total assets. These restrictions will
not be changed by the Fund's Board of the Directors without
considering the policies and concerns of the various applicable
Federal and state regulatory agencies.
The correlation between movements in the price of
futures contracts or options on futures contracts and movements
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in the price of the securities hedged or used for cover will not
be perfect and could produce unanticipated losses. If the value
of the index increases, the purchaser of the futures contract
thereon will be entitled to a cash payment. Conversely, if the
value of the index declines, the seller of a futures contract
will be entitled to a cash payment. In connection with its
purchase of index futures each Portfolio will deposit cash or
liquid, high-grade debt obligations equal to the market value of
the futures contract (less related margin) in a segregated
account with the Fund's custodian or a futures margin account
with a broker. If the Adviser were to forecast incorrectly, a
Portfolio might suffer a loss arising from adverse changes in the
current contract values of the bond futures or index futures
which it had purchased or sold. A Portfolio's ability to hedge
its positions through transactions in index futures depends on
the degree of correlation between fluctuations in the index and
the values of the securities which the Portfolio owns or intends
to purchase, or general interest rate movements.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
Options on Municipal and U.S. Government Securities. In
an effort to increase current income and to reduce fluctuations
in net asset value, the Portfolios intend to write covered put
and call options and purchase put and call options on municipal
securities and U.S. Government Securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and
purchasing of options by those Portfolios.
A put option gives the purchaser of such option, upon
payment of a premium, the right to deliver a specified amount of
a security to the writer of the option on or before a fixed date
at a predetermined price. A call option gives the purchaser of
the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a
fixed date at a predetermined price. A call option written by a
Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate
right to acquire that security without additional cash
consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange
of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is
maintained by the Portfolio in liquid assets in a segregated
account with the Fund's custodian. A put option written by a
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Portfolio is "covered" if the Portfolio maintains liquid assets
with a value equal to the exercise price in a segregated account
with the Fund's custodian, or else holds a put on the same
security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by
the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the
option, supply and demand and interest rates.
The Portfolios intend to write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
a Portfolio does not own the underlying security, and is designed
to provide a hedge against a decline in value in another security
which the Portfolio owns or has the right to acquire. In such
circumstances, a Portfolio collateralizes its obligation under
the option by maintaining in a segregated account with the Fund's
custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily. A
Portfolio would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option, while at
the same time achieving the desired hedge.
In purchasing a call option, a Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security increased by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security declined or remained the same or did not
increase during the period by more than the amount of the
premium. In purchasing a put option, the Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security declined by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security increased or remained the same or did not
decrease during that period by more than the amount of the
premium. If a put or call option purchased by a Portfolio were
permitted to expire without being sold or exercised, its premium
would be lost by the Portfolio.
If a put option written by a Portfolio were exercised
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by a
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a
decrease in the market value of the underlying security caused by
rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then
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be sold by the option holder to the Portfolio at a higher price
than its current market value. The risk involved in writing a
call option is that there could be an increase in the market
value of the underlying security caused by declining interest
rates or other factors. If this occurred, the option could be
exercised and the underlying security would then be sold by the
Portfolio at a lower price than its current market value. These
risks could be reduced by entering into a closing transaction.
The Portfolio retains the premium received from writing a put or
call option whether or not the option is exercised. See Appendix
C for a further discussion of the use, risks and costs of option
trading.
The Portfolios may purchase or write options on
securities of the types in which they are permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. These
Portfolios will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written in negotiated transactions are illiquid and
it may not be possible for the Portfolios to effect a closing
transaction at a time when the Adviser believes it would be
advantageous to do so. See "Description of the Portfolios-
Additional Investment Policies and Practices - Illiquid
Securities" in the Prospectus.
Interest Rate Transactions. Each Portfolio may enter
into interest rate swaps and may purchase or sell interest rate
caps and floors.
A Portfolio enters into these transactions primarily to
preserve a return or spread on a particular investment or portion
of its portfolio. A Portfolio may also enter into these
transactions to protect against price increases of securities the
Adviser anticipates purchasing for the Portfolio at a later date.
The Portfolios do not intend to use these transactions in a
speculative manner. Interest rate swaps involve the exchange by
a Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a contractually-based principal amount from the
party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal
amount from the party selling such interest rate floor.
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Each Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis,
depending upon whether they are hedging their assets or their
liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if
any, of a Portfolio's obligations over its entitlements with
respect to each interest rate swap will be accrued daily, and an
amount of liquid assets having an aggregate net asset value at
least equal to the accrued excess will be maintained in a
segregated account by the Custodian. If a Portfolio enters into
an interest rate swap on other than a net basis, the Portfolio
will maintain in a segregated account with the Custodian the full
amount, accrued daily, of the Portfolio's obligations with
respect to the swap. A Portfolio will not enter into any interest
rate swap, cap or floor unless the unsecured senior debt or the
claims paying ability of the other party thereto is then rated in
the highest rating category of at least one nationally recognized
rating organization. The Adviser will monitor the
creditworthiness of counterparties on an ongoing basis. If there
were a default by such a counterparty, the Portfolios would have
contractual remedies. The swap market has grown substantially in
recent years, with a large number of banks and investment banking
firms acting both as principals and agents utilizing standardized
swap documentation. The Adviser has determined that, as a
result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly. they
are less liquid than swaps. To the extent a Portfolio sells
(i.e., writes) caps and floors it will maintain in a segregated
account with the Custodian cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to
the full amount, accrued daily, of the Portfolio's obligations
with respect to any caps or floors.
The use of interest rate swaps is a highly specialized
activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities
transactions. If the Adviser were incorrect in its forecasts of
market values, interest rates and other applicable factors, the
investment performance of the Portfolios would diminish compared
with what they would have been if these investment techniques
were not used. Moreover, even if the Adviser is correct in its
forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being
hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by any of the Portfolios.
These transactions do not involve the delivery of securities or
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other underlying assets of principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net
amount of interest payments that a Portfolio is contractually
obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount
of interest payments that the Portfolio contractually is entitled
to receive. A Portfolio may purchase and sell (i.e., write) caps
and floors without limitation, subject to the segregated account
requirement described above.
When-Issued Securities and Forward Commitments. Each
Portfolio may purchase municipal securities offered on a "when-
issued" basis and may purchase or sell municipal securities on a
"forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment by a
Portfolio and settlement, no payment is made for the securities
purchased by the purchaser, and, thus, no interest accrues to the
purchaser from the transaction. The use of when-issued
transactions and forward commitments enables a Portfolio to hedge
against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling bond
prices, a Portfolio might sell municipal securities which it
owned on a forward commitment basis to limit its exposure to
falling bond prices. In periods of falling interest rates and
rising bond prices, a Portfolio might sell a municipal security
held by the Portfolio and purchase the same or a similar security
on a when-issued or forward commitment basis, thereby obtaining
the benefit of currently higher cash yields. However, if the
Adviser were to forecast incorrectly the direction of interest
rate movements, the Portfolio might be required to complete such
when-issued or forward transactions at prices less favorable than
the current market value.
When-issued municipal securities and forward commitments
may be sold prior to the settlement date, but a Portfolio enters
into when-issued and forward commitment transactions only with
the intention of actually receiving or delivering the municipal
securities, as the case may be. To facilitate such transactions,
the Fund's custodian bank will maintain, in a separate account of
the Fund, liquid assets having value equal to, or greater than,
any commitments to purchase municipal securities on a when-issued
or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of a Portfolio, the
portfolio securities themselves. If a Portfolio, however,
chooses to dispose of the right to acquire a when-issued security
prior to its acquisition or dispose of its right to deliver or
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receive against a forward commitment, it can incur a gain or
loss. When-issued municipal securities may include bonds
purchased on a "when, as and if issued" basis under which the
issuance of the securities depends upon the occurrence of a
subsequent event, such as approval of a proposed financing by
appropriate municipal authorities. Any significant commitment of
Portfolio assets to the purchase of securities on a "when, as an
if issued" basis may increase the volatility of the Portfolio's
net asset value. At the time a Portfolio makes the commitment to
purchase or sell a municipal security on a when-issued or forward
commitment basis, it records the transaction and reflects the
value of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. No when-issued or
forward commitments will be made by any Portfolio if, as a
result, more than 20% of the value of such Portfolio's total
assets would be committed to such transactions.
General. The successful use of the foregoing investment
practices, all of which are highly specialized investment
activities, draws upon the Adviser's special skill and experience
with respect to such instruments and usually depends on Adviser's
ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Portfolios may
not achieve the anticipated benefits of futures contracts,
options, interest rate transactions or forward commitment
contracts, or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of such instruments
and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its position in
futures contracts, options, interest rate transactions and
forward commitment contracts will depend on the availability of
liquid markets in such instruments. Markets for all these
vehicles with respect to municipal securities are relatively new
and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures
contracts and options on futures contracts. If, for example, a
secondary market did not exist with respect to an option
purchased or written by a Portfolio over-the-counter, it might
not be possible to effect a closing transaction in the option
(i.e., dispose of the option) with the result that (i) an option
purchased by the Portfolio would have to be exercised in order
for the Portfolio to realize any profit and (ii) the Portfolio
might not be able to sell portfolio securities covering the
option until the option expired or it delivered the underlying
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security or futures contract upon exercise. No assurance can be
given that the Portfolios will be able to utilize these
instruments effectively for the purposes set forth above.
Furthermore, the Portfolios' ability to engage in options and
futures transactions may be limited by tax considerations.
Repurchase Agreements. Each Portfolio may seek
additional income by investing in repurchase agreements
pertaining only to U.S. Government securities. 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. Such
agreements permit a Portfolio to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. Each Portfolio maintains procedures for
evaluating and monitoring the creditworthiness of vendors of
repurchase agreements. In addition, each Portfolio requires
continual maintenance of collateral held by the Fund's Custodian
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 vendor defaulted on its repurchase obligation, a Portfolio
might suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. In the
event of a vendor's bankruptcy, a Portfolio might be delayed in,
or prevented from, selling the collateral for its benefit.
Repurchase agreements may be entered into with member banks of
the Federal Reserve System including the Fund's Custodian or
"primary dealers" (as designated by the Federal Reserve Bank of
New York) in U.S. Government securities. It is the Fund's
current practice to enter into repurchase agreements only with
such primary dealers.
Illiquid Securities. Subject to any applicable
fundamental investment policy, a Portfolio will not maintain more
than 15% of its net assets in illiquid securities. These
securities include, among others, securities for which there is
no readily available market, options purchased by a Portfolio
over-the-counter, the cover for such options and repurchase
agreements not terminable within seven days. Because of the
absence of a trading market for these investments, a Portfolio
may not be able to realize their value upon sale.
Future Developments. A Portfolio may, following written
notice to its shareholders, take advantage of other investment
practices which are not at present contemplated for use by the
Portfolio or which currently are not available but which may be
developed, to the extent such investment practices are both
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consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Such investment practices, if
they arise, may involve risks which exceed those involved in the
activities described above.
Special Risk Considerations. Securities rated Baa are
considered by Moody's to have speculative characteristics.
Sustained periods of deteriorating economic conditions or rising
interest rates are more likely to lead to a weakening in the
issuer's capacity to pay interest and repay principal than in the
case of higher-rated securities. Securities rated below
investment grade, i.e., Ba or BB and lower, ("lower-rated
securities") are subject to greater risk of loss of principal and
interest than higher-rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic
conditions or rising interest rates. They are also generally
considered to be subject to greater market risk than higher-rated
securities in times of deteriorating economic conditions. In
addition, lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions
than investment grade securities.
The market for lower-rated securities may be thinner and
less active than that for higher-quality securities, which can
adversely affect the prices at which these securities can be
sold. To the extent that there is no established secondary
market for lower-rated securities, the Portfolio may experience
difficulty in valuing such securities and, in turn, the
Portfolio's assets. In addition, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities. Under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989,
federally-insured savings and loan associations are required to
divest their investments in non-investment grade corporate debt
securities by July 1, 1994. Such divestiture could have a
material effect on the market and prices of such securities.
The ratings of fixed-income securities by Moody's, S&P
and Fitch are a generally accepted barometer of credit risk. They
are, however, subject to certain limitations from an investor's
standpoint. The rating of an issuer is heavily weighted by past
developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may
be varying degrees of differences in credit risk of securities
within each rating category. See Appendix A for a description of
such ratings.
49
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The Adviser will try to reduce the risk of investment in
lower-rated securities through credit analysis, attention to
current developments and trends in interest rates and economic
conditions. However, there can be no assurance that losses will
not occur. Since the risk of default is higher for lower-quality
securities, the Adviser's research and credit analysis are a
correspondingly important aspect of its program for managing the
Portfolio's securities. In considering investments for the
Portfolio, the Adviser will attempt to identify those high-risk,
high-yield securities whose financial condition is adequate to
meet future obligations, has improved or is expected to improve
in the future. The Adviser's analysis focuses on relative values
based on such factors as interest coverage, financial prospects,
and the strength of the issuer.
Non-rated municipal securities will also be considered
for investment by the Portfolio when the Adviser believes that
the financial condition of the issuers of such obligations and
the protection afforded by the terms of the obligations
themselves limit the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the
Portfolio's objective and policies.
In seeking to achieve the Portfolio's objective, there
will be times, such as during periods of rising interest rates,
when depreciation and realization of capital losses on securities
in the portfolio will be unavoidable. Moreover, medium- and
lower-rated securities and non-rated securities of comparable
quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market
conditions. Such fluctuations after a security is acquired do
not affect the cash income received from that security but are
reflected in the net asset value of the Portfolio.
Investment Restrictions
Unless specified to the contrary, the following
restrictions apply to each of the National, Insured National,
California and New York Portfolios and are fundamental policies
which may not be changed with respect to any such Portfolio
without the affirmative vote of the holders of a majority of such
Portfolio's outstanding voting securities, which means with
respect to any such Portfolio (1) 67% or more or the shares
represented at a meeting at which more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of the outstanding shares, whichever is less. Each such
Portfolio may not:
(1) Invest 25% or more of its total assets in the
securities of issuers conducting their principal
business activities in any one industry, provided
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that for purposes of this policy (a) there is no
limitation with respect to investments in municipal
securities issued by governmental users (including
private activity bonds issued by governmental
users), U.S. Government Securities, 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, a Portfolio will
regard the entity which has the primary
responsibility for the payment of interest and
principal as the issuer;
(2) Pledge, hypothecate, mortgage or otherwise
encumber its assets, except in an amount of not
more than 15% of the value of its total assets, to
secure borrowings for temporary or emergency
purposes;
(3) Make short sales of securities, maintain a
short position or purchase securities on margin;
(4) Participate on a joint or joint and several
basis in any securities trading account;
(5) Issue any senior security within the meaning
of the Act;
(6) Make loans of its assets to any person, except
for (i) the purchase of publicly distributed debt
securities, (ii) the purchase of non-publicly
distributed securities subject to paragraph 7
below, and (iii) entering into repurchase
agreements;
(7) Act as an underwriter of securities of other
issuers, except that a Portfolio may acquire
restricted or not readily marketable securities
under circumstances where, if such securities were
sold, the Fund might be deemed to be an underwriter
for purposes of the Securities Act of 1933, as
amended;
(8) Invest in commodities or commodity contracts,
except that a Portfolio may invest in futures
contracts and options thereon;
(9) Purchase or sell real estate; or
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(10) Borrow money except from banks for temporary
or emergency purposes, including the meeting of
redemption requests which might require the
untimely disposition of securities. Borrowing in
the aggregate may not exceed 20%, and borrowing for
purposes other than meeting redemptions may not
exceed 5% of the value of the Fund's total assets
(including all borrowings by the Portfolio) less
liabilities (not including all borrowings by the
Portfolio) at the time the borrowing is made.
Outstanding borrowings in excess of 5% of the value
of the Fund's total assets will be repaid before
any subsequent investments are made.
The Insured California Portfolio may not:
(1) Invest more than 25% of its total assets in a
single industry, except that there is no limit on
the amount of its assets which may be invested in
municipal securities issued by governments or
political subdivisions thereof, in a particular
segment of the municipal securities market or in
U.S. Government Securities;
(2) Borrow money, except from banks for temporary
purposes and then in amounts not in excess of 10%
of the value of the Insured California Portfolio's
total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except
in connection with any such borrowing in amounts
not in excess of 15% of the value of the Insured
California Portfolio's total assets at the time of
such borrowing. All borrowings at any time
outstanding will be repaid before any additional
investments are made. (This borrowing provision is
not for investment leverage, but solely to
facilitate management of the Insured California
Portfolio by enabling it to meet redemption
requests where the liquidation of portfolio
securities is deemed to be disadvantageous or
inconvenient and to obtain such short-term credits
as may be necessary for the clearance of purchases
and sales of securities.);
(3) Make loans, except to the extent the Insured
California Portfolio's investments described in
paragraph (1) of the Prospectus may be considered
to be loans;
(4) Have more than 5% of its assets invested in
repurchase agreements with the same dealer; or
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(5) Purchase or sell real estate (but without
limitation on the purchase of municipal securities
secured by real estate or interests therein), issue
senior securities, purchase commodities or
commodity contracts (except that the Insured
California Portfolio may invest in futures
contracts), engage in short sales or purchase
securities on margin except that this paragraph (5)
shall not limit the Insured California Portfolio
from borrowing or pledging assets as provided in
paragraph (1).
(6) Underwrite securities issued by other persons
or purchase any securities as to which it would be
deemed an underwriter under the Securities Act of
1933, as amended, except to the extent the Insured
California Portfolio may be deemed to be an
underwriter in connection with the sale of
securities held in its portfolio.
Additional investment restrictions applicable only to
the California Portfolio, and investment restrictions applicable
only to the Insured California Portfolio are set forth under
"Investment Objectives and Policies-Investment Restrictions" in
the Fund's Prospectus.
Whenever any of the investment restrictions listed above
states a minimum or maximum percentage of a Portfolio's assets
which may be invested in any security or other asset, it is
intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of a Portfolio's
acquisition of such security or other asset. Accordingly, any
later increase or decrease in percentage beyond the specified
limitations resulting from a change in values or net assets will
not be considered a violation. Under the Act, a Portfolio is not
permitted to borrow unless immediately after such borrowing there
is "asset coverage," as that term is defined and used in the Act
of at least 300% for all borrowings of the Portfolio. In
addition, under the Act, in the event asset coverage falls below
300%, a Portfolio must within three days reduce the amount of its
borrowing to such an extent that the asset coverage of its
borrowings is at least 300%.
Portfolio Turnover. From time to time, the Portfolios
may engage in active short-term trading to benefit from yield
disparities among different issues of municipal securities, to
seek short-term profits during periods of fluctuating interest
rates, or for other reasons. Such trading will increase a
Portfolio's rate of turnover and the incidence of short-term
capital gain taxable as ordinary income. Management anticipates
that the annual turnover in each Portfolio will not exceed 250%.
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An annual turnover rate of 200% occurs, for example, when all of
the securities in a Portfolio are replaced twice in a period of
one year. A high rate of portfolio turnover involves
correspondingly greater expenses than a lower rate, which
expenses must be borne by a Portfolio and its shareholders.
However, the execution costs for municipal securities are
substantially less than those for equivalent dollar values of
equity securities. The portfolio turnover rates for the fiscal
years ending October 31, 1995 and 1996 were, respectively, for
the National Portfolio 118% and 137%, for the Insured National
Portfolio 171% and 157%, for the California Portfolio 39% and
49%, for the Insured California Portfolio 103% and 118% and for
the New York Portfolio 69% and 64%. See "Dividends,
Distributions and Taxes."
_______________________________________________________________
MANAGEMENT OF THE FUND
_______________________________________________________________
Adviser
Alliance Capital Management L.P., a New York Stock
Exchange listed company 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 Board of Directors.
The Adviser is a leading international investment
manager supervising client accounts with assets as of September
30, 1996 of more than $173 billion (of which more than $59
billion represented the assets of investment companies). The
Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies,
foundations and endowment funds and included, as of September 30,
1996, 33 of the FORTUNE 100 Companies. As of that date, the
Adviser and its subsidiaries employed approximately 1450
employees who operated out of domestic offices and the offices of
subsidiaries in Bombay, Istanbul, London, Paris, Sao Paulo,
Sydney, Tokyo, Toronto, Bahrain, Luxembourg and Singapore. The 52
registered investment companies comprising 110 separate
investment portfolios managed by the Adviser currently have more
than two million shareholders.
Alliance Capital Management Corporation, the sole
general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary
of The Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
54
<PAGE>
United States and a wholly-owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company. As of June 30, 1996,
ACMC, Inc. and Equitable Capital Management Corporation, each a
wholly-owned direct or indirect subsidiary of Equitable, together
with Equitable, owned in the aggregate approximately 57% of the
issued and outstanding units representing assignments of
beneficial ownership of limited partnership interests in the
Adviser ("Units"). As of June 30, 1996, approximately 33% and
10% of the Units were owned by the public and employees of the
Adviser and its subsidiaries, respectively, including employees
of the Adviser who serve as Directors of the Fund.
As of September 6, 1996, AXA and its subsidiaries owned
approximately 60.7% of the issued and outstanding shares of
capital stock of ECI. AXA is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations include activities in life
insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically, with activities
in France, the United States, Australia, the United Kingdom,
Canada and other countries, principally in Europe and the
Asia/Pacific area. AXA is also engaged in asset management,
investment banking, securities trading, brokerage, real estate
and other financial services activities in the United States, as
well as in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of September 9,
1996, 36.3% of the issued ordinary shares (representing 49.1% of
the voting power) of AXA were owned directly or indirectly by
Finaxa, a French holding company ("Finaxa"). As of September 6,
1996, 61.3% of the voting shares (representing 73.5% of the
voting power) of Finaxa were owned by five French mutual
insurance companies (the "Mutuelles AXA") (one of which, AXA
Assurances I.A.R.D. Mutuelle, owned 34.8% of the voting shares
representing 40.6% of the voting power), and 23.7% of the voting
shares of Finaxa (representing 15.0% of the voting power) were
owned by Banque Paribas, a French bank. Including the ordinary
shares directly or indirectly owned by Finaxa, the Mutuelles AXA
directly or indirectly owned 42.0% of the issued ordinary shares
(representing 56.8% of the voting power) of AXA as of September
9, 1996. Acting as a group, the Mutuelles AXA control AXA and
Finaxa. In addition, as of September 9, 1996, 7.8% of the issued
ordinary shares of AXA without the power to vote were owned by
subsidiaries of AXA.
The Adviser furnishes advice and recommendations with
respect to the portfolios of securities and investments and
provides persons satisfactory to the Board of Directors to act as
officers and employees of the Fund. Such officers and employees,
55
<PAGE>
as well as certain directors of the Fund, may be employees of the
Adviser or its affiliates.
The Adviser is, under the Advisory Agreement,
responsible for the following expenses incurred on behalf of the
Fund: (i) the compensation of any of the Fund's directors and
officers who are affiliated persons of the Adviser, (ii) expenses
of office rental, and (iii) any expenses incurred in promoting
the sale of Fund shares (other than the portion of the
promotional expenses borne by the Fund in accordance with an
effective plan pursuant to Rule 12b-1 under the Act, and the
costs of printing Fund prospectuses and other reports to
shareholders and fees related to registration with the Securities
and Exchange Commission and with state regulatory authorities).
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of services other than those specifically provided to
the Fund by the Adviser, the Fund may employ its own personnel.
For such services, it also may utilize personnel employed by the
Adviser or by affiliates of the Adviser. In such event, the
services will be provided to the Fund at cost and the payments
specifically approved by the Fund's Board of Directors.
For the fiscal year ended October 31, 1994, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounted to $4,934,890, $1,533,067, $1,997,073, $4,965,268 and
$822,833 respectively. Of such amounts, $3,750,516, $1,148,147,
$1,446,013, $3,219,652 and $379,671 was waived by the Adviser so
that during such fiscal year, the Fund paid advisory fees to the
Investment Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounting to $1,184,374, $384,920, $551,060, $1,745,616, and
$443,162, respectively.
For the fiscal year ended October 31, 1995, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounted to $4,357,009, $1,448,694, $1,878,376, $4,482,864 and
$758,429 respectively. Of such amounts, $2,685,230, $273,143,
$1,126,920, $2,183,908 and $71,127 was waived by the Adviser so
that during such fiscal year, the Fund paid advisory fees to the
Investment Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounting to $1,671,779, $1,175,551, $751,456, $2,298,956, and
$687,302, respectively.
For the fiscal year ended October 31, 1996, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
56
<PAGE>
amounted to $4,179,489, $1,447,924, $1,946,292, $4,527,101 and
$800,847 respectively. Of such amounts, $2,760,334, $250,000,
$1,468,820, $2,025,214 and $0 was waived by the Adviser so that
during such fiscal year, the Fund paid advisory fees to the
Investment Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounting to $1,419,155, $1,197,924, $477,472, $2,501,886, and
$800,847, respectively.
The Advisory Agreement became effective on July 22,
1992. The Advisory Agreement will continue in effect from year
to year with respect to each Portfolio if approved at least
annually by a majority vote of the holders of the outstanding
voting securities of such Portfolio or by a majority vote of the
Directors, and in either case, by a majority of the Directors who
are not parties to the Advisory Agreement or interested persons
of any such party as defined by the Act. Most recently, the
Board of Directors approved the continuance of the Advisory
Agreement until September 30, 1997 at their Meeting held on
September 11, 1996.
The Advisory Agreement is terminable with respect to a
Portfolio without penalty by a vote of a majority of the
Portfolio's outstanding voting securities or by a vote of a
majority of the Fund's Directors on 60 days' written notice, or
by the Adviser on 60 days' written notice, and will terminate
automatically in the event of its assignment. The Advisory
Agreement provides that in the absence of willful misfeasance,
bad faith or gross negligence on the part of the Adviser, or of
reckless disregard of its obligations thereunder, the Adviser
shall not be liable for any action or failure to act in
accordance with its duties thereunder.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. It is
the policy of the Adviser to allocate advisory recommendations
and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Adviser (including the
Fund) are purchasing or selling the same security on a given day
from the same broker-dealer, such transactions may be averaged as
to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
57
<PAGE>
and is investment adviser to ACM Institutional Reserves, Inc.,
AFD Exchange Reserves, The Alliance Fund, Inc., Alliance Balanced
Shares, Inc., Alliance Bond Fund, Inc., Alliance Capital
Reserves, Alliance Developing Markets Fund, Inc., Alliance Global
Dollar Government Fund, Inc., Alliance Global Small Cap Fund,
Inc., Alliance Global Strategic Income Trust, Inc., Alliance
Government Reserves, Alliance Growth and Income Fund, Inc.,
Alliance Income Builder Fund, Inc., Alliance International Fund,
Alliance Money Market Fund, Alliance Mortgage Securities Income
Fund, Inc., Alliance Limited Maturity Government Fund, Inc.,
Alliance Multi-Market Strategy Trust, Inc., Alliance Municipal
Income Fund, Inc., Alliance Municipal Income Fund II, Alliance
Municipal Trust, Alliance New Europe Fund, Inc., Alliance North
American Government Income Trust, Inc., Alliance Premier Growth
Fund, Inc., Alliance Quasar Fund, Inc., Alliance Real Estate
Investment Fund, Inc., Alliance/Regent Sector Opportunity Fund,
Inc., Alliance Short-Term Multi-Market Trust, Inc., Alliance
Technology Fund, Inc., Alliance Utility Income Fund, Inc.,
Alliance Variable Products Series Fund, Inc., Alliance World
Income Trust, Inc., Alliance Worldwide Privatization Fund, Inc.,
The Alliance Portfolios, Fiduciary Management Associates and The
Hudson River Trust, all registered open-end investment companies;
and to ACM Government Income Fund, Inc., ACM Government
Securities Fund, Inc., ACM Government Spectrum Fund, Inc., ACM
Government Opportunity Fund, Inc., ACM Managed Dollar Income
Fund, Inc., ACM Managed Income Fund, Inc., ACM Municipal
Securities Income Fund, Inc., Alliance Global Environment Fund,
Inc., Alliance World Dollar Government Fund, Inc., Alliance World
Dollar Government Fund II, Inc., The Austria Fund, Inc., The
Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and
The Spain Fund, Inc., all registered closed-end investment
companies.
Directors and Officers
The Directors and officers of the Fund, their ages and
their principal occupations during the past five years are set
forth below. Each such Director and officer is also a director,
trustee or officer of other registered investment companies
sponsored by the Adviser. Unless otherwise specified, the
address of each of the following persons is 1345 Avenue of the
Americas, New York, New York 10105.
Directors
JOHN D. CARIFA* - 51, Chairman and President of the
Fund, is the President, Chief Operating Officer and a Director of
ACMC with which he has been associated since prior to 1992.
_________________________
* An "interested person" of the Fund as defined in the Act.
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<PAGE>
DAVID H. DIEVLER - 67, was formerly Chairman of the
Board and President of the Fund and Senior Vice President of
ACMC. He is currently an independent consultant.
RUTH BLOCK - 66, is a Director of Ecolab Incorporated
(specialty chemicals) and Amoco Corporation (oil and gas).
Previously, she was an Executive Vice President and the Chief
Insurance Officer of Equitable since prior to 1992. Her address
is Box 4653, Stamford, Connecticut 06903.
JAMES R. GREENE - 75, is an independent financial
consultant since prior to 1992. He is also a Director of ASARCO,
Incorporated (metals smelting and refining), Bank Leumi Trust
Co., Buck Engineering Company (manufacturing), American Reliance
Insurance Co. (insurance) and United Tote (computer software).
His address is 134 Buttonwood Drive, Fair Haven, New Jersey
07701
DR. JAMES M. HESTER - 72, is President of the Harry
Frank Guggenheim Foundation and a Director of Union Carbide
Corporation with which he has been associated since prior to
1992. He was formerly President of New York University, the New
York Botanical Garden and Rector of the United Nations
University. His address is 45 East 89th Street, New York, New
York 10128.
CLIFFORD L. MICHEL - 57, is a member of the law firm of
Cahill Gordon & Reindel since prior to 1992. He is President and
Chief Executive Officer of Wenonah Development Company
(investments) and a Director of Placer Dome, Inc. (mining). His
address is St. Bernard's Road, Gladstone, New Jersey 07934.
DONALD J. ROBINSON - 62, was formerly a partner at
Orrick, Herrington & Sutcliff and is currently of counsel to that
law firm. His address is 666 Fifth Avenue, 19th Floor, New York,
New York 10103.
Officers
JOHN D. CARIFA, Chairman and President, (see biography,
above).
SUSAN P. KEENAN 39, Senior Vice President, is a Senior
Vice President of ACMC with which she has been associated since
prior to 1992.
WAYNE D. LYSKI, 55, Senior Vice President, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1992.
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KATHLEEN A. CORBET, 36, Senior Vice President, has been
a Senior Vice President of ACMC since July 1993. Previously, she
held various responsibilities as head of Equitable Capital
Management Corporation's Fixed Income Management Department,
Private Placement Secondary Trading and Fund Management since
prior to 1992.
WILLIAM E. OLIVER 45, Vice President, has been a Vice
President of ACMC, since May 1993. Previously, he was a Vice
President and Director of Investment Grade Municipal Research
with the Prudential Capital Management Group.
DAVID M. DOWDEN 31, Vice President, is an Assistant Vice
President of ACMC, with which he has been associated since 1993.
Previously, he was an analyst in the Municipal Strategy Group at
Merrill Lynch Capital Markets.
TERRANCE T. HULTS 30, Vice President, is an Assistant
Vice President of ACMC, with which he has been associated since
1993. Previously, he was an Associate and trader in the
Municipal Derivative Products Department at Merrill Lynch Capital
Markets.
EDMUND P. BERGAN, JR., 46, Secretary, is a Senior Vice
President and the General Counsel of AFD and Alliance Fund
Services, Inc. and Vice President and Assistant General Counsel
of ACMC, with which he has been associated since prior to 1992.
DOMENICK PUGLIESE, 35, Assistant Secretary, is Vice
President and Assistant General Counsel of Alliance Fund
Distributors, Inc. with which he has been associated since May
1995. Previously, he was Vice President and Counsel, Concord
Financial Holding Corporation since 1994, Vice President and
Associate General Counsel of Prudential Securities since 1992.
MARK D. GERSTEN 46, Treasurer and Chief Financial
Officer, is a Vice President of Alliance Fund Distributors, Inc.
and Senior Vice President of Alliance Fund Services, Inc., with
which he has been associated since prior to 1992.
JUAN RODRIGUEZ 39, Controller, is an Assistant Vice
President of Alliance Fund Services, Inc. with which he has been
associated since prior to 1992.
MELVIN OLIVER 39, Assistant Controller, is an Accounting
Manager of Alliance Fund Services Inc. with which he has been
associated since prior to 1992.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended October 31, 1996, the
aggregate compensation paid to each of the Directors during
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<PAGE>
calendar year 1996 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 in the Alliance Fund Complex with respect to
which each of the Directors serves as a trustee or director, 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 trustees or
directors. Each of the Directors is a director of one or more
other registered investment companies in the Alliance Fund
Complex.
Total Number
of Funds in
the Alliance
Total Fund Complex,
Compensation Including the
from the Fund, as to
Alliance which the
Aggregate Fund Complex, Director is
Name of Director Compensation Including a Trustee
of the Fund from the Fund the Fund or Director
John D. Carifa $0 $0 50
David H. Dievler $3,465 $182,000 43
Ruth Block $3,485 $157,500 37
James R. Greene $3,965 $ 63,000 11
Dr. James M. Hester $3,490 $148,500 38
Clifford L. Michel $3,490 $146,068 38
Donald J. Robinson $ 405 $137,250 38
______________________
As of January 17, 1997, the Directors and officers of the Fund
as a group owned less than 1% of the shares of the Fund.
_______________________________________________________________
EXPENSES OF THE FUND
_______________________________________________________________
Distribution Services Agreement
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Fund's principal underwriter (the "Principal
Underwriter"), to permit the Principal Underwriter to distribute
the Fund's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with the distribution
of its Class A, Class B and Class C shares in accordance with a
plan of distribution which is included in the Agreement and which
61
<PAGE>
has been duly adopted and approved in accordance with Rule 12b-1
adopted by the Commission under the Act (the "Rule 12b-1 Plan").
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Portfolio as accrued.
The distribution services fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge, and at the same time to permit the
Principal Underwriter to compensate broker-dealers in connection
with the sale of such shares. In this regard the purpose and
function of the combined respective contingent deferred sales
charges and respective distribution services fees on the Class B
shares, and the distribution services fee on the Class C shares,
are the same as those of the initial sales charge and
distribution services fee with respect to the Class A shares in
that in each case the sales charge and distribution services fee
provide for the financing of the distribution of the relevant
class of the Portfolio's shares.
Under the Agreement, the Treasurer of the Fund reports
the amounts expended under the Rule 12b-1 Plan and the purposes
for which such expenditures were made to the Directors of the
Fund for their review on a quarterly basis. Also, the Agreement
provides that the selection and nomination of Directors who are
not interested persons of the Fund (as defined in the Act) are
committed to the discretion of such disinterested Directors then
in office.
The Agreement became effective on July 22, 1992. The
Agreement replaced an earlier agreement (the "First Agreement")
that terminated because of its technical assignment as a result
of AXA's acquisition of control over Equitable. In anticipation
of the assignment of the First Agreement, the Agreement was
approved by the unanimous vote, cast in person, of the Fund's
Directors (including the Directors who are not parties to the
Agreement or interested persons of any such party as defined in
the Act) at a meeting called for such purpose held on September
11, 1991. An amendment to the Agreement to permit the
distribution of an additional class of shares, Class B shares,
was approved by the unanimous vote, cast in person, of the
disinterested Directors at a meeting called for that purpose held
on November 24, 1992, and by the initial holder of Class B shares
of each Portfolio of the Fund on December 29, 1992. An amendment
to the Agreement to permit the distribution of an additional
class of shares, Class C shares, was approved by the unanimous
vote, cast in person, of the disinterested Directors at a meeting
called for that purpose held on February 23, 1993, and by the
initial holder of Class C shares of each Portfolio of the Fund on
April 30, 1993.
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<PAGE>
During the fiscal year ended October 31, 1996, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
expenditures under the Agreement in the case of the Class A
shares in amounts aggregating $991,717, $484,186, $539,859,
$1,406,123 and $307,307 which constituted .30%, .30%, .30%, .30%
and .30%, respectively, of each Portfolio's average daily net
assets attributable to the Class A shares. In addition, during
the fiscal year ended October 31, 1996, the Adviser made
aggregate payments under the Agreement from its own resources in
the case of the Class A shares as described above of $1,249,516.
Of the $4,978,708 paid by the Fund and the Adviser under the
Agreement in the case of the Class A shares, $323,928 was spent
on advertising, $44,625 on the printing and mailing of
prospectuses for persons other than current shareholders,
$3,578,142 for compensation to broker-dealers and other financial
intermediaries (including $2,986,481 to the Fund's Principal
Underwriter), $210,304 for compensation to sales personnel and
$821,709 was spent on printing of sales literature, travel,
entertainment, due diligence and other promotional expenses.
During the fiscal year ended October 31, 1996, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
expenditures under the Agreement in the case of the Class B
shares in amounts aggregating $2,352,948, $558,288, $967,401,
$1,657,856 and $292,862 which constituted 1.00%, 1.00%, 1.00%,
1.00% and 1.00%, respectively, of each Portfolio's average daily
net assets attributable to the Class B shares. In addition,
during the fiscal year ended October 31, 1996, the Adviser made
aggregate payments under the Agreement from its own resources in
the case of the Class B shares as described above of $0. Of the
$4,969,652 paid by the Fund and the Adviser under the Agreement
in the case of the Class B shares, $253,244 was spent on
advertising, $34,071 on the printing and mailing of prospectuses
for persons other than current shareholders, $3,192,316 for
compensation to broker-dealers and other financial intermediaries
(including $1,449,660 to the Fund's Principal Underwriter),
$104,889 for compensation to sales personnel and $535,982 was
spent on printing of sales literature, travel, entertainment, due
diligence and other promotional expenses and $849,150 for
interest on Class B shares financing. Unreimbursed distribution
expenses incurred during the Fund's fiscal year ended October 31,
1996 and carried over for reimbursement in future years in
respect of the Class B shares amounted to approximately $0 or 0%
for National Portfolio, $0 or 0% for Insured National Portfolio,
$59,632 or .06% for New York Portfolio, $0 or 0% for California
Portfolio, and $108,896 or .41% for Insured California Portfolio,
of the net assets represented by the Class B shares of each such
Portfolio on that date.
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<PAGE>
During the fiscal year ended October 31, 1996, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
expenditures under the Agreement in the case of the Class C
shares in amounts aggregating $1,028,510, $223,607, $347,137,
$898,428 and $139,446 which constituted 1.00%, 1.00%, 1.00%,
1.00% and 1.00%, respectively, of each Portfolio's average daily
net assets attributable to the Class C shares. In addition,
during the fiscal year ended October 31, 1996, the Adviser made
aggregate payments under the Agreement from its own resources in
the case of the Class C shares as described above of $1,484,934.
Of the $4,122,062 paid by the Fund and the Adviser under the
Agreement in the case of the Class C shares, $250,647 was spent
on advertising, $36,333 on the printing and mailing of
prospectuses for persons other than current shareholders,
$3,186,320 for compensation to broker-dealers and other financial
intermediaries (including $2,610,819 to the Fund's Principal
Underwriter), $116,158 for compensation to sales personnel and
$532,604 was spent on printing of sales literature, travel,
entertainment, due diligence and other promotional expenses.
Unreimbursed distribution expenses incurred during the Fund's
fiscal period ended October 31, 1996 and carried over for
reimbursement in future years in respect of the Class C shares
amounted to approximately $458,577 or .48% for National
Portfolio, $206,711 or .91% for Insured National Portfolio,
$265,566 or .77% for New York Portfolio, $454,035 or .50% for
California Portfolio, and $100,046 or .78% for Insured California
Portfolio, of the net assets represented by the Class C shares of
each such Portfolio on that date.
The Agreement will continue in effect until September
30, 1997 and thereafter for successive twelve-month periods
(computed from each October 1) with respect to each class of a
Portfolio, provided, however, that such continuance is
specifically approved at least annually by the Directors of the
Fund or by vote of the holders of a majority of the outstanding
voting securities (as defined in the Act) of that class, and in
either case, by a majority of the Directors of the Fund who are
not parties to this agreement or interested persons, as defined
in the Act, of any such party (other than as directors of the
Fund) and who have no direct or indirect financial interest in
the operation of the Rule 12b-1 Plan or any agreement related
thereto. Most recently the Directors approved the continuance of
the Agreement until September 30, 1997 at their meeting held on
September 11, 1996.
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission may payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
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<PAGE>
such compensation to brokers or other persons for their
distribution assistance.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares of a Portfolio, (i) no distribution services fees
(other than current amounts accrued but not yet paid) would be
owed by the Fund to the Principal Underwriter with respect to
that class, and (ii) the Fund would not be obligated to pay the
Principal Underwriter for any amounts expended under the
Agreement not previously recovered by the Principal Underwriter
from distribution services fees in respect of shares of such
class or through deferred sales charges.
All material amendments to the Agreement will become
effective only upon approval as provided in the preceding
paragraph; and the Agreement may not be amended in order to
increase materially the costs that a particular class or
Portfolio may bear pursuant to the Agreement without the approval
of a majority of the holders of the outstanding voting shares of
such class or Portfolio affected. The Agreement may be
terminated (a) by the Fund without penalty at any time by a
majority vote of the holders of the outstanding voting securities
of the Portfolio, voting separately by class or by a majority
vote of the disinterested Directors or (b) by the Principal
Underwriter. To terminate the Agreement, any party must give the
other parties 60 days' written notice; to terminate the Rule 12b-
1 Plan only, the Fund need give no notice to the Principal
Underwriter. The Rule 12b-1 Plan will terminate automatically in
the event of its assignment.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser, receives a transfer agency fee per
account holder of the Class A shares, Class B shares, Class C
shares and Advisor Class shares of each Portfolio of the Fund,
plus reimbursement for out-of-pocket expenses. The transfer
agency fee with respect to the Class B shares and Class C shares
is higher than the transfer agency fee with respect to the Class
A shares and Advisor Class shares or the Class C shares
reflecting the additional costs associated with the Class B
shares and Class C shares contingent deferred sales charge. For
the fiscal year ended October 31, 1996, the Fund paid Alliance
Fund Services, Inc. $1,045,781 for transfer agency services and
out of pocket expenses.
65
<PAGE>
_______________________________________________________________
PURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares -- How To Buy Shares."
General
Shares of each Portfolio are offered on a continuous
basis at a price equal to their net asset value plus an initial
sales charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares"), or without
any initial sales charge and, as long as the shares are held one
year or more, without any contingent deferred sales charge
("Class C shares"), or, to investors eligible to purchase Advisor
Class shares, without any initial, contingent deferred or asset
based sales charge, in each case as described below. Shares of
each Portfolio that are offered subject to a sales charge are
offered through (i) investment dealers that are members of the
National Association of Securities Dealers, Inc. and have entered
into selected dealer agreements with the Principal Underwriter
("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered
into selected agent agreements with the Principal Underwriter
("selected agents"), and (iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased and
held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers
or other financial intermediaries and approved by the Principal
Underwriter, pursuant to which each investor pays an asset-based
fee at an annual rate of at least .50% of the assets in the
investor's account, to the sponsor, or its affiliates or agent,
(ii) through self-directed defined contribution employee benefit
plans (e.g., 401(k) plans) that have at least 1,000 participants
or $25 million in assets, (iii) by the categories of investors
described in clauses (i) through (iv) below under "--Sales at Net
Asset Value" (other than officers, directors and present and
full-time employees of selected dealers or agents, or relatives
of such person, or any trust, individual retirement account or
retirement plan account for the benefit of such relative, none of
whom is eligible on the basis solely of such status to purchase
and hold Advisor Class shares) or (iv) by directors and present
or retired full-time employees of Koll Real Estate Services.
If you are a Fund shareholder through account
established under fee-based program, your fee-based program may
impose requirements with respect to the purchase, sale or
66
<PAGE>
exchange of Advisor Class shares of the Fund that are different
from those described in the Advisor Class Prospectus and this
Statement of Additional Information. A transaction fee may be
charged by your financial representative with respect to the
purchase, sale or exchange of Advisor Class shares made through
such financial representative.
Investors may purchase shares of a Portfolio either
through selected dealers, agents or financial representatives or
directly through the Principal Underwriter. Sales personnel of
selected dealers and agents distributing the Fund's shares may
receive differing compensation for selling Class A, Class B,
Class C or Advisor Class shares. The Fund may refuse any order
for the purchase of shares. The Fund reserves the right to
suspend the sale of each Portfolio's shares to the public in
response to conditions in the securities markets or for other
reasons.
The public offering price of shares of each Portfolio is
their net asset value, plus, in the case of Class A shares, a
sales charge which will vary depending on the purchase
alternative chosen by the investor, as shown in the table below
under "Class A Shares". On each Fund business day on which a
purchase or redemption order is received by the Fund and trading
in the types of securities in which the Portfolio invests might
materially affect the value of Portfolio shares, the per share
net asset value is computed in accordance with the Fund's
Articles of Incorporation and By-Laws as of the next close of
regular trading on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time) by dividing the value of the
Portfolio's total assets, less its liabilities, by the total
number of its shares then outstanding. A Fund business day is
any day, on which the Exchange is open for trading. The
respective per share net asset values of the Class A, Class B,
Class C and Advisor Class shares are expected to be substantially
the same. Under certain circumstances, however, the per share
net asset values of the Class B and Class C shares may be lower
than the per share net asset values of the Class A and Advisor
Class shares, as a result of the differential daily expense
accruals of the distribution and transfer agency fees applicable
with respect to those classes of shares. Even under those
circumstances, the per share net asset values of the four classes
eventually will tend to converge immediately after the payment of
dividends, which will differ by approximately the amount of the
expense accrual differential among the classes.
The Board of Directors has further determined that the
value of certain debt securities in the National, Insured
National, California and Insured California Portfolios, other
than temporary investments in short-term securities, be
determined by reference to valuations obtained from a pricing
67
<PAGE>
service which takes into account appropriate factors such as
institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations
of such securities, without exclusive reliance upon quoted
prices, since such valuations are believed by the Board to more
accurately reflect the fair value of such securities. At the
present time, the Fund is employing a pricing service offered by
Muller Data Corporation, a wholly-owned subsidiary of The
Thompson Corporation. However, other pricing services are
available, and the Board of Directors may authorize the use of
another such service. The Adviser may decide, subject to
guidelines established by the Board of Directors of the Fund, to
retain in the Insured National and Insured California Portfolios
municipal securities which are insured under the Portfolio Policy
or any other Mutual Fund Insurance Policy and which are in
default or in significant risk of default in the payment of
principal or interest until the default has been cured or the
principal and interest are paid by the issuer or the insurer. In
establishing fair value for these securities the Board of
Directors will give recognition to the value of the insurance
feature as well as the market value of the securities. Absent
any unusual or unforeseen circumstances, the Adviser will
recommend valuing these securities at the same price as similar
securities of a minimum investment grade (i.e., a "BBB" rating).
The Fund will accept unconditional orders for shares of
each Portfolio to be executed at the public offering price equal
to their net asset value next determined (plus applicable Class A
sales charges), as described below. Orders received by the
Principal Underwriter prior to the close of regular trading on
the Exchange on each day the Exchange is open for trading are
priced at the net asset value computed as of the close of regular
trading on the Exchange on that day (plus applicable Class A
sales charges). In the case of orders for purchase of shares
placed through selected dealers, agents or financial
representatives, as applicable, the applicable public offering
price will be the net asset value as so determined, but only if
the selected dealer, agent or financial representatives receives
the order prior to the close of regular trading on the Exchange
and transmits it to the Principal Underwriter prior to 5:00 p.m.
Eastern time. The selected dealer, agent or financial
representative, as applicable, is responsible for transmitting
such orders by 5:00 p.m. If the selected dealer, agent or
financial representative fails to do so, the investor's right to
that day's closing price must be settled between the investor and
the selected dealer, agent or financial representative, as
applicable. If the selected dealer, agent or financial
representatives, as applicable, receives the order after the
close of regular trading on the Exchange, the price will be based
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<PAGE>
on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of Portfolio shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate
portion of the Subscription Application or an "Autobuy"
application obtained by calling the "For Literature" telephone
number shown on the cover of this Statement of Additional
Information. Except with respect to certain omnibus accounts,
telephone purchase order may not exceed $500,000. Payment for
shares purchased by telephone can be made only by Electronic
Funds Transfer from a bank account maintained by the shareholder
at a bank that is a member of the National Automated Clearing
House Association ("NACHA"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a
Fund business day, the order to purchase shares is automatically
placed the following Fund business day, and the applicable public
offering price will be the public offering price determined as of
the close of business on such following business day. Full and
fractional shares are credited to a subscriber's account in the
amount of his or her subscription. As a convenience to the
subscriber, and to avoid unnecessary expense to a Portfolio,
stock certificates representing shares of a Portfolio are not
issued except upon written request to the Fund by the shareholder
or his or her authorized selected dealer or agent. This
facilitates later redemption and relieves the shareholder of the
responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional shares,
although such shares remain in the shareholder's account on the
books of the Fund.
In addition to the discount or commission amount paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash or other incentives to dealers or agents,
including EQ Financial Consultants, Inc. formerly Equico
Securities, Inc., an affiliate of the Principal Underwriter, in
connection with the sale of shares of a Portfolio. Such
additional amounts may be utilized, in whole of in part, to
provide additional compensation to registered representatives who
sell shares of a Portfolio. On some occasions, such cash or
other incentives will be conditioned upon the sale of a specified
minimum dollar amount of the shares of a Portfolio and/or other
Alliance Mutual Funds, as defined below, during a specific period
of time. On some occasions, such cash or other incentives may
take the form of payment for attendance at seminars, meals,
sporting events or theater performance, or payment for travel,
lodging and entertainment incurred in connection with travel
taken by persons associated with a dealer or agent and their
immediate family members to urban or resort locations within or
outside the United States. Such dealer or agent may elect to
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<PAGE>
receive cash incentives of equivalent amounts in lieu of such
payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of
each Portfolio, have the same rights and are identical in all
respects, except that (i) Class A shares bear the expense of the
initial sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of
the deferred sales charge, (ii) Class B shares and Class C shares
each bear the expense of a higher distribution services fee than
do Class A shares, and Advisor Class shares do not bear such a
fee, (iii) Class B and Class C shares bear higher transfer agency
costs than that borne by Class A and Advisor Class shares, (iv)
each of Class A, Class B and Class C shares has exclusive voting
rights with respect to provisions of the Rule 12b-1 Plan pursuant
to which its distribution services fee is paid and other matters
for which separate class voting is appropriate under applicable
law, provided that, if each Portfolio submits to a vote of the
Class A shareholders an amendment to the Rule 12b-1 Plan that
would materially increase the amount to be paid thereunder with
respect to the Class A shares then such amendment will also be
submitted to the Class B and Advisor Class shareholders and the
Class A shareholders, the Class B shareholders and the Advisor
Class shareholders will vote separately by class and (v) Class B
and Advisor Class shares are subject to a conversion feature.
Each class has different exchange privileges and certain
different shareholder service options available.
The Directors of the Fund have determined that currently
no conflict of interest exists between or among the Class A,
Class B, Class C and Advisor Class shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties
under the 1940 Act and state law, will seek to ensure that no
such conflict arises.
Alternative Retail Purchase Arrangements -- Class A, Class B
and Class C Shares**
The alternative purchase arrangements available with
respect to Class A shares, Class B shares and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length
of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Portfolio, the
accumulated distribution services fee and contingent deferred
_________________________
** Advisor Class shares are sold only to investors described
above in this section under "--General."
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<PAGE>
sales charge on Class B shares prior to conversion, or the
accumulated distribution services fee and contingent deferred
sales charge on Class C shares would be less than the initial
sales charge and accumulated distribution services fee on Class A
shares purchased at the same time and to what extent such
differential would be offset by the higher return of Class A
shares. Class A shares will normally be more beneficial than
Class B shares to the investor who qualifies for reduced initial
sales charges on Class A shares, as described below. In this
regard, the Principal Underwriter will reject any order (except
orders from certain retirement plans) for more than $250,000 for
Class B shares. Class C shares will normally not be suitable for
the investor who qualifies to purchase Class A shares at net
asset value. For this reason, the Principal Underwriter will
reject any order for more than $1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the time
of purchase, investors purchasing Class A shares would not have
all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for
an extended period of time might consider purchasing Class A
shares because the accumulated continuing distribution charges on
Class B shares or Class C shares may exceed the initial sales
charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration
against the fact that, because of such initial sales charges, not
all their funds will be invested initially.
Other investors might determine, however, that it would
be more advantageous to purchase Class B shares or Class C shares
in order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and
being subject to a contingent deferred sales charge for a three-
year and one-year period, respectively. For example, based on
current fees and expenses, an investor subject to the 4.25%
initial sales charge or Class A shares would have to hold his or
her investment approximately seven years for the Class C
distribution services fee to exceed the initial sales charge plus
the accumulated distribution services fee of Class A shares. In
this example, an investor intending to maintain his or her
investment for a longer period might consider purchasing Class A
shares. This example does not take into account the time value of
money, which further reduces the impact of the Class C
distribution services fees on the investment, fluctuations in net
asset value or the effect of different performance assumptions.
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<PAGE>
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Portfolio shares
for the three-year period during which Class B shares are subject
to a contingent deferred sales charge may find it more
advantageous to purchase Class C shares.
During the Fund's fiscal years ended October 31, 1994,
1995 and 1996, the aggregate amount of underwriting commission
payable with respect to shares of the National Portfolio were
$3,999,376 and $1,076,847 and $1,002,148; the Insured National
Portfolio were $880,897, $517,715 and $141,083; the New York
Portfolio were $2,183,874, $632,625 and $771,571; the California
Portfolio were $6,376,539, $1,481,582 and $1,784,420; and the
Insured California Portfolio were $898,670, $507,946 and
$288,199; of that amount, the Principal Underwriter, received the
amounts of $148,447, $53,831 and $50,984 for the National
Portfolio; $35,669, $24,091 and $17,440 for the Insured National
Portfolio; $74,564, $25,809 and $29,267 for the New York
Portfolio; $214,705, $62,269 and $78,399 for the California
Portfolio; and $34,685, $23,459 and $14,356 the Insured
California Portfolio; representing that portion of the sales
charges paid on shares of each Portfolio of the Fund sold during
the year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
fiscal year ended October 31, 1996, the Principal Underwriter
received in contingent deferred sales charges with respect to
Class B redemptions $281,532, for the National Portfolio,
$101,606, for the Insured National Portfolio, $247,892, for the
California Portfolio, $37,596, for the Insured California
Portfolio and $126,674 for the New York Portfolio. During the
fiscal year ended October 31, 1996, the Principal Underwriter
received in contingent deferred sales charges with respect to
Class C redemptions $3,183, for the National Portfolio, $320, for
the Insured National Portfolio, $6,470, for the California
Portfolio, $96, for the Insured California Portfolio and $2,412
for the New York Portfolio.
Class A Shares
The public offering price of Class A shares is the net
asset value plus a sales charge, as set forth below.
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Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000. . . 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000. . . 3.36 3.25 3.00
$250,000 but
less than
$500,000. . . 2.30 2.25 2.00
$500,000 but
less than
$1,000,000. . 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemption, as described below under "--Class B
Shares". In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends and
distributions) and , second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
of compensation to selected dealers and agents for selling
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Class A Shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "Class B
Shares--Conversion Feature" and "--Conversion of Advisor Class
Shares to Class A Shares". Each Portfolio receives the entire
net asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may, however, elect to reallow the entire sales
charge to selected dealers and agents for all sales with respect
to which orders are placed with the Principal Underwriter. A
selected dealer who receives reallowance in excess of 90% of such
a sales charge may be deemed to be an "underwriter" under the
Securities Act of 1933, as amended (the "Securities Act").
Set forth below is an example of the method of computing
the offering price of the Class A shares. The example assumes a
purchase of Class A shares of the Portfolio aggregating less than
$100,000 subject to the schedule of sales charges set forth above
for each Portfolio at a price based upon the net asset value of
Class A shares of the Portfolio on October 31, 1996.
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National Portfolio
Net Asset Value per Share at
October 31, 1996 $10.51
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .47
______
Per Share Offering Price to
the Public $10.98
======
Insured National Portfolio
Net Asset Value per Share at
October 31, 1996 $10.28
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .46
______
Per Share Offering Price to
the Public $10.74
======
New York Portfolio
Net Asset Value per Share at
October 31, 1996 $9.66
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .43
_____
Per Share Offering Price to
the Public $10.09
======
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California Portfolio
Net Asset Value per Share at
October 31, 1996 $10.59
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .47
______
Per Share Offering Price to
the Public $11.06
======
Insured California Portfolio
Net Asset Value per Share at
October 31, 1996 $13.39
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .59
______
Per Share Offering Price to
the Public $13.98
======
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but subject in most such cases to a contingent
deferred sales charge, or (ii) a reduced initial sales charge.
The circumstances under which investors may pay a reduced initial
sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of a
Portfolio into a single "purchase," if the resulting "purchase"
totals at least $100,000. The term "purchase" refers to: (i) a
single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed
amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares of a Portfolio for
his, her or their own account(s); (ii) a single purchase by a
trustee or other fiduciary purchasing shares for a single trust,
estate or single fiduciary account although more than one
beneficiary is involved; or (iii) a single purchase for the
employee benefit plans of a single employer. The term "purchase"
also includes purchases by any "company," as the term is defined
in the Act, but does not include purchases by any such company
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<PAGE>
which has not been in existence for at least six months or which
has no purpose other than the purchase of shares of a Portfolio
or shares of other registered investment companies at a discount.
The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit card holders of a company, policy
holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase"
may also include shares, purchased at the same time through a
single selected dealer or agent, of any other "Alliance Mutual
Fund." Currently, the Alliance Mutual Funds include:
AFD Exchange Reserves
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance/Regent Sector Opportunity Fund, Inc.
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<PAGE>
Alliance Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Strategic Balanced Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
Cumulative Quantity Discount (Right of Accumulation). An
investor's purchase of additional Class A shares of a Portfolio
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all shares of a Portfolio
held by the investor and (b) all shares of any
other Alliance Mutual Fund held by the investor;
and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with that
of the investor into a single "purchase" (see
above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Portfolio worth
an additional $100,000, the sales charge for the $100,000
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Fund, rather than the 3.25%
rate.
To qualify for the Combined Purchase Privilege or to
obtain the Cumulative Quantity Discount on a purchase through a
selected dealer or agent, the investor or selected dealer or
agent must provide the Principal Underwriter with sufficient
information to verify that each purchase qualifies for the
privilege or discount.
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<PAGE>
Statement of Intention. Class A investors may also
obtain the reduced sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B, Class
C and/or Advisor Class shares) of a Portfolio or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction
of the dollar amount indicated in the Statement of Intention. At
the investor's option, a Statement of Intention may include
purchases of shares of a Portfolio or any other Alliance Mutual
Fund made not more than 90 days prior to the date that the
investor signs the Statement of Intention; however, the 13-month
period during which the Statement of Intention is in effect will
begin on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at
least $100,000 in Class A shares of a Portfolio, the investor and
the investor's spouse each purchase shares of a Portfolio worth
$20,000 (for a total of $40,000), it will be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% sales charge on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Portfolio shares, are not subject to
escrow. When the full amount indicated has been purchased, the
escrow will be released. To the extent that an investor
purchases more than the dollar amount indicated on the Statement
of Intention and qualifies for a further reduced sales charge,
the sales charge will be adjusted for the entire amount purchased
at the end of the 13-month period. The difference in the sales
charge will be used to purchase additional shares of the Fund
subject to the rate of the sales charge applicable to the actual
amount of the aggregate purchases.
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<PAGE>
Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
a Portfolio should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the
Portfolios or any other Alliance Mutual Fund at a reduced sales
charge on a monthly basis during the 13-month period following
such a plan's initial purchase. The sales charge applicable to
such initial purchase of shares of the Portfolios will be that
normally applicable, under the schedule of sales charges set
forth in this Statement of Additional Information, to an
investment 13 times larger than such initial purchase. The sales
charge applicable to each succeeding monthly purchase will be
that normally applicable, under such schedule, to an investment
equal to the sum of (i) the total purchase previously made during
the 13-month period and (ii) the current month's purchase
multiplied by the number of months (including the current month)
remaining in the 13-month period. Sales charges previously paid
during such period will not be retroactively adjusted on the
basis of later purchases.
Reinstatement Privilege. A shareholder who has caused
any or all of his or her Class A or Class B shares of a Portfolio
to be redeemed or repurchased may reinvest all or any portion of
the redemption or repurchase proceeds in Class A shares of the
Portfolio at net asset value without any sales charge, provided
that (i) such reinvestment is made within 120 calendar days after
the redemption or repurchase date and (ii) for Class B shares, a
contingent deferred sales charge, has been paid and the Principal
Underwriter has approved, at its discretion, the reinvestment of
such shares. Shares are sold to a reinvesting shareholder at the
net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal income tax purposes
except that no loss will be recognized to the extent that the
proceeds are reinvested in shares of a Portfolio within 30
calendar days after the redemption or repurchase transaction.
The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or
repurchased, except that the privilege may be used more than once
in connection with transactions whose sole purpose is to transfer
a shareholder's interest in a Portfolio to his or her individual
retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written
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<PAGE>
request sent to the Fund at the address shown on the cover of
this Statement of Additional Information.
Sales at Net Asset Value. Each Portfolio may sell its
Class A shares at net asset value (i.e., without an initial sales
charge) and without a contingent deferred sales charge to certain
categories of investors including: (i) investment management
clients of the Adviser or its affiliates; (ii) officers and
present or former Directors or Trustees of the Fund; present or
former directors and trustees of other investment companies
managed by the Adviser; present or retired full-time employees of
the Adviser, the Principal Underwriter, Alliance Fund Services,
Inc. and their affiliates; officers and directors of ACMC, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; officers, directors and present and full-time
employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives")
of any such person; or any trust, individual retirement account
or retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not
be resold except to the Fund); (iii) the Adviser, Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
certain employee benefit plans for employees of the Adviser, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their service and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a fee
based program, sponsored and maintained by a registered broker-
dealer and approved by the Principal Underwriter, pursuant to
which persons pay an asset-based fee to such or its affiliate or
agent, for services in the nature of investment advisory or
administrative services; and (vi) persons who establish to the
Principal Underwriter's satisfaction that they are investing,
within such time period as may be designated by the Principal
Underwriter, proceeds of redemption of share of such other
registered investment companies as may be designated from time to
time by the Principal Underwriter.
Class B Shares
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
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<PAGE>
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
Class B shares are paid to the Principal Underwriter and are used
by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to a Portfolio in connection with the sale of the Class
B shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables a Portfolio to sell the Class B shares without a
sales charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which
are redeemed within three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 Class B shares (proceeds
of $600), 10 Class B shares will not be subject to the charge
because of dividend reinvestment. With respect to the remaining
40 Class B shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 2.0% (the applicable rate in the
second year after purchase as set forth below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
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Contingent Deferred
Sales Charge as a %
of Dollar Amount
Year Since Purchase Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions) and, second,
of shares held longest during the time they are subject to the
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charges is waived on
redemptions of shares (i) following the death or disability, as
defined in the Internal Revenue Code of 1986, as amended (the
"Code"), of a shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who
has attained the age of 70-1/2, (iii) that had been purchased by
present or former Directors or Trustees of the Fund, by the
relative of any such person, by any trust, individual retirement
account or retirement plan account for the benefit of any such
person or relative, or by the estate of any such person or
relative, or (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services--Systematic Withdrawal Plan" below).
Conversion Feature. Six years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
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<PAGE>
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under Federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee
for an indefinite period which may extend beyond the period
ending six years after the end of the calendar month in which the
shareholder's purchase order was accepted.
Class C Shares
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of
a sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that each
Portfolio will receive the full amount of the investor's purchase
payment, as long as the shares are held for one year or more, and
without a contingent deferred sales charge so that the investor
will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution
services fee enables each Portfolio to sell Class C shares
without either an initial or contingent deferred sales charge, as
long as the shares are held for one year or more. Class C shares
do not convert to any other class of shares of the Portfolio and
incur higher distribution services fees and transfer agency costs
than Class A shares and Advisor Class shares, and will thus have
a higher expense ratio and pay correspondingly lower dividends
than Class A shares and Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
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<PAGE>
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts and employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary that satisfies the
requirements to purchase shares set forth under "Purchase of
Shares--General" or (ii) the holder is otherwise no longer
eligible to purchase Advisor Class shares as described in the
Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically and
without notice to the shareholder, other than the notice
contained in the Advisor Class Prospectus and this Statement of
Additional Information, to Class A shares of the Fund during the
calendar month following the month in which the Fund is informed
of the occurrence of the Conversion Event. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on the
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<PAGE>
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee
and have a higher expense ratio than Advisor Class shares. As a
result, Class A shares may pay correspondingly lower dividends
and have a lower net asset value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem his Advisor Class shares, which would constitute a taxable
event under federal income tax law.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Share--How to Sell Shares". If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
Redemption
Subject only to the limitations described below, the
Fund's Articles of Incorporation require that the Fund redeem the
shares of each Portfolio tendered to it, as described below, at a
redemption price equal to their net asset value as next computed
following the receipt of shares tendered for redemption in proper
form. Except for any contingent deferred sales charge which may
be applicable to Class A shares, Class B shares or Class C
shares, there is no redemption charge. Payment of the redemption
price will be made within seven days after the Fund's receipt of
such tender for redemption. If a shareholder is in doubt about
what documents are required by his or her fee-based program or
employee benefit plan, the shareholder should contact his or her
financial representative.
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The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during
which an emergency (as determined by the Commission) exists as a
result of which disposal by the Fund of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the
Fund.
Payment of the redemption price will be made in cash.
The value of a shareholder's shares on redemption or repurchase
may be more or less than the cost of such shares to the
shareholder, depending upon the market value of the Fund's
portfolio securities at the time of such redemption or
repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment (either in cash or in portfolio
securities) received by a shareholder upon redemption or
repurchase of his shares, assuming the shares constitute capital
assets in his hands, will result in long-term or short-term
capital gains (or loss) depending upon the shareholder's holding
period and basis in respect of the shares redeemed.
To redeem shares of a Portfolio for which no share
certificates have been issued, the registered owner or owners
should forward a letter to the Fund containing a request for
redemption. The signature or signatures on the letter must be
guaranteed by an "eligible guarantor institution" as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
To redeem shares of the Fund represented by share
certificates, the investor should forward the appropriate share
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
share certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
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Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer, once in any 30-day period (except for certain
omnibus accounts), of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
A telephone redemption request may not exceed $100,000 (except
for certain omnibus accounts), and must be made by 4:00 p.m.
Eastern time on a Fund business day as defined above. Proceeds of
telephone redemptions will be sent by Electronic Funds Transfer
to a shareholder's designated bank account at a bank selected by
the shareholder that is a member of the NACHA.
Telephone Redemption By Check. Except for certain
omnibus accounts or as noted below, each Fund shareholder is
eligible to request redemption by check, once in any 30-day
period, of Portfolio shares for which no stock certificates have
been issued by telephone at (800) 221-5672 before 4:00 p.m.
Eastern time on a Fund business day in an amount not exceeding
$50,000 per check. Proceeds of such redemptions are remitted by
check to the shareholder's address of record. Telephone
redemption by check is not available with respect to shares (i)
for which certificates have been issued, (ii) held in nominee or
"street name" accounts, (iii) held by a shareholder who has
changed his or her address of record within the preceding 30
calendar days or (iv) held in any retirement plan account. A
shareholder otherwise eligible for telephone redemption by check
may cancel the privilege by written instruction to Alliance Fund
Services, Inc., or by checking the appropriate box on the
Subscription Application found in the Prospectus.
Telephone Redemptions-General. 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 Alliance Fund Services, Inc. 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 Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
redemption service at any time without notice. Neither the Fund
nor the Adviser, the Principal Underwriter or Alliance Fund
Services, Inc. will be responsible for the authenticity of
telephone requests for redemptions that the Fund reasonably
believes to be genuine. The Fund 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
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resulting transactions to be sent to shareholders. If the Fund
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.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of a Portfolio to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of a Portfolio are offered through a financial
intermediary or selected dealer or agent, the repurchase is
settled by the shareholder as an ordinary transaction with or
through the selected dealer or agent, who may charge the
shareholder for this service. The repurchase of shares of a
Portfolio as described above is a voluntary service of the Fund
and the Fund may suspend or terminate this practice at any time.
General
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of a Portfolio recently purchased by check, redemption proceeds
will not be made available until the Fund is reasonably assured
that the check has cleared, normally up to 15 calendar days
following the purchase date.
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_______________________________________________________________
SHAREHOLDER SERVICES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set
forth below are applicable to Class A, Class B, Class C and
Advisor Class shares unless otherwise indicated. If you are an
Advisor Class shareholder through an account established under a
fee-based program your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Automatic Investment Program
Investors may purchase shares of a Portfolio through an
automatic investment program utilizing Electronic Fund Transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
Exchange Privilege
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may on a tax-free basis,
exchange Class A shares of the Fund for Advisor Class shares of
the Fund. Exchanges of shares are made at the net asset value
next determined and without sales or service charges. Exchanges
may be made by telephone or written request. Telephone exchange
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requests must be received by Alliance Fund Services, Inc. by
4:00 p.m. Eastern time on a Fund business day in order to receive
that day's net asset value.
Shares will continue to age without regard to exchanges
for purpose of determining the CDSC, if any, upon redemption and,
in the case of Class B shares, for the purpose of conversion to
Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request. Call
Alliance Fund Services, Inc. at 800-221-5672 to exchange
uncertificated shares. Except with respect to exchanges of
Class A shares of the Fund for Advisor Class shares of the Fund,
exchanges of shares as described above in this section are
taxable transactions for Federal tax purposes. The exchange
service may be changed, suspended, or terminated on 60 days'
written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date.
Each Portfolio shareholder, and the shareholder's
selected dealer, agent or financial representative, as
applicable, are authorized to make telephone requests for
exchanges unless Alliance Fund Services, Inc., receives written
instruction to the contrary from the shareholder, or the
shareholder declines the privilege by checking the appropriate
box on the Subscription Application found in the Prospectus. Such
telephone requests cannot be accepted with respect to shares then
represented by stock certificates. Shares acquired pursuant to a
telephone request for exchange will be held under the same
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account registration as the shares redeemed through such
exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. 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 Alliance Fund Services, Inc. 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 Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the following
Fund business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
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Dividend Direction Plan
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Portfolio
account, a Class A, Class B, Class C or Advisor Class account
with one or more other Alliance Mutual Funds may direct that
income dividends and/or capital gains paid on his or her Class A,
Class B, Class C or Advisor Class Portfolio shares be
automatically reinvested, in any amount, without the payment of
any sales or service charges, in shares of the same class of such
other Alliance Mutual Fund(s). Further information can be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information. Investors
wishing to establish a dividend direction plan in connection with
their initial investment should complete the appropriate section
of the Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of a Portfolio having a current net asset value of at least
$4,000 (for quarterly or less frequent payments), $5,000 (for
bi-monthly payments) or $10,000 (for monthly payments) may
establish a systematic withdrawal plan under which the
shareholder will periodically receive a payment in a stated
amount of not less than $50 on a selected date. Systematic
withdrawal plan participants must elect to have their dividends
and distributions from a Portfolio automatically reinvested in
additional shares of such Portfolio.
Shares of a Portfolio owned by a participant in the
Fund's systematic withdrawal plan will be redeemed as necessary
to meet withdrawal payments and such payments will be subject to
any taxes applicable to redemptions and, except as discussed
below, any applicable contingent deferred sales charge. Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
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Repurchase of Shares -- General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a shareholder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of a Portfolio should complete the appropriate portion of
the Subscription Application found in the Prospectus, while
current Portfolio shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at
the address or the "Literature" telephone number shown on the
cover of this Statement of Additional Information.
CDSC Waiver for Class B and Class C Shares. Under a
systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3%
quarterly of the value at the time of redemption of the Class B
or Class C shares in a shareholders account may be redeemed free
of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares that are held
the longest will be redeemed next. Redemption of Class B shares
in excess of the foregoing limitations will be subject to any
otherwise applicable contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
Statements and Reports
Each shareholder of a Portfolio receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a monthly cumulative dividend statement and a
confirmation of each purchase and redemption. By contacting his
or her broker or Alliance Fund Services, Inc., a shareholder can
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arrange for copies of his or her account statements to be sent to
another person.
Shareholder Services Applicable to
Class A and Class C Shareholders Only
Checkwriting
A new Class A or Class C investor may fill out the
Signature Card which is included in the Prospectus to authorize
the Fund to arrange for a checkwriting service through State
Street Bank and Trust Company (the "Bank") to draw against Class
A or Class C shares of a Portfolio redeemed from the investor's
account. Under this service, checks may be made payable to any
payee in any amount not less than $500 and not more than 90% of
the net asset value of the Class A or Class C shares in the
investor's account (excluding for this purpose the current
month's accumulated dividends and shares for which certificates
have been issued). A Class A or Class C shareholder wishing to
establish this checkwriting service subsequent to the opening of
his or her Portfolio account should contact the Fund by telephone
or mail. Corporations, fiduciaries and institutional investors
are required to furnish a certified resolution or other evidence
of authorization. This checkwriting service will be subject to
the Bank's customary rules and regulations governing checking
accounts, and the Fund and the Bank each reserve the right to
change or suspend the checkwriting service. There is no charge
to the shareholder for the initiation and maintenance of this
service or for the clearance of any checks.
When a check is presented to the Bank for payment, the
Bank, as the shareholder's agent, causes the Fund to redeem, at
the net asset value next determined, a sufficient number of full
and fractional shares of a Portfolio in the shareholder's account
to cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various
factors, to market fluctuations, a shareholder should not attempt
to close his or her account by use of a check. In this regard,
the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks
are returned to the shareholder. The checkwriting service
enables the shareholder to receive the daily dividends declared
on the shares to be redeemed until the day that the check is
presented to the Bank for payment.
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_______________________________________________________________
NET ASSET VALUE
_______________________________________________________________
The per share net asset value of each Portfolio is
computed in accordance with the Fund's Articles of Incorporation
and By-Laws as of the next close of trading on the Exchange
(currently 4:00 p.m.) following receipt of a purchase or
redemption order by the Fund, on each Fund business day on which
such an order is received and trading in the types of securities
in which the Portfolio invests might materially affect the value
of the Portfolio's shares, by dividing the value of the
Portfolio's total assets less its liabilities, by the total
number of its shares then outstanding.
For purposes of this computation, portfolio securities
that are actively traded in the over-the counter market,
including listed securities for which the primary market is
believed to be over-the-counter, are valued at the mean between
the most recently quoted bid and asked prices provided by the
principal market makers. Any security for which the primary
market is on an exchange is valued at the last sale price on such
exchange on the day of valuation or, if there was no sale on such
day, the last bid price quoted on such day. Options will be
valued at market value or fair value if no market exists.
Futures contracts will be valued in a like manner, except that
open futures contracts sales will be valued using the closing
settlement price or, in the absence of such a price, the most
recent quoted asked price. Securities and assets for which
market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of
the Board of Directors of the Fund. However, readily marketable
fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by
the Fund to reflect the fair market value of such securities. The
prices provided by a pricing service take into account
institutional size trading in similar groups of securities and
any developments related to specific securities. U.S.
Government Securities and other debt instruments having sixty
days or less remaining until maturity are stated at amortized
cost if their original maturity was 60 days or less, or by
amortizing their fair value as of the 61st day prior to maturity
if their original term to maturity exceeded 60 days (unless in
either case the Fund's Board of Directors determines that this
method does not represent fair value).
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_______________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_______________________________________________________________
General
Each Portfolio of the Fund intends for each taxable year
to qualify as a "regulated investment company" under the Code.
Such qualification relieves a Portfolio of Federal income tax
liability on the part of its net investment company taxable
income and net realized capital gains which it timely distributes
to its shareholders. Such qualification does not, of course,
involve governmental supervision of management or investment
practices or policies. Investors should consult their own
counsel for a complete understanding of the requirements each
Portfolio must meet to qualify for such treatment.
Until the Directors otherwise determine, each income
dividend and capital gains distribution, if any, declared by the
Fund on the outstanding shares of a Portfolio will, at the
election of each shareholder of the Portfolio, be paid in cash or
reinvested in additional full and fractional shares of the
Portfolio. An election to receive dividends and distributions in
cash or shares is made at the time the shares are initially
purchased and may be changed by written notification to the Fund
at least 30 days prior to the record date for a particular
dividend or distribution. Cash dividends can be paid by check
or, if the shareholder so elects, electronically via the ACH
network. There is no sales or other charge in connection with
the reinvestment of dividends and capital gains distributions.
Capital gains realized by a Portfolio during the Fund's
fiscal year will be distributed; however the Fund may retain any
long-term capital gains realized by the Portfolio if this is
determined by the Directors to be in the best interests of the
Portfolio. Dividends paid by a Portfolio, if any, with respect
to Class A, Class B and Class C shares will be calculated in the
same manner at the same time on the same day and will be in the
same amount, except that the higher distribution services fees
applicable to Class B and Class C shares, and any incremental
transfer agency costs relating to Class B shares, will be borne
exclusively by the class to which they relate.
The information set forth in the Prospectus and the
following discussion relates generally to Federal income taxes on
dividends and distributions by each Portfolio of the Fund and
assumes that each Portfolio of the Fund qualifies to be taxed as
a regulated investment company. Investors should consult their
own tax counsel with respect to the specific tax consequences of
their being shareholders of a Portfolio, including the effect and
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applicability of Federal, state, and local tax laws to their own
particular situation and the possible effects of changes therein.
Each Portfolio intends to declare and distribute
dividends in the amounts and at the times necessary to avoid the
application of the 4% Federal excise tax imposed on certain
undistributed income of regulated investment companies. For
Federal income and excise tax purposes, dividends declared and
payable to shareholders of record as of a date in October,
November or December but actually paid during the following
January will be treated as having been distributed by the
Portfolio, and will be taxable to these shareholders, for the
year declared, and not for the subsequent calendar year in which
the shareholders actually receive the dividend.
Substantially all of the dividends paid by the Fund 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.
For shareholders' Federal income tax purposes,
distributions to shareholders out of tax-exempt interest income
earned by each Portfolio of the Fund are not subject to Federal
income tax if, at the close of each quarter of such Portfolio's
taxable year, at least 50% of the value of such Portfolio's total
assets consists of tax-exempt obligations. Each Portfolio
intends to meet this requirement. Insurance proceeds received by
a Portfolio under any insurance policies in respect of scheduled
interest payments on defaulted municipal securities, as described
herein, will be excludable from gross income in the same manner
as interest payments from the insured municipal securities, and
consequently such insurance proceeds may be included in exempt-
interest dividends which are designated and paid by the Fund.
Each Portfolio generally will be required to withhold
tax at the rate of 31% with respect to dividends of net ordinary
income and net realized capital gains payable to a noncorporate
shareholder unless the shareholder certifies on his subscription
application that the social security or taxpayer identification
number provided is correct and that the shareholder has not been
notified by the Internal Revenue Service that he is subject to
backup withholding.
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United States Federal Income Taxation of the Portfolios
The following discussion relates to certain significant
United States Federal income tax consequences to the Portfolios
with respect to the determination of their "investment company
taxable income" each year. This discussion assumes that each
Portfolio will be taxed as a regulated investment company for
each of its taxable years.
Options and Futures Contracts. Certain listed options
and regulated futures contracts are considered "section 1256
contracts" for Federal income tax purposes. Section 1256
contracts held by a Portfolio at the end of each taxable year
will be "marked to market" and treated for Federal income tax
purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a
Portfolio on section 1256 contracts will generally be considered
60% long-term and 40% short-term capital gain or loss. A
Portfolio can elect to exempt its section 1256 contracts which
are part of a "mixed straddle" (as described below) from the
application of section 1256.
With respect to over-the-counter options, gain or loss
realized by a Portfolio upon the lapse or sale of such options
held by the Portfolio will be either long-term or short-term
capital gain or loss depending upon the Portfolio's holding
period with respect to such option. However, gain or loss
realized upon the lapse or closing out of such options that are
written by a Portfolio will be treated as short-term capital gain
or loss. In general, if a Portfolio exercises an option, or an
option that the Portfolio has written is exercised, gain or loss
on the option will not be separately recognized but the premium
received or paid will be included in the calculation of gain or
loss upon disposition of the property underlying the option.
Tax Straddles. Any option, futures contract, interest
rate swap, cap or floor, or other position entered into or held
by a Portfolio in conjunction with any other position held by
such Portfolio may constitute a "straddle" for Federal income tax
purposes. A straddle of which at least one, but not all, the
positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules
that may affect the character and timing of a Portfolio's gains
and losses with respect to straddle positions by requiring, among
other things, that (i) loss realized on disposition of one
position of a straddle not be recognized to the extent that such
Portfolio has unrealized gains with respect to the other position
in such straddle; (ii) such Portfolio's holding period in
straddle positions be suspended while the straddle exists
(possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (iii) losses recognized
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with respect to certain straddle positions which are part of a
mixed straddle and which are non-section 1256 positions be
treated as 60% long-term and 40% short-term capital loss; (iv)
losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (v) the deduction of
interest and carrying charges attributable to certain straddle
positions may be deferred. Various elections are available to a
Portfolio which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held
by a Portfolio all of the offsetting positions of which consist
of section 1256 contracts.
Zero Coupon Municipal Securities. Under current federal
income tax law, a Portfolio will include in its net investment
income as interest each year, in addition to stated interest
received on obligations held by the Portfolio, tax-exempt
interest income attributable to the Portfolio from holding zero
coupon municipal securities. Current federal income tax law
requires that a holder (such as a Portfolio) of a zero coupon
municipal security accrue as income each year a portion of the
original issue discount (i.e., the amount equal to the excess of
the stated redemption price of the security at maturity over its
issue price) attributable to such obligation even though the
Portfolio does not receive interest payments in cash on the
security during the year which reflect the accrued discount. As
a result of the above rules, in order to make the distributions
necessary for a Portfolio not to be subject to federal income or
excise taxes, a Portfolio may be required to pay out as an income
distribution each year an amount greater than the total amount of
cash which the Portfolio has actually received as interest during
the year. Such distributions will be made from the cash assets
of the Portfolio, from borrowings or by liquidation of portfolio
securities, if necessary. If a distribution of cash necessitates
the liquidation of portfolio securities, the Adviser will select
which securities to sell. A Portfolio may realize a gain or loss
from such sales. In the event a Portfolio realizes capital gains
from such sales, its shareholders may receive larger
distributions than they would receive in the absence of such
sales.
_______________________________________________________________
BROKERAGE AND PORTFOLIO TRANSACTIONS
_______________________________________________________________
Subject to the general supervision of the Directors of
the Fund, the Adviser makes the investment decisions and places
the orders for portfolio securities for each of the Fund's
Portfolios and determines the broker or dealer to be used in each
specific transaction. Most transactions for the Fund's
100
<PAGE>
Portfolios, including transactions in listed securities, are
executed in the over-the-counter market by approximately fifteen
(15) principal market maker dealers with whom the Adviser
maintains regular contact. Most transactions made by the Fund
will be principal transactions at net prices and the Fund will
incur little or no brokerage costs. Where possible, securities
will be purchased directly from the issuer or from an underwriter
or market maker for the securities unless the Adviser believes a
better price and execution is available elsewhere. Purchases
from underwriters of newly-issued securities for inclusion in a
Portfolio usually will include a concession paid to the
underwriter by the issuer and purchases from dealers serving as
market makers will include the spread between the bid and asked
price.
The Fund has no obligation to enter into transactions in
portfolio securities with any broker, 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
broker or dealer, the Adviser may, in its discretion, purchase
and sell securities through brokers and 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. Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to
seeking best price and execution, the Fund may consider sales of
shares of the Fund as a factor in the selection of dealers to
enter into portfolio transactions with the Fund.
No transactions for the Fund's Portfolios are executed
through any broker or dealer affiliated with the Fund's Adviser,
Alliance Capital Management L.P., or with Donaldson, Lufkin &
Jenrette Securities Corporation, an affiliate of the Adviser.
During the fiscal years ended October 31, 1994, 1995 and 1996 the
Fund incurred no brokerage commissions.
101
<PAGE>
_______________________________________________________________
GENERAL INFORMATION
_______________________________________________________________
Capitalization
The authorized capital stock of the Fund consists solely
of 950,000,000 shares of Common Stock having a par value of $.001
per share, of which 250,000,000 shares are presently designated
for each of the Insured National and National Portfolios and
150,000,000 shares are presently designated for each of the
California, Insured California and New York Portfolios. Shares
issued are fully paid and non-assessable. All shares of each
Portfolio participate equally in dividends and distributions from
that Portfolio, including any distributions in the event of a
liquidation. Each share of a Portfolio is entitled to one vote
for all purposes. Shares of all series vote for the election of
Directors and on any other matter that affects all Portfolios in
substantially the same manner as a single series, except as
otherwise required by law. As to matters affecting each
Portfolio differently, such as approval of the Advisory Agreement
and changes in investment policy, shares of each Portfolio vote
as a separate series. There are no conversion or pre-emptive
rights in connection with any shares of the Fund. Since voting
rights are noncumulative, holders of more than 50% of the shares
voting for the election of Directors can elect all of the
Directors. Procedures for calling a shareholders' meeting for
the removal of Directors of the Fund, similar to those set forth
in Section 16(c) of the Act and in the Fund's By-Laws, will be
available to shareholders of the Fund. All shares of the Fund
when duly issued will be fully paid and non-assessable. The
rights of the holders of shares of a series may not be modified
except by the vote of a majority of the outstanding shares of
such series.
The Board of Directors is authorized to reclassify and
issue any unissued shares to any number of additional series
without shareholder approval. Accordingly, the Directors 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 series of shares.
Any issuance of shares of another series would be governed by the
Act and Maryland law.
At January 17, 1997, there were outstanding 181,790,231
voting shares of common stock of the Fund, including, 30,472,756
Class A shares, 19,803,356 Class B shares and 8,957,060 Class C
shares of the National Portfolio; 16,241,468 Class A shares,
5,010,895 Class B shares and 1,966,444 Class C shares of the
Insured National Portfolio; 18,392,799 Class A shares, 1,796,540
102
<PAGE>
Class B shares and 1,777,709 Class C shares of the New York
Portfolio; 42,970,260 Class A shares, 15,313,456 Class B shares
and 8,624,728 Class C shares of the California Portfolio; and
7,572,487 Class A shares, 1,917,035 Class B shares and 973,238
Class C shares of the Insured California Portfolio. The
following is a list of all persons who owned of record or
beneficially 5% or more of each class or shares of each Portfolio
as of January 17, 1997.
No. of
Shares % of % of % of
Name and Address Of Class Class A Class B Class C
National Portfolio
MLPF&S For the Sole 1,873,061 6.15%
Benefits of Its
Customers
Attn. Fund Administration 2,149,948 10.86%
4800 Deer Lake Dr.
East 3rd Floor 4,567,985 51.00%
Jacksonville FL
32246-6484
Insured National Portfolio
MLPF&S For the Sole 477,484 9.53%
Benefit of Its
Customers
Attn. Fund Administration 1,269,639 64.57%
4800 Deer Lake Dr.
East 3rd Floor
Jacksonville FL
32246-6484
California Portfolio
MLPF&S For the Sole 5,925,823 13.79%
Benefit of Its
Customers
Attn. Fund Administration 3,493,663 22.81%
4800 Deer Lake Dr.
East 3rd Floor 5,549,015 64.34%
Jacksonville FL
32246-6484
103
<PAGE>
Insured California Portfolio
MLPF&S For the Sole 494,936 6.54%
Benefit of Its
Customers
Attn. Fund Administration 360,392 18.80%
4800 Deer Lake Dr.
East 3rd Floor
Jacksonville FL
32246-6484
MLPF&S For the Sole 311,315 31.99%
Benefit of Its
Customers
Attn. Fund Administration
4800 Deer Lake Dr.
East 3rd Floor
Jacksonville FL
32246-6484
The Berton Living 74,717 7.68%
Trust
Peter A. Berten TTEE
UTD 1/06/1994
320 South Rodeo Drive
Beverly Hills CA
90212-4207
Catherine L. Burdick 53,209 5.47%
TTEE The Catherine L.
Burdick Trust
DTD 3/03/1994
4261 N. Rogers Rd.
Spring Valley CA
91977-1220
Prudential Securities 55,991 5.75%
FBO
Rakesh C. Gupta
Neelam Gupta Co-TTEES
FBO Gupta Family Living
Trust
UA DTD 12/22/1994
Hemet CA 92544
104
<PAGE>
New York Portfolio
MLPF&S For the Sole 1,796,540 18.48%
Benefit of Its
Customers
Attn. Fund Administration
4800 Deer Lake Dr.
East 3rd Floor
Jacksonville FL
32246-6484
MLPF&S For the Sole 1,777,709 53.18%
Benefit of Its
Customers
Attn. Fund Administration
4800 Deer Lake Dr.
East 3rd Floor
Jacksonville FL
32246-6484
Custodian
State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, acts as custodian for the
securities and cash of the Fund but plays no part in deciding the
purchase or sale of portfolio securities.
Principal Underwriter
Alliance Fund Distributors, Inc., 1345 Avenue of the
Americas, New York, New York 10105, serves as the Fund's
Principal Underwriter, and as such may solicit orders from the
public to purchase shares of the Fund. Under the Distribution
Services Agreement between the Fund and the Principal
Underwriter, the Fund has agreed to indemnify the distributors,
in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder,
against certain civil liabilities, including liabilities under
the Securities Act.
Counsel
Legal matters in connection with the issuance of the
shares offered hereby are passed upon by Seward & Kissel, New
York, New York. Seward & Kissel has relied upon the opinion of
Venable, Baetjer and Howard, LLP, Baltimore, Maryland, for
matters relating to Maryland law.
105
<PAGE>
Independent Auditors
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
Yield and Total Return Quotations
From time to time a Portfolio states its "yield,"
"actual distribution rate" and "total return." Computed
separately for each class, a Portfolio's yield for any 30-day (or
one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. A Portfolio may advertise a
"taxable equivalent yield" that is calculated by assuming that
net investment income per share is increased by an amount
sufficient to offset the benefit of tax exemptions at the stated
income tax rate. For example, under 1995 federal individual
income tax rates and assuming that there are no applicable state
income taxes, a tax-exempt yield of 5% would equal a tax
equivalent yield of 6.94% (28% tax bracket), 7.25% (31% tax
bracket), 7.81% (36% tax bracket), and 8.28% (39.6% tax bracket),
respectively; 6% would equal 8.33% (28% tax bracket), 8.70% (31%
tax bracket), 9.38% (36% tax bracket) and 9.93% (39.6% tax
bracket), respectively; and 7% would equal 9.72% (28% tax
bracket), 10.14% (31% tax bracket), 10.94% (36% tax bracket), and
11.59% (39.6% tax bracket), respectively. A Portfolio's "actual
distribution rate," which may be stated in sales literature, is
computed in the same manner as yield except that actual income
dividends declared per share during the period in question are
substituted for net investment income per share. The actual
distribution rate is compounded separately for Class A, Class B
and Class C shares. Computed separately for each class, a
Portfolio's "total return" is its average annual compounded total
return for recent one year, five year and ten year periods (or
the period since the Portfolio's inception). A Portfolio's total
return for such a period is computed by finding, through the use
of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an
assumed initial amount invested to the value of such investment
at the end of the period. For purposes of computing total
return, income dividends and capital gains distributions paid on
shares of a Portfolio are assumed to have been reinvested when
paid and the maximum sales charge applicable to purchases of such
Portfolio's shares is assumed to have been paid.
The yield for the month ended October 31, 1996 for the
Insured National Portfolio was 4.77% for the Class A shares,
4.27% for the Class B shares and 4.28% for Class C shares; for
106
<PAGE>
the National Portfolio, 5.24% for the Class A shares, 4.77% for
Class B shares and 4.77% for Class C shares; for the New York
Portfolio, 5.43% for the Class A shares, 4.97% for Class B shares
and 4.97% for Class C shares; for the California Portfolio, 5.44%
for the Class A shares, 4.98% for Class B shares and 4.99% for
Class C shares; and for the Insured California Portfolio, 4.63%
for the Class A shares, 4.13% for Class B shares and 4.13% for
Class C shares.
The tax equivalent yield for the month ended October 31,
1996 was: for the Insured National Portfolio was 7.64% for the
Class A shares, 6.84% for Class B shares and 6.86% for Class C
shares; for the National Portfolio, 8.68% for the Class A shares,
7.90% for Class B shares and 7.90% for Class C shares; for the
New York Portfolio, 9.65% for the Class A shares, 8.83% for Class
B shares and 8.83% for Class C shares (each computed without
taking into account the effects New York City income taxes) and
10.07%, 9.22% and 9.22% for Class A, B and C shares, respectively
(each computed assuming the effects of New York City income
taxes); for the California Portfolio, 10.08% for the Class A
shares, 9.23% for Class B shares and 9.25% for Class C shares;
and for the Insured California Portfolio, 8.20% for Class A
shares, 7.31% for Class B shares and 7.31% for Class C shares.
The tax equivalent yield calculations assume that the
taxpayer is an individual in the highest federal and state (and,
if applicable, New York City) income tax bracket, who is not
subject to federal or state alternative minimum taxes and who is
able to fully deduct state (and, if applicable, New York City)
taxes in computing federal taxable income. The tax rates used in
these calculations were: federal--39.6%, New York State--7.5%,
New York City--3.91% and California--11%. The tax equivalent
yield is computed by dividing that portion of the yield of a
Portfolio that is tax-exempt by one minus the applicable marginal
income tax rate (39.6% in the case of the National and the
Insured National Portfolios; the combined effective federal and
state (and, if applicable, New York City) marginal income tax
rates in the case of the New York, California, and Insured
California Portfolios) and adding the quotient to that portion,
if any, of the yield of the Portfolio that is not tax-exempt.
The actual distribution rate was for the Insured
National Portfolio, 4.82% for the Class A shares, 4.39% for Class
B shares and 4.39% for Class C shares; for the National
Portfolio, 5.27% for the Class A shares, 4.84% for Class B shares
and 4.85% for Class C shares; for the New York Portfolio, 5.42%
for the Class A shares, 4.92% for Class B shares and 4.92% for
Class C shares; for the California Portfolio, 5.28% for Class A
shares, 4.79% for Class B shares and 4.79% for Class C shares;
and for the Insured California Portfolio, 4.84% for Class A
shares, 4.30% for Class B shares and 4.30% for Class C shares.
107
<PAGE>
The average annual total return for the one-year period ended
October 31, 1996 was: for the Class A shares of the Insured
National Portfolio was 2.84%; for the National Portfolio, 1.83%;
for the New York Portfolio, 1.75%; for the California Portfolio,
2.63%; and for the Insured California Portfolio, 1.30%. The
average annual total return for the one-year period ended
October 31, 1996 was: for Class B shares of the Insured National
Portfolio, 3.74%; for the National Portfolio, 2.61%; for the New
York Portfolio, 2.52%; for the California Portfolio, 3.37%; and
for the Insured California Portfolio, 1.99%. The average annual
total return for the one-year period ended October 31, 1996 was:
for Class C shares of the Insured National Portfolio, 5.74%; for
the National Portfolio, 4.62%; for the New York Portfolio, 4.52%;
for the California Portfolio, 5.38%; and for the Insured
California Portfolio, 3.99%. For the five-year period ended
October 31, 1996 and the period since inception to October 31,
1996, respectively, the average annual total return was: for
Class A shares of the Insured National Portfolio, 6.86% and
7.29%; for Class A shares of the National Portfolio, 6.87% and
7.66%; for Class A shares of the New York Portfolio, 6.42% and
6.63%; for Class A shares of the California Portfolio, 6.68% and
7.52%; and for Class A shares of the Insured California
Portfolio, 6.28% and 7.44%.
A Portfolio's yield and total return are not fixed and
will fluctuate in response to prevailing market conditions or as
a function of the type and quality of the securities held by such
Portfolio, its average portfolio maturity and its expenses. Yield
and total return information is useful in reviewing a Portfolio's
performance but such information may not provide a basis for
comparison with bank deposits or other investments which pay a
fixed yield for a stated period of time. An investor's principal
invested in a Portfolio is not fixed and will fluctuate in
response to prevailing market conditions.
Advertisements quoting performance ratings of the
Portfolios as measured by financial publications or by
independent organizations such as Lipper Analytical Services,
Inc. ("Lipper") and Morningstar, Inc. and advertisements
presenting the historical record of payments of income dividends
by the Portfolios may also from time to time be sent to investors
or placed in newspapers, magazines such as Barrons, Business
Week, Changing Times, Forbes, Investor's Daily, Money Magazine,
The New York Times and The Wall Street Journal or other media on
behalf of the Fund.
The Morningstar ratings and the Lipper rankings may be
used in advertisements and sales literature relating to such
Portfolios.
108
<PAGE>
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or to Alliance Fund Services, Inc. at the
address or telephone numbers shown on the front cover of this
Statement of 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 of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge
from the Commission or may be examined, without charge, at the
offices of the Commission in Washington, D.C.
________________________________________________________________
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
________________________________________________________________
109
00250011.AJ7
<PAGE>
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
MUNICIPAL BONDS-98.3%
LONG TERM MUNICIPAL BONDS-98.1%
ARIZONA-4.4%
NR Goodyear
Assess Dist #1 Ser 96C
7.25%, 7/01/16 $ 4,200 $ 4,248,804
AA+ Maricopa Cnty
Util Rev (Citizen's Util) Ser 95 AMT
6.20%, 5/01/30 8,020 8,313,532
AA+ Mohave Cnty IDA
Util Rev (Citizen's Util) Ser 93B AMT
5.80%, 11/15/28 2,000 1,997,060
AA- Mohave Cnty IDR
(Cargill/No Star Steel Proj)
Ser 95A AMT
6.70%, 3/01/20 11,000 11,887,480
AAA Phoenix Arpt Rev
MBIA Ser 94D AMT
6.30%, 7/01/10 1,270 1,349,121
------------
27,795,997
CALIFORNIA-15.0%
A California Poll Ctl Fin Auth
PCR (Pacific Gas & Elec) Ser 93A AMT
5.875%, 6/01/23 41,145 40,410,151
A+ California Poll Ctl Fin Auth
PCR (San Diego Gas & Elec)
Ser 93A-C AMT
5.85%, 6/01/21 6,000 5,945,640
AA- Long Beach Harbor Rev
Ser 93 AMT
5.125%, 5/15/18 31,325 28,528,304
NR Novato Comm Fac Dist #94-1
(Hamilton Field) Ser 95 ETM
7.375%, 9/01/25 6,300 6,568,569
AAA San Francisco City & Cnty Int'l Arpt
MBIA Ser 10A AMT
5.70%, 5/01/26 14,385 14,122,905
------------
95,575,569
COLORADO-3.7%
Baa* Arapahoe Cnty
Public Highway Auth
7.00%, 8/31/26 1,500 1,621,560
BBB Denver City & Cnty
(Arpt System Rev) Ser C AMT
6.75%, 11/15/22 9,500 9,911,540
BB Denver City & Cnty Arpt Auth
(United Airlines) Ser 92A AMT
6.875%, 10/01/32 11,775 12,109,410
------------
23,642,510
FLORIDA-8.0%
NR Collier Cnty IDR
(Southern St Util) Ser 96 AMT
6.50%, 10/01/25 14,605 14,614,785
AAA Dade Cnty Arpt Rev
(Miami Int'l Arpt) MBIA Ser 95B AMT
6.00%, 10/01/24 7,160 7,279,859
AAA Escambia Cnty HFA
SFMR (Multi County Proj)
GNMA Ser 95B AMT
6.25%, 4/01/28 8,955 9,042,938
AAA Florida HFA
SFMR (Mtg Hsg Fin Agy)
GNMA Coll Ser 94B AMT
6.65%, 7/01/26 3,190 3,320,981
AAA Hillsborough Cnty Aviation
Arpt Rev (Tampa Int'l)
FGIC Ser 96A AMT
6.00%, 10/01/23 1,500 1,543,635
NR Northern Palm Beach Cnty
Imp Dist #9A (ABACOA) Ser 96A
7.20%, 8/01/16 5,000 5,070,350
AA- Orlando Util Comm
(Wtr & Elec Rev) Ser 93B
7.266%, 10/06/17 (a) 4,550 4,484,708
Aaa* Pinellas Cnty HFA
SFMR GNMA Ser 94A AMT
6.55%, 8/01/27 1,855 1,911,262
Baa* Volusia Cnty Ed Fac Auth Rev
(Embry-Riddle Aero Univ) Ser 96A
6.125%, 10/15/26 3,860 3,907,092
------------
51,175,610
7
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
GEORGIA-5.5%
AAA Atlanta
Arpt Fac Rev MBIA AMT
Zero coupon, 1/01/10 $75,535 $35,150,212
INDIANA-8.5%
BB Indianapolis Arpt Auth
(United Airlines Maint Ctr Proj)
Ser 95A AMT
6.50%, 11/15/31 41,570 41,796,141
AA Warrick Cnty
PCR (So Indiana Gas & Elec Co)
Ser 93B AMT
6.00%, 5/01/23 12,290 12,535,308
------------
54,331,449
MARYLAND-0.2%
NR Maryland Ind Dev Fin Auth Eco Dev
(Med Waste Assoc) Ser 89 AMT
8.75%, 11/15/10 1,440 1,494,245
MASSACHUSETTS-4.0%
A+ Massachusetts Bay Trans Auth
Ser 92C
6.10%, 3/01/23 1,715 1,770,960
AAA Massachusetts Ed Fin Auth
Education Loan Rev AMBAC Ser 94E AMT
6.00%, 1/01/12 4,440 4,478,406
AAA Massachusetts HFA
MFHR (Harbor Point Dev)
AMBAC Ser 96A AMT
6.40%, 12/01/15 6,940 7,041,532
AAA Massachusetts HFA
MFHR (Rental Hsg) AMBAC Ser 95E AMT
6.00%, 7/01/37 2,680 2,623,854
AAA Massachusetts Ind Fin Agy
Elec Rev Sys
(Nantucket Elec Proj)
AMBAC Ser 96A AMT
5.875%, 7/01/17 1,435 1,446,308
A* Massachusetts Ind Fin Auth
Ed Fac (Brooks School) Ser 93
5.95%, 7/01/23 1,670 1,684,446
AAA Massachusetts Ind Fin Auth
MFHR (Heights Crossing) FHA Ser 95 AMT
6.15%, 2/01/35 6,445 6,475,356
------------
25,520,862
MICHIGAN-2.8%
BBB Detroit GO
Ser 93
6.35%, 4/01/14 4,250 4,349,577
AAA Kent Cnty GO Arpt Rev
(Kent Cnty Int'l) Ser 95 AMT
6.10%, 1/01/25 4,340 4,461,911
AA+ Michigan HDA
SFMR (Mortgage Rev) Ser 96B AMT
6.20%, 6/01/27 5,805 5,828,394
A- Michigan Strategic Fund
PCR (General Motors Corp) Ser 95
6.20%, 9/01/20 2,810 2,896,829
------------
17,536,711
MINNESOTA-4.2%
BBB+ Bass Brook PCR
(Minnesota Pwr & Light) Ser 92
6.00%, 7/01/22 1,350 1,353,969
AAA Burnsville-Eagan-Savage GO
Ind Sch Dist #191 CGIC Ser 95A
6.20%, 2/01/17 1,150 1,210,410
AA+ Duluth GO
Arpt Lease Rev Ser 95C AMT
6.25%, 8/01/14 4,140 4,311,893
AAA Minneapolis GO
SFMR (Home Ownership/Renovation)
Ser 93 Stage III AMT
5.70%, 12/01/23 3,525 3,458,095
AAA Minnesota HFA
MFHR (Rental Housing) MBIA Ser 95D
6.00%, 2/01/22 1,000 1,006,730
AA+ Minnesota HFA
SFMR (Home Mortgage) Ser 93-C2 AMT
6.15%, 7/01/23 2,460 2,481,082
8
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AA+ Minnesota HFA
SFMR (Home Mortgage) Ser 96F AMT
6.30%, 1/01/28 $ 4,600 $ 4,650,922
AA+ Minnesota HFA
SFMR (Home Mortgage) Ser 96G AMT
6.25%, 7/01/26 8,500 8,560,180
------------
27,033,281
NEBRASKA-1.2%
A* Nebraska Higher Ed
Student Loan Rev Ser 93B AMT
5.875%, 6/01/14 7,705 7,535,413
NEW JERSEY-2.1%
AAA New Jersey Eco Dev Auth
(Elizabethtown Wtr Co)
MBIA Ser 95 AMT
5.60%, 12/01/25 6,000 5,881,560
AAA New Jersey Eco Dev Auth
(Hackensack Wtr Co) MBIA Ser 94B AMT
5.90%, 3/01/24 1,345 1,361,207
AAA New Jersey Eco Dev Auth
PCR (Public Svc Elec & Gas)
MBIA Ser 94A AMT
6.40%, 5/01/32 1,420 1,484,653
AA- New Jersey Eco Dev Auth
Swr Rev (Anheuser-Busch) Ser 95 AMT
5.85%, 12/01/30 1,400 1,411,270
AAA New Jersey Hsg & Mtg Fin Agy
MFHR Pooled Loan AMBAC Ser 96A AMT
6.25%, 5/01/28 2,950 2,974,013
------------
13,112,703
NEW YORK-9.6%
AAA Monroe Cnty Arpt Auth
Arpt Rev (Gtr Rochester Int'l)
MBIA Ser 93 AMT
5.50%, 1/01/13 2,450 2,398,501
BBB+ New York City GO
Ser 95B
7.25%, 8/15/19 1,350 1,461,132
AAA Niagara Frontier Trans Auth Arpt Rev
(Gtr Buffalo Int'l)
AMBAC Ser 94A AMT
6.25%, 4/01/24 1,200 1,248,336
A+ NYS Energy Res & Dev
Auth (Consolidated Edison) Ser 94A AMT
7.125%, 12/01/29 13,000 14,439,100
AAA NYS Energy Res & Dev Auth Gas Fac
(Brooklyn Union Gas) MBIA AMT
5.60%, 6/01/25 10,000 9,614,200
AAA NYS Energy Res & Dev Auth Solid Waste
(NYS Elec & Gas) MBIA Ser 93A AMT
5.70%, 12/01/28 8,000 7,770,400
BBB NYS Envir Fac Auth IDR
(Occidental Petroleum) Ser 93A AMT
5.70%, 9/01/28 3,350 3,113,825
Aa* NYS HFA MFHR (Syracuse/Springville Proj)
Ser 93A AMT
5.95%, 8/15/24 5,650 5,588,811
AA- Port Auth of NY & NJ
Cons (95th Ser) AMT
6.125%, 7/15/29 4,600 4,688,688
AAA Port Auth of NY & NJ
Cons (96th Ser) FGIC AMT
6.60%, 10/01/23 10,000 10,768,600
------------
61,091,593
OHIO-5.5%
AAA Cleveland Arpt Rev
(Cleveland Int'l) FGIC Ser 94A AMT
6.25%, 1/01/20 10,000 10,467,000
AAA Columbus Arpt Rev
(PT Columbus Int'l) MBIA Ser 94A AMT
6.25%, 1/01/24 1,695 1,766,749
A Cuyahoga Cnty Hosp Rev
(Meridia Hlth Sys) Ser 95
6.25%, 8/15/24 2,560 2,632,474
9
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AAA Ohio Air Quality Dev Auth
(JMG Funding/Ohio Pwr Co)
AMBAC Ser 94B AMT
6.375%, 4/01/29 $ 7,850 $ 8,258,435
NR Ohio Air Quality Dev Auth
PCR (Columbus So Pwr) Ser 85B
6.25%, 12/01/20 2,600 2,630,316
AA- Ohio Air Quality Dev Auth PCR
(Dayton Power & Light Proj) Ser 92B
6.40%, 8/15/27 1,900 1,992,131
A Ohio Wtr Dev Auth Solid Waste
(North Star BHP) AMT
6.45%, 9/01/20 4,275 4,426,036
Aa3* Toledo-Lucas Cnty Port Auth IDR
(Cargill Inc. Proj)
5.90%, 12/01/15 2,640 2,698,608
------------
34,871,749
PENNSYLVANIA-2.6%
AAA Allegheny Cnty Arpt Rev
(Gtr Pittsburgh Int'l) FSA
Ser 92B AMT
6.625%, 1/01/22 1,980 2,113,175
A- Cambria Township Wtr Auth
Ser 93A AMT
6.00%, 12/01/12 1,400 1,459,822
AAA Pennsylvania Higher Ed Student Loan Rev
AMBAC Ser 88D AMT
6.05%, 1/01/19 7,700 7,797,482
AAA Philadelphia Arpt Sys Rev
AMBAC Ser 95A AMT
6.10%, 6/15/25 4,950 5,066,077
------------
16,436,556
RHODE ISLAND-1.3%
AA+ Rhode Island Hsg & Mtg Fin Corp
SFMR (Home Ownership) Ser 92-7A AMT
6.75%, 10/01/25 8,000 8,306,480
SOUTH DAKOTA-1.7%
AA+ South Dakota HDA
SFMR (Home Ownership) Ser 91D-93-II AMT
6.15%, 5/01/26 9,600 9,445,920
6.25%, 5/01/26 1,440 1,436,126
------------
10,882,046
TENNESSEE-1.3%
BBB Memphis Shelby Cnty Spec Fac
(Federal Express) Ser 93 AMT
6.20%, 7/01/14 8,000 8,052,320
TEXAS-3.6%
BB+ Alliance Arpt Auth Fac Imp
(American Airlines) Ser 90 AMT
7.50%, 12/01/29 11,690 12,467,619
BBB Alliance Arpt Auth Spec Fac
(Federal Express) Ser 96 AMT
6.375%, 4/01/21 10,200 10,219,686
------------
22,687,305
UTAH-1.7%
AAA Emery Cnty
PCR (Pacific Proj) AMBAC AMT
5.625%, 11/01/23 11,400 10,949,472
VIRGINIA-5.1%
A Alexandria Redev & Hsg
MFHR (Buckingham Village) Ser 96A AMT
6.15%, 1/01/29 4,000 4,005,960
Aa* Chesapeake IDA
(Cargill Inc. Proj) Ser 93
5.875%, 3/01/13 1,705 1,752,655
A+ Giles Cnty IDR
(Hoechst-Celanese Corp) Ser 96 AMT
6.45%, 5/01/26 3,460 3,590,788
A- Isle of Wight Cnty IDA
Solid Waste (Union Camp Corp)
Ser 94 AMT
6.55%, 4/01/24 3,685 3,863,870
10
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AAA Metro Wash Arpt Auth
MBIA Ser 94A AMT
5.75%, 10/01/20 $ 4,680 $ 4,602,078
A* Prince William Cnty IDA
Hosp Rev (Potomac Hosp Grp) Ser 95
6.75%, 10/01/15 1,920 2,046,566
NR Staunton IDA
Ed Fac (Mary Baldwin College) Ser 96
6.75%, 11/01/21 2,000 2,019,600
AA Virginia Beach
Hosp Rev (Sentara Bayside)
6.30%, 11/01/21 700 720,678
AA Virginia College Bldg Auth Ed Fac Rev
(Washington & Lee)
5.80%, 1/01/24 3,500 3,507,070
AA+ Virginia HDA
SFMR (Commonwealth Mtg) Ser 96B AMT
6.375%, 1/01/26 5,000 5,042,400
AA Virginia Res Auth Swr Rev
(Hopewell Fac) Ser 95A AMT
6.00%, 10/01/25 1,065 1,083,691
------------
32,235,356
WASHINGTON-2.9%
BBB+ Pilchuck Dev Pub Corp Spec Fac
(BF Goodrich) Ser 93 AMT
6.00%, 8/01/23 19,000 18,408,340
WEST VIRGINIA-0.9%
AAA West Virginia Eco Dev
Pkwy Rev FGIC Ser 93
7.817%, 5/16/19 (a) 6,000 6,013,740
WISCONSIN-2.3%
AAA Wisconsin GO
MBIA Ser 96B AMT
6.20%, 11/01/26 13,930 14,315,861
TOTAL LONG TERM MUNICIPAL BONDS
(cost $606,953,830) 624,155,380
SHORT TERM MUNICIPAL NOTE-0.2%
ILLINOIS-0.2%
NR Illinois Health Fac Auth
(Ingalls Mem Hosp) Ser 85B VRDN
3.55%, 1/01/16 (b)
(cost $1,400,000) 1,400 1,400,000
TOTAL INVESTMENTS-98.3%
(cost $608,353,830) 625,555,380
Other assets less liabilities-1.7% 10,861,102
NET ASSETS-100% $636,416,482
# Unaudited.
* Moody's or Fitch Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as the
prime interest rate). This instrument is payable on demand and is secured by
letters of credit or other credit support agreements from major banks.
See Glossary of Terms on page 22.
See notes to financial statements.
11
INSURED NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
MUNICIPAL BONDS-96.8%
LONG TERM MUNICIPAL BONDS-95.1%
ALABAMA-8.2%
AAA West Jefferson PCR
(Alabama Power) MBIA Ser 93C
6.05%, 5/01/23 $19,000 $19,303,430
ALASKA-4.3%
AAA Alaska Hsg Fin Corp
MFHR Mtg Rev MBIA Ser 96A
6.00%, 12/01/15 6,400 6,385,216
6.05%, 12/01/17 2,000 1,995,160
A+ Alaska Hsg Fin Corp SFMR
Insured Mtg Prog Ser 93I
5.90%, 12/01/33 1,850 1,793,131
------------
10,173,507
ARIZONA-9.2%
AAA Glendale IDA
Ed Fac (Midwestern Univ)
CONNIE LEE Ser 96A
6.00%, 5/15/26 960 988,157
AAA Maricopa Cnty
Hosp Rev (Cath Hlth West)
MBIA Ser 93
7.472%, 7/01/13 (a) 1,305 1,304,961
AAA Maricopa Cnty GO
Chandler Sch Imp #80 FGIC Ser 95
6.00%, 7/01/13 970 1,015,852
AAA Maricopa Cnty GO
Kyrene Elem Sch Imp #28 FGIC Ser 95B
6.00%, 7/01/14 2,000 2,074,260
AAA Maricopa Cnty GO
Sch Dist #28 FGIC Ser 93C
Zero coupon, 7/01/11 6,000 2,632,860
AAA Maricopa Cnty Hlth Fac
(Samaritan Hlth) MBIA Ser 90A
7.00%, 12/01/13 545 597,407
AAA Mohave Cnty IDA
(Baptist Hospital) MBIA Ser 96
5.75%, 9/01/26 560 561,372
AA Phoenix IDA
MFHR (Woodstone & Silver Springs)
Ser 93 Asset Gty
6.25%, 4/01/23 2,460 2,501,574
AA+ Phoenix Sr Lien
(Civic Plaza Bldg Corp) Ser 94
6.00%, 7/01/12 3,485 3,619,173
AAA Tempe IDR
MFHR (Mtg-Quadrangles) FHA Ser 93
6.25%, 6/01/26 4,625 4,704,411
AAA Yavapai Cnty GO
Humboldt Sch Imp #22 FGIC Ser 95A
5.95%, 7/01/14 1,500 1,542,780
------------
21,542,807
CALIFORNIA-12.4%
AAA Los Angeles Cnty
Metro Trans Auth MBIA Ser 93A
5.625%, 7/01/18 8,000 7,895,840
AAA Orange Cnty
Saddleback Valley Sch Dist FSA Ser 95A
5.65%, 9/01/17 5,000 4,981,350
AAA Palm Springs ETM Ser 91B
Zero coupon, 4/15/21 34,025 7,907,070
AAA San Francisco City & Cnty Int'l Arpt
MBIA Ser 10B
5.50%, 5/01/26 5,000 4,906,950
AAA Univ of California Regents
Hosp Rev (UCLA Med Ctr) MBIA Ser 94
5.50%, 12/01/20 3,685 3,598,366
------------
29,289,576
COLORADO-4.8%
AAA Denver City & Cnty Arpt Sys Rev
MBIA Ser 95A-96A
5.50%, 11/15/25 5,000 4,838,100
5.70%, 11/15/25 6,375 6,347,906
------------
11,186,006
12
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
FLORIDA-1.1%
A Duval Cnty HFA
MFHR (St Augustine Apts)
5.90%, 9/01/16 $ 2,555 $ 2,531,187
ILLINOIS-1.8%
AAA Metro Pier & Expo Auth
(McCormick Place Expo) FGIC Ser 93A
Zero coupon, 6/15/19 15,850 4,209,760
MASSACHUSETTS-14.0%
AAA Chelsea GO
AMBAC Ser 94
6.00%, 6/15/14 1,965 2,046,371
AAA Holyoke GO
FSA Ser 93B
6.125%, 8/01/13 1,435 1,502,502
AAA Massachusetts Muni
Wholesale (Elec Pwr Supply Sys)
MBIA Ser 92A
6.00%, 7/01/18 4,850 4,909,703
AAA Massachusetts HFA
MFHR (Residential Dev) AMBAC Ser 93A
6.15%, 10/01/15 9,500 9,623,595
AAA Massachusetts HFA
MFHR (Residential Dev) FNMA Ser 92F
6.25%, 11/15/12 5,000 5,142,650
AAA Massachusetts HFA
SFMR (Residential Dev) FNMA Ser 92A
6.90%, 11/15/24 2,500 2,659,500
AAA Massachusetts Hlth & Ed
Fac Hosp Rev
(New England Med Ctr) MBIA
6.63%, 7/01/18 (a) 5,000 4,463,350
AA- Massachusetts Wtr Poll
(So Essex Proj) Ser 94A
6.375%, 2/01/15 2,470 2,613,631
------------
32,961,302
MICHIGAN-13.9%
AAA Brighton GO AMBAC
Sch Dist Ser 92-II
Zero coupon, 5/01/18 7,295 2,112,997
AAA Detroit Swr Sys Rev
Ser 93A
7.491%, 7/01/23 (a) 11,080 10,732,199
AAA Grand Rapids Swr Disp Rev Sys
MBIA Ser 92
6.00%, 1/01/22 1,825 1,865,223
AAA Kalamazoo Hosp Fin Auth Hosp Rev
(Borgess Med Ctr) FGIC Ser 94A
6.668%, 6/01/11 (a) 5,750 5,445,365
AAA Lowell Area Schools GO
FGIC Ser 92
Zero coupon, 5/01/19 7,050 1,953,061
AAA Michigan Hosp Fin Auth Hosp Rev
(St. John's Hospital) AMBAC Ser 92A
6.00%, 5/15/13 330 340,649
AA Michigan Muni Bond Auth
Revolving Fund Rev Ser 93
5.40%, 10/01/14 3,000 2,942,490
AAA Michigan Strategic Fund
PCR (Detroit Edison Co.) MBIA Ser 95AA
6.40%, 9/01/25 4,375 4,630,237
AAA Three Rivers GO
Sch Dist MBIA Ser 96
6.00%, 5/01/23 1,745 1,812,532
AAA Yale Pub Sch Dist GO
AMBAC Ser 93
5.50%, 5/01/23 990 965,725
------------
32,800,478
MINNESOTA-5.7%
AAA Lakeville GO
(Ind Sch Dist #194) FGIC Ser 93
5.60%, 2/01/18 1,000 985,250
AAA Minneapolis
(Spec Sch Dist #1) MBIA Ser 96A
5.90%, 2/01/17 4,120 4,204,790
13
INSURED NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AAA Minnesota HFA
MFHR (Rental Hsg) MBIA Ser 95D
6.00%, 2/01/22 $ 3,500 $ 3,523,555
AAA Minnesota Pub Fac Auth
(Wtr Poll Ctr Rev) Ser 95A
6.25%, 3/01/15 1,005 1,064,325
AAA So Minnesota Muni Pwr Auth
(Pwr Supply Sys) MBIA Ser 94
Zero coupon, 1/01/26 13,060 2,452,015
AAA St Francis GO
(Ind Sch Dist #15) CGIC Ser 95A
6.375%, 2/01/16 1,165 1,253,668
------------
13,483,603
NEBRASKA-1.5%
AAA Nebraska Inv Fin Auth Hosp Rev
(Bishop Clarkson Mem) MBIA Ser 91
9.507%, 11/15/16 (a) 3,000 3,473,280
NEW YORK-5.5%
AAA Glen Cove IDR
(The Regency at Glen Cove) Ser 92B ETM
Zero coupon, 10/15/19 30,000 7,796,400
AAA New York City GO
MBIA Ser 93D
6.00%, 5/15/11 5,000 5,237,550
------------
13,033,950
OHIO-1.2%
AA- Ohio Trpk Comm Rev
Ser 94A
5.75%, 2/15/24 2,700 2,705,481
PENNSYLVANIA-2.5%
AAA Pennsylvania Conv Ctr
MBIA Ser 94A
6.75%, 9/01/19 2,500 2,764,325
AAA Pennsylvania Trpk Comm
(Oil Franchise Tax Rev) AMBAC Ser 94A
6.00%, 12/01/19 1,900 1,969,635
AA Potter Cnty Hosp Auth Hosp Rev
(Charles Cole Mem Hosp)
Ser 96 Asset Gty
6.05%, 8/01/24 1,150 1,162,386
------------
5,896,346
VIRGINIA-9.0%
AAA Chesapeake Bay Bridge & Tunnel Auth
MBIA Ser 91
5.75%, 7/01/25 1,620 1,606,360
AAA Harrisonburg Redev & Hsg Auth
MFHR (Battery Heights Assoc)
GNMA Ser 96
6.25%, 4/20/36 5,185 5,282,478
AA Henrico Cnty IDR
(Henrico Cnty Reg Jail) Ser 94
7.125%, 8/01/21 3,735 4,262,195
AAA Loudoun Cnty IDA
(Loudoun Hosp Ctr) FSA Ser 95
5.80%, 6/01/20 2,200 2,222,396
AAA Newport News IDA
MFHR (Mennowood) GNMA
6.25%, 8/01/36 1,925 1,963,769
AAA Richmond Met Auth
(Expressway Rev) FGIC Ser 92B
6.25%, 7/15/22 700 727,167
AAA Virginia HFA
SFMR (Home Mtg Rev) MBIA Ser 95D
5.75%, 1/01/19 5,000 5,031,200
------------
21,095,565
TOTAL LONG TERM MUNICIPAL BONDS
(cost $215,340,978) 223,686,278
14
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
SHORT TERM MUNICIPAL NOTES-1.7%
ILLINOIS-0.5%
VMIG-1* Illinois Ed Fac Auth
(Cultural Pooled Financial Prog)
Ser 85 VRDN
3.50%, 12/01/25 (b) $ 500 $ 500,000
VMIG-1* Illinois Health Fac
(Ingalls Mem Hosp) Ser 85B VRDN
3.55%, 1/01/16 (b) 600 600,000
------------
1,100,000
INDIANA-1.2%
A-1 Indiana Hosp Fin Auth
MBIA Ser 85A VRDN
3.55%, 12/01/15 (b) 2,940 2,940,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $4,040,000) 4,040,000
TOTAL INVESTMENTS-96.8%
(cost $219,380,978) 227,726,278
Other assets less liabilities-3.2% 7,617,427
NET ASSETS-100% $235,343,705
# Unaudited.
* Moody's or Fitch Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as the
prime interest rate). This instrument is payable on demand and is secured by
letters of credit or other credit support agreements from major banks.
See Glossary of Terms on page 22.
See notes to financial statements.
15
NEW YORK PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- ------------------------------------------------------------------------
NEW YORKMUNICIPAL BONDS-98.7%
A- Essex County IDA
(Int'l Paper) Ser 95A AMT
5.80%, 12/01/19 $ 7,000 $ 6,842,990
AAA Glen Cove IDR
(The Regency At Glen Cove)
Ser 92B ETM
Zero coupon, 10/15/19 30,010 7,798,999
AAA Islip Res Rec Agy
AMBAC Ser 94B AMT
6.125%, 7/01/12 2,020 2,095,023
BBB+ New York City GO
Ser 92C
7.00%, 8/01/16 1,735 1,856,571
BBB+ New York City GO
Ser 93A
6.25%, 8/01/18 6,000 6,002,880
BBB+ New York City GO
Ser 93D
8.004%, 8/29/14 (a) 6,250 6,175,375
BBB+ New York City GO
Ser 95B
7.25%, 8/15/19 9,630 10,422,742
BBB+ New York City GO
Ser 96J
6.00%, 2/15/24 15,580 15,110,886
BBB+ New York City GO
Ser 97A
6.25%, 8/01/17 16,750 16,761,725
BB+ New York City IDA
(American Airlines) Ser 94 AMT
6.90%, 8/01/24 12,000 12,686,520
A New York City IDA
(Terminal One LP) Ser 94 AMT
6.125%, 1/01/24 41,500 41,625,330
NR New York City IDA
(Visy Paper) Ser 95 AMT
7.80%, 1/01/16 2,000 2,133,360
AAA Niagara Frontier Trans Arpt Auth
(Gtr Buffalo Int'l) AMBAC Ser 94A AMT
6.25%, 4/01/24 14,925 15,526,179
AAA NYS Energy Res & Dev Auth
(Brooklyn Union Gas) MBIA AMT
7.457%, 7/08/26 (a) 6,000 5,521,020
AAA NYS Energy Res & Dev Auth
(Brooklyn Union Gas) MBIA Ser 89B AMT
6.75%, 2/01/24 7,500 8,115,750
A+ NYS Energy Res & Dev Auth
(Consolidated Edison) Ser 94A AMT
7.125%, 12/01/29 14,000 15,549,800
AAA NYS Energy Res & Dev Auth
(Rochester Gas & Elec) MBIA AMT
6.50%, 5/15/32 6,460 6,756,514
AAA NYS Energy Res & Dev Auth
PCR (NYS Elec & Gas) MBIA Ser 87A AMT
6.15%, 7/01/26 15,000 15,399,450
AAA NYS Energy Res & Dev Auth
PCR (NYS Elec & Gas) MBIA Ser 88A AMT
5.95%, 12/01/27 6,700 6,736,917
AAA NYS Energy Res & Dev Auth Solid Waste
(NYS Elec & Gas) MBIA Ser 93A AMT
5.70%, 12/01/28 10,050 9,761,565
BBB NYS Envir Fac Auth IDR
(Occidental Petroleum) Ser 93A AMT
5.70%, 9/01/28 16,600 15,429,700
NR NYS Envir Fac Corp Wtr Fac
(Long Island Wtr Corp) Ser 87A AMT
10.00%, 10/01/17 3,200 3,360,160
AAA NYS Envir Fac Corp Wtr Fac
(Spring Valley Wtr) AMBAC Ser 94A AMT
6.30%, 8/01/24 11,800 12,286,396
Aa* NYS HFA MFHR (Westchester/Onondaga/
Rockland Proj) Ser 92F AMT
6.70%, 8/15/25 6,000 6,218,700
16
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
Aa* NYS Mtg Agy
SFMR Ser 42 AMT
6.65%, 4/01/26 $ 4,500 $ 4,646,790
Aa* NYS Mtg Agy
SFMR Ser 46 AMT
6.65%, 10/01/25 19,960 20,665,786
AAA Onondaga Cnty
PCR (Bristol-Myers Squibb) AMT
5.75%, 3/01/24 8,000 8,087,600
AA- Port Auth of NY & NJ
Cons Rev (95th Ser) AMT
6.125%, 7/15/29 14,955 15,243,332
AAA Troy HDC
MFHR (Ninth St #2) FHA Ser 90B
8.10%, 2/01/24 3,535 3,898,257
AAA Troy HDC
MFHR (TUR Proj.) FHA Ser 90C
8.10%, 2/01/24 3,780 4,197,879
TOTAL INVESTMENTS-98.7%
(cost $295,080,901) 306,914,196
Other assets less liabilities-1.3% 4,059,005
NET ASSETS-100% $310,973,201
# Unaudited.
* Moody's or Fitch Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
See Glossary of Terms on page 22.
See notes to financial statements.
17
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
CALIFORNIA MUNICIPAL BONDS-98.6%
A+ California GO
(Veterans Hsg) Ser 95 AMT
6.40%, 2/01/20 $40,000 $40,848,400
AAA California HFA
MFHR (Home Mtg Rev) MBIA Ser 91A AMT
7.20%, 2/01/26 3,450 3,631,401
AAA California HFA
MFHR (Home Mtg Rev) MBIA Ser 91C AMT
7.00%, 8/01/23 1,475 1,542,791
A+ California HFA
MFHR (Multi-Unit Rental Hsg)
Ser 92A AMT
6.50%, 2/01/14 4,865 4,988,960
AAA California HFA
SFMR (Home Mtg Rev) AMBAC Ser 96H AMT
6.20%, 2/01/27 8,000 8,032,160
AA- California HFA
SFMR (Home Mtg Rev) Ser 91G AMT
7.05%, 8/01/27 5,570 5,771,021
AAA California HFA
SFMR (Home Mtg Rev) Ser 95A-2 AMT
6.45%, 8/01/25 13,400 13,759,254
AA- California HFA
SFMR (Home Mtg Rev) Ser E AMT
6.70%, 8/01/25 9,850 10,157,714
A California Poll Ctl Fin Auth
(Browning-Ferris Ind/Keller Canyon)
Ser 92 AMT
6.875%, 11/01/27 5,000 5,267,900
A California Poll Ctl Fin Auth
PCR (Pacific Gas & Elec) Ser 93A AMT
5.875%, 6/01/23 7,200 7,071,408
A+ California Poll Ctl Fin Auth
PCR (San Diego Gas & Elec)
Ser 93A-C AMT
5.85%, 6/01/21 32,335 32,042,045
A+ California Poll Ctl Fin Auth
Res Rec (Waste Mgmt Inc) Ser 91A AMT
7.15%, 2/01/11 2,400 2,607,696
A California Poll Ctl Fin Auth
PCR (Pacific Gas & Elec) Ser 93B AMT
5.85%, 12/01/23 70,000 68,507,600
A+ California Poll Ctl Fin Auth
PCR (So Calif Edison) Ser 92B AMT
6.40%, 12/01/24 36,030 37,078,473
A+ Chula Vista PCR
(San Diego Gas & Elec) Ser 92A AMT
6.40%, 12/01/27 28,240 29,318,203
Aaa* Contra Costa Cnty
MFHR (Byron Park Proj)
GNMA Ser 93A AMT
6.40%, 1/20/31 11,860 12,143,217
NR Encinitas Comm Fac Dist #1
(Encinitas Ranch) Ser 95A
7.375%, 9/01/26 23,000 23,533,830
NR Encinitas Rec Rev
(Encinitas Ranch Golf Course) Ser 96A
7.75%, 9/01/26 10,760 10,907,735
NR Fairfield Assess Dist
(No Cordelia Imp Dist) Ser 93
7.375%, 9/02/18 2,510 2,585,225
AAA Fairfield Pub Fin Auth
Tax Alloc (Fairfield Proj)
CGIC Ser 93C
5.50%, 8/01/23 4,000 3,874,480
NR Fontana Comm Fac Dist #3
(Hunters Ridge) Ser 90A
8.70%, 10/01/15 8,000 8,330,720
NR Fontana Redev Agy
(Jurupa Hills Proj) Ser 94
8.00%, 1/01/98 5,000 5,057,550
AAA Fremont FHA
MFHR (Regency Sq Apts) Ser 86A AMT
7.75%, 11/01/28 1,500 1,587,720
18
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AAA Garden Grove
MFHR (Tudor Grove) GNMA Coll AMT
7.25%, 5/20/32 $ 7,255 $ 7,463,436
AA- Long Beach Harbor Rev
Ser 93 AMT
5.125%, 5/15/13 16,150 15,147,569
AAA Los Angeles Cnty Arpt
(Ontario Int'l Arpt) FGIC Ser 96A AMT
6.00%, 5/15/22 12,780 13,049,658
NR Los Angeles Cnty Comm Fac Dist #3
(Valencia/Newhall Area) Ser 95A
7.125%, 9/01/20 5,500 5,600,870
NR Los Angeles Cnty Comm Fac Dist #4
(Calabasas Area) Ser 92A
7.65%, 9/01/17 7,500 7,755,600
NR Los Angeles Cnty Comm Fac Dist #92-1
(Castaic Union SD Northlake Proj)
Ser 92
9.00%, 10/01/19 8,710 9,052,042
BBB+ Los Angeles Comm Redev
MFHR (Grand Ctrl Proj) Ser 93A AMT
5.85%, 12/01/26 7,030 6,770,031
AAA Los Angeles Harbor Rev
MBIA Ser 96B AMT
6.20%, 8/01/25 10,000 10,440,000
AA Los Angeles Harbor Rev
Ser 95A AMT
6.625%, 8/01/25 24,000 25,432,320
AAA No Calif Trans Agy Elec Rev
(Calif-Oregon Trans) MBIA Ser 93A
6.822%, 4/29/24 (a) 14,250 13,384,170
NR Novato Comm Fac Dist #94-1
(Hamilton Field) Ser 95
7.375%, 9/01/25 6,100 6,360,043
NR Ontario Assess Dist #107
(CA Commerce Ctr So)
7.70%, 9/02/10 6,130 6,316,904
AAA Orange Cnty Arpt Rev
(John Wayne Int'l Arpt)
MBIA Ser 93 AMT
5.50%, 7/01/18 16,500 15,833,565
NR Orange Cnty Comm Fac Dist #87-2
(Portola Hills) Ser 91A
9.30%, 8/15/16 8,950 9,385,955
BBB- Orange Cnty Sr Lien
Foothill/Eastern Corridor Agy
Ser 95A
Zero coupon, 1/01/15 18,500 5,863,390
Zero coupon, 1/01/25 15,000 2,456,700
Zero coupon, 1/01/27 10,000 1,440,300
Zero coupon, 1/01/28 10,000 1,350,700
NR Orange Cnty Sr Lien
San Joaquin Hills Trans Corridor
Ser 93
Zero coupon, 1/01/17 16,000 4,556,320
Zero coupon, 1/01/19 20,000 5,027,800
Zero coupon, 1/01/20 20,000 4,671,400
Zero coupon, 1/01/21 20,000 4,387,000
Zero coupon, 1/01/23 35,000 6,771,100
Zero coupon, 1/01/25 33,100 5,571,061
7.00%, 1/01/30 15,000 15,944,700
AAA Palm Springs COP
Ser 91B ETM
Zero coupon, 4/15/21 20,000 4,647,800
AAA Palm Springs Fin Auth
Arpt Rev (Palm Springs Regional Arpt)
MBIA Ser 92 AMT
6.00%, 1/01/22 6,860 6,966,810
AAA Port of Oakland
MBIA Ser 92E AMT
6.40%, 11/01/22 23,370 24,514,663
6.50%, 11/01/16 8,000 8,469,120
A Port of Oakland Spec Fac
(Mitsui O.S.K. Lines) Ser 92A AMT
6.80%, 1/01/19 3,700 3,856,140
NR Riverside Cnty Assess Dist #161
(Winchester Prop) Ser 94C
10.00%, 9/02/14 7,005 7,175,011
19
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
NR Riverside Comm Fac Dist #90-1
(Lusk-Highlander Proj) Ser 91A
8.50%, 9/01/15 $ 2,000 $ 2,053,520
AAA Sacramento Cnty Arpt Sys Rev
FGIC Ser 92A AMT
6.00%, 7/01/20 11,750 11,943,287
AAA Sacramento Cnty Arpt Sys Rev
MBIA Ser 96A AMT
5.90%, 7/01/24 5,050 5,079,139
AAA San Bernardino Cnty Solid Waste
(Inland Empire) FSA Ser 96B AMT
6.00%, 8/01/16 2,500 2,535,475
NR San Diego Comm Fac Dist #1
(Miramar Ranch North) Ser 95B
7.10%, 9/01/20 7,000 7,125,860
AAA San Francisco City & Cnty Int'l Arpt
AMBAC Ser 94 II-6 AMT
6.60%, 5/01/24 5,000 5,390,850
AAA San Francisco City & Cnty Int'l Arpt
FGIC Ser 94 II-5 AMT
6.50%, 5/01/24 11,000 11,695,970
AAA San Francisco City & Cnty Int'l Arpt
FGIC Ser 96-II AMT
6.25%, 5/01/26 7,000 7,263,480
AAA San Francisco City & Cnty Int'l Arpt
MBIA Ser 93 II-3 AMT
6.10%, 5/01/13 7,990 8,267,812
6.20%, 5/01/20 14,500 15,002,135
AAA San Jose Arpt Rev
(San Jose Arpt) FGIC Ser 93 AMT
5.70%, 3/01/18 8,825 8,738,250
AAA So Calif HFA
SFMR GNMA/FNMA Ser 92A AMT
6.75%, 9/01/22 1,425 1,488,270
Ser 91B
6.90%, 10/01/24 1,635 1,718,009
BBB+ Westminster Redev Agy
MFHR (Rose Garden Apt) AMT
6.75%, 8/01/24 4,300 4,354,438
AAA Yolo Cnty Hsg Auth
MFHR (Waggener Ranch Apts)
FHA Ser 91 AMT
7.00%, 10/01/33 9,000 9,581,310
TOTAL INVESTMENTS-98.6%
(cost $673,382,635) 706,545,486
Other assets less liabilities-1.4% 9,710,944
NET ASSETS-100% $716,256,430
# Unaudited.
* Moody's or Fitch Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
See Glossary of Terms on page 22.
See notes to financial statements.
20
INSURED CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
CALIFORNIA MUNICIPAL BONDS-98.8%
LONG TERM MUNICIPAL BONDS-96.0%
AAA Alhambra COP
Assess Dist #91-1: Police Fac
AMBAC Ser 92
6.75%, 9/01/23 $ 5,000 $ 5,408,850
AAA Brea Pub Fin Auth
Tax Alloc Redev Proj B MBIA Ser 91A
7.00%, 8/01/15 1,470 1,617,103
AAA California HFA
MFHR (Home Mtg Rev) AMBAC Ser 95A
6.25%, 2/01/37 5,000 5,080,100
AAA Coronado Comm Dev Proj
Tax Alloc FSA Ser 96
6.00%, 9/01/26 8,700 8,974,311
AAA Fontana Pub Fin Auth
Tax Alloc (No Fontana) MBIA Ser 93A
5.625%, 9/01/24 9,805 9,729,109
AAA Glendale Hlth Fac Rev
(Glendale Mem Hosp) CONNIE LEE Ser 95A
5.60%, 11/15/25 2,000 1,949,580
AAA La Mirada Redev Agy
Tax Alloc (Commercial Redev)
CGIC Ser 95B
5.90%, 8/15/24 5,000 5,067,100
A Lancaster Redev Agy FHA
MFHR (High Valley Apts) Ser 96A
6.00%, 6/01/27 4,170 4,100,945
AAA Los Angeles Cnty Comm Redev
Tax Alloc (Bunker Hill Proj)
FSA Ser 93H
5.60%, 12/01/28 10,000 9,809,600
AAA Los Angeles Trans Comm
FGIC Ser 91B
6.50%, 7/01/15 5,000 5,316,200
AAA Madera Cnty COP
Hosp Rev (Valley Children's Hosp)
MBIA Ser 95
6.125%, 3/15/23 4,000 4,169,440
AAA Mojave Water Agy
(Morongo Basin Pipeline) FGIC Ser 96
5.80%, 9/01/22 10,000 10,101,300
AAA Northern Calif Trans Agy Elec Rev
(Calif-Oregon Trans) MBIA Ser 93A
6.82%, 4/29/24 (a) 5,000 4,696,200
AAA Orange Cnty COP
(Loma Ridge Data Ctr Proj)
AMBAC Pre-refunded
6.00%, 6/01/21 1,000 1,013,580
AAA Orange Cnty Rec Cert
MBIA Ser 96A
6.00%, 7/01/26 3,000 3,055,110
AAA Palm Springs ETM COP
Ser 91B
Zero coupon, 4/15/21 32,475 7,546,865
AAA Rancho Wtr Dist Fin Auth
AMBAC Ser 91 Pre-refunded
9.024%, 8/17/21 (a) 3,000 3,587,430
AAA Redding COP
Elec Sys Rev MBIA Ser 92A
8.901%, 7/01/22 (a) 2,000 2,408,940
AAA Sacramento Cnty
Arpt Sys Rev MBIA Ser 96B
5.75%, 7/01/26 3,260 3,265,184
AAA Sacramento Muni Util Dist
Elec Rev MBIA Ser 93E
5.75%, 5/15/22 5,000 5,023,250
AAA San Bernardino
Joint Pwr Fin Auth CGIC Ser 95A
5.75%, 10/01/25 5,000 5,007,700
AAA San Bernardino Cnty Redev ETM
(Ontario Red Proj 1) MBIA Ser 93
5.80%, 8/01/23 10,000 9,931,700
AAA San Dimas Redev Agy
(Creative Growth Refunding)
CGIC Ser 91A
6.75%, 9/01/16 1,000 1,079,540
21
INSURED CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
STANDARD PRINCIPAL
& POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------
AAA San Francisco City & Cnty Int'l Arpt
MBIA Ser 93 II-4
6.00%, 5/01/14 $5,000 $ 5,140,400
AAA Shasta Lake Elec Sys Rev FSA Ser 96-2
6.00%, 4/01/16 2,895 2,966,825
AAA So Tahoe Jnt Pwr Fin Auth
Ser 95A CAP MAC
5.75%, 10/01/25 4,500 4,480,830
A Vacaville
MFHR (Vacaville Comm Hsg) Ser 94A
7.85%, 11/01/24 4,625 4,962,486
TOTAL LONG TERM MUNICIPAL BONDS
(cost $130,844,442) 135,489,678
SHORT TERM MUNICIPAL NOTES-2.8%
A-1+ Orange Cnty COP
Sanitation Dist 1-3 VRDN
3.55%, 8/01/15 (b) 1,900 1,900,000
A-1+ San Jose Redev Agy
Ser B VRDN
3.55%, 7/01/26 (b) 2,000 2,000,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $3,900,000) 3,900,000
TOTAL INVESTMENTS-98.8%
(cost $134,744,442) 139,389,678
Other assets less liabilities-1.2% 1,674,704
NET ASSETS-100% $141,064,382
# Unaudited.
* Moody's or Fitch Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as the
prime interest rate). This instrument is payable on demand and is secured by
letters of credit or other credit support agreements from major banks.
See Glossary of Terms below.
See notes to financial statements.
Glossary of Terms:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax--(subject to)
CAPMAC Capital Markets Assurance Corporation
CGIC Capital Guaranty Insurance Corporation
COP Certificate of Participation
ETM Escrow to Maturity
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Administration
FNMA Federal National Mortgage Association
FSA Financial Security Assurance, Inc.
GNMA Government National Mortgage Association
GO General Obligation
HDA Housing Development Authority
HDC Housing Development Corporation
HFA Housing Finance Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue
MBIA Municipal Bond Investors Assurance
MFHR Multi-Family Housing Revenue
NR Rating not applied for
PCR Pollution Control Revenue
SFMR Single Family Mortgage Revenue
VRDN Variable Rate Demand Note
22
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
INSURED INSURED
NATIONAL NATIONAL NEW YORK CALIFORNIA CALIFORNIA
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities, at value (cost:
National-$608,353,830; Ins. National-
$219,380,978; New York-$295,080,901;
California-$673,382,635; Ins. California-
$134,744,442, respectively) $625,555,380 $227,726,278 $306,914,196 $706,545,486 $139,389,678
Cash 127,698 75,670 200,949 -0- 2,146
Interest receivable 11,621,130 3,432,758 4,790,939 13,840,343 2,115,903
Receivable for investment securities sold 3,855,289 4,961,543 -0- 65,000 -0-
Receivable for capital stock sold 634,476 121,461 429,487 959,682 128,527
Prepaid expenses and other assets 25,557 16,521 -0- -0- 21
Total assets 641,819,530 236,334,231 312,335,571 721,410,511 141,636,275
LIABILITIES
Due to custodian -0- -0- -0- 2,431,637 -0-
Payable for investment securities purchased 2,247,200 -0- -0- -0- -0-
Payable for capital stock redeemed 1,447,452 372,274 609,709 835,530 95,445
Distribution fee payable 348,429 103,766 156,803 332,745 59,264
Advisory fee payable 108,172 98,802 39,401 214,973 65,535
Accrued expenses and other liabilities 1,251,795 415,684 556,457 1,339,196 351,649
Total liabilities 5,403,048 990,526 1,362,370 5,154,081 571,893
NET ASSETS $636,416,482 $235,343,705 $310,973,201 $716,256,430 $141,064,382
COMPOSITION OF NET ASSETS
Capital stock, at par $60,533 $22,886 $32,189 $67,632 $10,532
Additional paid-in capital 637,865,112 224,161,094 306,928,900 700,624,260 138,328,427
Undistributed (Overdistributed) net
investment income (148,284) (222,691) (74,276) 47 154,220
Accumulated net realized gain (loss)
on investments (18,562,429) 3,037,116 (7,746,907) (17,598,360) (2,074,033)
Net unrealized appreciation of investments 17,201,550 8,345,300 11,833,295 33,162,851 4,645,236
------------- ------------- ------------- ------------- -------------
$636,416,482 $235,343,705 $310,973,201 $716,256,430 $141,064,382
CLASS A SHARES
Net assets $325,288,446 $160,425,266 $179,451,877 $460,443,830 $101,542,634
Shares of capital stock outstanding 30,939,835 15,599,865 18,575,479 43,477,011 7,581,558
CLASS B SHARES
Net assets $214,993,974 $52,155,579 $96,959,087 $164,895,496 $26,695,899
Shares of capital stock outstanding 20,449,430 5,072,521 10,036,392 15,570,045 1,993,196
CLASS C SHARES
Net assets $96,134,062 $22,762,860 $34,562,237 $90,917,104 $12,825,849
Shares of capital stock outstanding 9,143,965 2,213,957 3,577,585 8,584,700 957,603
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share $10.51 $10.28 $ 9.66 $10.59 $13.39
Sales charge--4.25% of public offering price .47 .46 .43 .47 .59
Maximum offering price $10.98 $10.74 $10.09 $11.06 $13.98
CLASS B SHARES
Net asset value and offering price per share $10.51 $10.28 $ 9.66 $10.59 $13.39
CLASS C SHARES
Net asset value and offering price per share $10.51 $10.28 $ 9.66 $10.59 $13.39
</TABLE>
See notes to financial statements.
23
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
INSURED INSURED
NATIONAL NATIONAL NEW YORK CALIFORNIA CALIFORNIA
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $41,749,682 $14,499,511 $19,614,502 $45,931,046 $ 9,132,446
EXPENSES
Advisory Fee 4,179,489 1,447,924 1,946,292 4,527,101 800,847
Distribution fee-Class A 991,717 484,186 539,859 1,406,123 307,307
Distribution fee-Class B 2,352,948 558,288 967,401 1,657,856 292,282
Distribution fee-Class C 1,028,510 223,607 347,137 898,428 139,446
Transfer agency 620,912 167,697 272,626 472,263 76,465
Custodian 169,895 100,701 103,004 151,928 93,305
Administrative 99,000 99,000 99,000 99,000 99,000
Printing 89,624 18,559 23,082 58,040 6,214
Audit and legal 81,076 55,929 52,352 70,841 43,528
Registration 58,409 53,103 8,174 5,643 2,958
Taxes 46,397 17,117 21,285 48,135 10,226
Directors' fees 4,370 4,370 4,370 4,370 4,370
Miscellaneous 36,615 5,719 9,360 7,445 5,369
Total expenses 9,758,962 3,236,200 4,393,942 9,407,173 1,881,317
Less advisory fee waived (see note B) (2,760,334) (250,000) (1,468,820) (2,025,214) -0-
Net expenses 6,998,628 2,986,200 2,925,122 7,381,959 1,881,317
Net investment income 34,751,054 11,513,311 16,689,380 38,549,087 7,251,129
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on investments 16,964,535 8,542,348 4,364,814 (2,028,050) 1,834,892
Net change in unrealized appreciation
of investments (13,559,055) (3,328,071) (3,048,492) 11,344,019 (1,363,432)
Net gain on investments 3,405,480 5,214,277 1,316,322 9,315,969 471,460
NET INCREASE IN NET ASSETS FROM
OPERATIONS $38,156,534 $16,727,588 $18,005,702 $47,865,056 $ 7,722,589
</TABLE>
See notes to financial statements.
24
STATEMENTS OF CHANGES IN NET ASSETS ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
NATIONALINSURED NATIONAL
----------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCT. 31,1996 OCT. 31,1995 OCT. 31,1996 OCT. 31,1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 34,751,054 $ 38,182,112 $ 11,513,311 $ 12,312,442
Net realized gain (loss) on
investments 16,964,535 (16,742,673) 8,542,348 (1,551,031)
Net change in unrealized
appreciation of investments (13,559,055) 88,985,630 (3,328,071) 29,609,236
Net increase in net assets
from operations 38,156,534 110,425,069 16,727,588 40,370,647
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A (18,357,293) (19,579,195) (8,246,992) (8,620,766)
Class B (11,489,379) (12,886,174) (2,490,145) (2,612,853)
Class C (5,041,417) (5,920,496) (998,865) (1,078,823)
Distributions in excess of
net investment income
Class A -0- -0- -0- (239,073)
Class B -0- -0- -0- (72,460)
Class C -0- -0- -0- (29,919)
CAPITAL STOCK TRANSACTIONS
Net decrease (65,588,040) (95,757,376) (16,451,516) (10,119,842)
Total increase (decrease) (62,319,595) (23,718,172) (11,459,930) 17,596,911
NET ASSETS
Beginning of year 698,736,077 722,454,249 246,803,635 229,206,724
End of year $636,416,482 $698,736,077 $235,343,705 $246,803,635
</TABLE>
See notes to financial statements.
25
STATEMENTS OF CHANGES IN NET ASSETS (CONT.) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NEW YORK
----------------------------
YEAR ENDED YEAR ENDED
OCT. 31, 1996 OCT. 31, 1995
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 16,689,380 $ 16,972,904
Net realized gain (loss) on investments 4,364,814 (8,599,808)
Net change in unrealized appreciation
of investments (3,048,492) 37,571,643
Net increase in net assets from operations 18,005,702 45,944,739
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income
Class A (10,253,521) (10,790,213)
Class B (4,792,337) (4,577,754)
Class C (1,717,798) (1,680,454)
CAPITAL STOCK TRANSACTIONS
Net decrease (914,884) (17,006,966)
Total increase 327,162 11,889,352
NET ASSETS
Beginning of year 310,646,039 298,756,687
End of year $310,973,201 $310,646,039
See notes to financial statements.
26
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
<TABLE>
<CAPTION>
CALIFORNIA INSURED CALIFORNIA
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCT. 31,1996 OCT. 31,1995 OCT. 31,1996 OCT. 31,1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 38,549,087 $ 40,567,570 $ 7,251,129 $ 7,096,605
Net realized gain (loss) on
investments (2,028,050) (10,675,369) 1,834,892 47,999
Net change in unrealized
appreciation of investments 11,344,019 83,053,467 (1,363,432) 16,442,245
Net increase in net assets
from operations 47,865,056 112,945,668 7,722,589 23,586,849
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A (26,160,727) (27,565,247) (5,222,731) (5,371,233)
Class B (8,034,602) (8,365,628) (1,268,940) (1,159,355)
Class C (4,353,711) (4,642,175) (605,238) (566,017)
Distributions in excess of
net investment income
Class A -0- -0- -0- (102,666)
Class B -0- -0- -0- (22,160)
Class C -0- -0- -0- (10,819)
CAPITAL STOCK TRANSACTIONS
Net decrease (26,146,521) (74,094,906) (5,640,530) (2,195,497)
Total increase (decrease) (16,830,505) (1,722,288) (5,014,850) 14,159,102
NET ASSETS
Beginning of year 733,086,935 734,809,223 146,079,232 131,920,130
End of year $716,256,430 $733,086,935 $141,064,382 $146,079,232
</TABLE>
See notes to financial statements.
27
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Municipal Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified open-end management investment
company. The Fund, which is a Maryland corporation, operates as a series
company currently comprised of five portfolios: National Portfolio, Insured
National Portfolio, New York Portfolio, California Portfolio and Insured
California Portfolio (the "Portfolios"). Each series is considered to be a
separate entity for financial reporting and tax purposes. Each portfolio offers
three classes of shares: Class A, Class B and Class C Shares. Class A shares
are sold with a front-end sales charge of up to 4.25%. Class B shares are sold
with a contingent deferred sales charge which declines from 3% to zero
depending on the period of time the shares are held. Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month of purchase. Class C shares purchased on or after July 1, 1996 are
subject to a contingent deferred sales charge of 1% on redemptions made within
the first year after purchase. All three classes of shares have identical
voting, dividend liquidation and other rights and the same terms and
conditions, except that each class bears different distribution expenses and
has exclusive voting rights with respect to its distribution plan. The
following is a summary of the significant accounting policies followed by the
Fund.
1. SECURITY VALUATION
The Fund values municipal securities at fair value based on prices provided by
a recognized pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities. Securities
for which market quotations are not readily available and restricted securities
which are subject to limitations as to their resale are valued in good faith at
fair value by the Fund's Adviser under procedures established by the Fund's
Board of Directors. Short-term securities which mature in 60 days or less are
valued at amortized cost, which approximates market value.
2. TAXES
It is the intention of each Portfolio to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its investment company taxable income and net realized gains, if applicable,
to its shareholders. Therefore, no provisions for federal income or excise
taxes are required.
3. INVESTMENT INCOME AND SECURITY TRANSACTIONS
Interest income is accrued daily. Security transactions are accounted for on
the date the securities are purchased or sold. Security gains and losses are
determined on the identified cost basis. The Fund amortizes premiums and
accrues original issue discounts and market discounts as adjustments to
interest income.
The New York, Insured California and California Portfolios follow an investment
policy of investing primarily in municipal obligations of one state. Economic
changes affecting the state and certain of its public bodies and municipalities
may affect the ability of issuers within the state to pay interest on, or repay
principal of, municipal obligations held by the Portfolios.
4. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date and are determined in accordance with income tax regulations.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the National, New York and
California Portfolios pay Alliance Capital Management L.P., (the "Adviser") an
advisory fee at an annual rate of up to .625 of 1% of each Portfolio's average
daily net assets. For the Insured National Portfolio, the Agreement provides
for a fee at an annual rate of up to .625 of 1% of the first $200 million, .50
of 1% of the next $200 million and .45 of 1% in excess of $400 million of the
Portfolio's average daily net assets. For the Insured California Portfolio, the
Agreement provides for a fee at an annual rate of up to .55 of 1% of the first
$200 million, .50 of 1% of the next $200 million and .45 of 1% in excess of
$400 million of the Portfolio's average daily net assets. Such fees are accrued
daily and paid monthly.
28
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
The Adviser has agreed, under the terms of the investment advisory agreement,
to reimburse the Fund to the extent that the expenses of each of its Portfolios
(exclusive of interest, taxes, brokerage, distribution fees, and extraordinary
expenses) exceed the limits prescribed by any state in which that Portfolio's
shares are qualified for sale. The most restrictive expense limitation is
believed to be 2.5% of the first $30 million, 2% of the next $70 million, and
1.5% of the excess over $100 million of each Portfolio's average daily net
assets. No such reimbursement was required for the year ended October 31, 1996.
For the year ended October 31, 1996 the Adviser voluntarily agreed to waive
part of its advisory fee for the National, Insured National, New York and
California Portfolios. The aggregate amounts of such fee waivers were: National
Portfolio, $2,760,334; Insured National Portfolio, $250,000; New York
Portfolio, $1,468,820 and California Portfolio, $2,025,214. Pursuant to the
Advisory Agreement, the Fund paid $495,000 to the Adviser representing the cost
of certain legal and accounting services provided to each Portfolio by the
Adviser.
Each Portfolio compensates Alliance Fund Services, Inc. (a wholly-owned
subsidiary of the Adviser) under a Services Agreement for providing personnel
and facilities to perform transfer agency services for each Portfolio. Such
compensation amounted to $407,609 for the National Portfolio, $107,638 for the
Insured National Portfolio, $185,283 for the New York Portfolio, $296,481 for
the California Portfolio and $48,770 for the Insured California Portfolio.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's capital stock. The amount of front-end
sales charges received by the Distributor from sales of the respective
Portfolio's Class A shares for the year ended October 31, 1996 were: National
Portfolio, $50,984; Insured National Portfolio, $9,936; New York Portfolio,
$29,267; California Portfolio, $78,399; and Insured California Portfolio,
$14,356. The amount of contingent deferred sales charge imposed upon
redemptions by shareholders of Class B shares were: National Portfolio,
$264,900; Insured National Portfolio, $99,819; New York Portfolio, $115,061;
California Portfolio, $224,923; and Insured California Portfolio, $39,020. The
amount of contingent deferred sales charges imposed upon redemptions by
shareholders of Class C shares for the period from July 1, 1996 to October 31,
1996 were:National Portfolio, $1,118; Insured National Portfolio, $194; New
York Portfolio, $1,122; California Portfolio, $958; and Insured California had
no contingent deferred sales charge.
NOTE C: DISTRIBUTION SERVICES AGREEMENT
Each Portfolio has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940 for Class A,
Class B and Class C shares. Under the Agreement, each Portfolio pays a
distribution fee to the Distributor at an annual rate of up to .30 of 1% of
each Portfolio's average daily net assets attributable to the Class A shares
and 1% of each Portfolio's average daily net assets attributable to the Class B
and Class C shares. The Agreement provides that the Distributor will use such
payments in their entirety for distribution assistance and promotional
activities. The Distributor has incurred expenses in excess of the distribution
costs reimbursed by each Portfolio as follows:
PORTFOLIO CLASS B CLASS C
- ------------------ ---------- ----------
National $3,752,255 $2,193,843
Insured National 1,813,206 789,090
New York 2,914,342 880,036
California 4,465,745 1,852,542
Insured California 1,344,057 479,829
Such costs may be recovered from each Portfolio in future periods so long as
the Agreement is in effect. In accordance with the Agreement, there is no
provision for recovery of unreimbursed distribution costs incurred by the
Distributor beyond the current fiscal year for Class A shares. The Agreement
also provides that the Adviser may use its own resources to finance the
distribution of each Portfolio's shares.
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term securities
and U.S. Government Securities) for the year ended October 31, 1996 were:
PORTFOLIO PURCHASES SALES
- ------------------ ------------ ------------
National $910,892,716 $985,367,960
Insured National 366,442,366 392,883,795
New York 197,981,284 200,413,580
California 354,330,716 383,892,499
Insured California 169,384,418 182,131,351
At October 31, 1996, the cost of securities for federal income tax purposes,
gross unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation/depreciation of investments for each Portfolio were as follows:
GROSS UNREALIZED NET
----------------------------- UNREALIZED
TAX COST APPRECIATION (DEPRECIATION) APPRECIATION
------------ ------------ -------------- ------------
National $608,449,095 $18,985,073 $(1,878,788) $17,106,285
Insured National 219,386,655 8,397,531 (57,908) 8,339,623
New York 295,121,818 11,875,445 (83,067) 11,792,378
California 673,382,635 34,251,197 (1,088,346) 33,162,851
Insured California 134,744,442 4,892,341 (247,105) 4,645,236
NOTE E: TAXES
For Federal income tax purposes at October 31, 1996, the Fund had capital loss
carryforwards for the following Portfolios: $235,124 expiring in 2002 and
$18,232,039 expiring in 2003 for the National Portfolio; $7,705,786 expiring in
2003 for the New York Portfolio; $4,748,470 expiring in 2002, $10,797,828
expiring in 2003 and $2,052,062 expiring in 2004 for the California Portfolio;
and $2,074,032 expiring in 2002 for the Insured California Portfolio.
30
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NOTE F: CAPITAL STOCK
There are 3,000,000,000 shares of $.001 par value capital stock authorized,
designated Class A, Class B and Class C shares. There are 200,000,000
authorized shares for each Class.
NATIONAL PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 5,575,925 4,787,898 $ 58,487,725 $ 47,317,764
Shares issued in
reinvestment of
dividends 1,019,710 1,139,057 10,606,458 11,273,668
Shares converted
from Class B 1,147,625 -0- 11,942,215 -0-
Shares redeemed (9,175,311) (9,571,534) (95,864,424) (93,714,112)
Net decrease (1,432,051) (3,644,579) $(14,828,026) $(35,122,680)
CLASS B
Shares sold 2,083,622 3,237,841 $ 21,678,779 $ 31,671,965
Shares issued in
reinvestment of
dividends 691,706 840,798 7,193,169 8,326,644
Shares converted
to Class A (1,147,625) -0- (11,942,215) -0-
Shares redeemed (5,326,953) (6,546,335) (55,286,254) (63,976,163)
Net decrease (3,699,250) (2,467,696) $(38,356,521) $(23,977,554)
CLASS C
Shares sold 2,326,094 2,513,404 $ 24,279,598 $ 24,850,658
Shares issued in
reinvestment of
dividends 335,126 506,602 3,484,071 5,001,846
Shares redeemed (3,859,000) (6,842,684) (40,167,162) (66,509,646)
Net decrease (1,197,780) (3,822,678) $(12,403,493) $(36,657,142)
INSURED NATIONAL PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 1,382,575 2,109,319 $ 13,902,664 $ 19,729,676
Shares issued in
reinvestment of
dividends and
distributions 414,861 463,475 4,198,610 4,426,013
Shares converted
from Class B 24,166 -0- 243,256 -0-
Shares redeemed (2,661,772) (3,272,946) (26,886,521) (30,921,711)
Net decrease (840,170) (700,152) $ (8,541,991) $ (6,766,022)
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NATIONAL PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
CLASS B
Shares sold 725,416 1,180,257 $ 7,364,166 $ 11,132,100
Shares issued in
reinvestment of
dividends and
distributions 149,506 173,416 1,512,818 1,661,573
Shares converted
to Class A (24,166) -0- (243,256) -0-
Shares redeemed (1,637,886) (1,232,039) (16,598,949) (11,659,140)
Net increase(decrease) (787,130) 121,634 $ (7,965,221) $ 1,134,533
CLASS C
Shares sold 713,617 488,859 $ 7,183,108 $ 4,578,511
Shares issued in
reinvestment of
dividends and
distributions 66,139 107,163 669,187 1,023,246
Shares redeemed (777,517) (1,074,063) (7,796,599) (10,090,110)
Net increase(decrease) 2,239 (478,041) $ 55,696 $ (4,488,353)
NEW YORK PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 1,703,514 1,541,732 $ 16,329,024 $ 14,097,320
Shares issued in
reinvestment of
dividends 661,612 730,643 6,340,256 6,699,094
Shares converted
from Class B 25,442 -0- 280,942 -0-
Shares redeemed (2,945,222) (4,026,816) (28,238,945) (36,382,127)
Net decrease (554,654) (1,754,441) $ (5,288,723) $(15,585,713)
CLASS B
Shares sold 1,812,208 1,765,580 $ 17,384,846 $ 16,166,559
Shares issued in
reinvestment of
dividends 323,928 330,093 3,102,964 3,029,271
Shares converted
to Class A (25,442) -0- (280,942) -0-
Shares redeemed (1,885,403) (1,678,380) (18,010,268) (15,223,910)
Net increase 225,291 417,293 $ 2,196,600 $ 3,971,920
32
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
NEW YORK PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
CLASS C
Shares sold 1,388,105 774,912 $ 13,398,638 $ 7,137,932
Shares issued in
reinvestment of
dividends 132,115 145,723 1,265,387 1,332,925
Shares redeemed (1,295,305) (1,539,788) (12,486,786) (13,864,030)
Net increase(decrease) 224,915 (619,153) $ 2,177,239 $ (5,393,173)
CALIFORNIA PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 4,406,385 4,608,607 $ 46,067,687 $ 45,697,476
Shares issued in
reinvestment of
dividends 1,158,430 1,354,247 12,118,531 12,936,654
Shares converted
from Class B 108,411 -0- 1,125,538 -0-
Shares redeemed (8,003,914) (10,053,974) (83,570,318) (97,704,751)
Net decrease (2,330,688) (4,091,120) $(24,258,562) $(39,070,621)
CLASS B
Shares sold 2,529,481 2,379,727 $ 26,499,615 $ 23,517,537
Shares issued in
reinvestment of
dividends 404,752 477,127 4,234,295 4,724,963
Shares converted
to Class A (108,411) -0- (1,125,538) -0-
Shares redeemed (3,207,605) (3,973,996) (33,548,529) (38,724,734)
Net decrease (381,783) (1,117,142) $ (3,940,157) $(10,482,234)
CLASS C
Shares sold 2,465,162 1,828,084 $ 25,830,785 $ 18,294,426
Shares issued in
reinvestment of
dividends 250,607 335,322 2,619,923 3,304,549
Shares redeemed (2,530,143) (4,758,478) (26,398,510) (46,141,026)
Net increase(decrease) 185,626 (2,595,072) $ 2,052,198 $(24,542,051)
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
INSURED CALIFORNIA PORTFOLIO
-----------------------------------------------------------
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 827,900 1,612,641 $ 10,898,263 $ 19,702,408
Shares issued in
reinvestment of
dividends and
distributions 189,983 201,630 2,517,761 2,542,607
Shares converted
from Class B 1,804 -0- 23,470 -0-
Shares redeemed (1,244,117) (2,051,864) (16,388,925) (25,275,836)
Net decrease (224,430) (237,593) $ (2,949,431) $ (3,030,821)
CLASS B
Shares sold 558,000 812,573 $ 7,459,223 $ 10,053,570
Shares issued in
reinvestment of
dividends and
distributions 51,658 50,558 684,457 638,689
Shares converted
to Class A (1,804) -0- (23,470) -0-
Shares redeemed (703,582) (859,461) (9,300,020) (10,363,603)
Net increase(decrease) (95,728) 3,670 $ (1,179,810) $ 328,656
CLASS C
Shares sold 198,597 474,208 $ 2,664,787 $ 5,898,558
Shares issued in
reinvestment of
dividends and
distributions 32,458 29,986 429,912 379,781
Shares redeemed (349,078) (486,148) (4,605,988) (5,771,671)
Net increase(decrease) (118,023) 18,046 $ (1,511,289) $ 506,668
34
FINANCIAL HIGHLIGHTS ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
---------------------------------------------------------------
CLASS A
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $ 9.41 $11.05 $10.19 $ 9.96
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .58 .58 .57 .61 .65
Net realized and unrealized gain (loss)
on investments .06 1.04 (1.37) .88 .28
Net increase (decrease) in net asset
value from operations .64 1.62 (.80) 1.49 .93
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.58) (.57) (.62) (.65)
Distributions in excess of net
investment income -0- -0- (.03) -0- -0-
Distributions from net realized gains -0- -0- (.24) (.01) (.05)
Total dividends and distributions (.58) (.58) (.84) (.63) (.70)
Net asset value, end of year $10.51 $10.45 $ 9.41 $11.05 $10.19
TOTAL RETURN
Total investment return based on net
asset value(b) 6.32% 17.73% (7.65)% 14.94% 9.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $325,288 $338,311 $338,814 $386,484 $261,895
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .69% .71% .62% .65% .83%
Expenses, before waivers/reimbursements 1.10% 1.09% 1.09% 1.08% 1.11%
Net investment income, net of waivers/
reimbursements 5.55% 5.84% 5.61% 5.69% 6.35%
Portfolio turnover rate 137% 118% 110% 233% 86%
</TABLE>
See footnote summary on page 49.
35
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
---------------------------------------------------
CLASS B
---------------------------------------------------
JANUARY 4,
1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.45 $9.41 $11.05 $10.43
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .51 .51 .50 .44
Net realized and unrealized gain (loss)
on investments .06 1.04 (1.38) .63
Net increase (decrease) in net asset
value from operations .57 1.55 (.88) 1.07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.50) (.45)
Distributions in excess of net
investment income -0- -0- (.02) -0-
Distributions from net realized gains -0- -0- (.24) -0-
Total dividends and distributions (.51) (.51) (.76) (.45)
Net asset value, end of period $10.51 $10.45 $9.41 $11.05
TOTAL RETURN
Total investment return based on net
asset value(b) 5.61% 16.91% (8.34)% 10.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $214,994 $252,357 $250,391 $216,489
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.40% 1.42% 1.32% 1.36%(d)
Expenses, before waivers/reimbursements 1.81% 1.80% 1.80% 1.78%(d)
Net investment income, net of waivers/
reimbursements 4.85% 5.13% 4.91% 4.59%(d)
Portfolio turnover rate 137% 118% 110% 233%
</TABLE>
See footnote summary on page 49.
36
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
---------------------------------------------------
CLASS C
---------------------------------------------------
MAY 3,1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.45 $ 9.41 $11.05 $10.70
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .51 .51 .50 .26
Net realized and unrealized gain (loss)
on investments .06 1.04 (1.38) .36
Net increase (decrease) in net asset
value from operations .57 1.55 (.88) .62
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.50) (.27)
Distributions in excess of net
investment income -0- -0- (.02) -0-
Distributions from net realized gains -0- -0- (.24) -0-
Total dividends and distributions (.51) (.51) (.76) (.27)
Net asset value, end of period $10.51 $10.45 $ 9.41 $11.05
TOTAL RETURN
Total investment return based on net
asset value(b) 5.62% 16.93% (8.33)% 5.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $96,134 $108,068 $133,249 $150,953
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.39% 1.41% 1.31% 1.36%(d)
Expenses, before waivers/reimbursements 1.80% 1.78% 1.79% 1.78%(d)
Net investment income, net of waivers/
reimbursements 4.85% 5.16% 4.89% 4.17%(d)
Portfolio turnover rate 137% 118% 110% 233%
</TABLE>
See footnote summary on page 49.
37
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
INSURED NATIONAL PORTFOLIO
--------------------------------------------------------------
CLASS A
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.07 $ 8.96 $10.76 $ 9.87 $ 9.88
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .51 .51 .53 .56 .60
Net realized and unrealized gain (loss)
on investments .22 1.13 (1.40) .96 .15
Net increase (decrease) in net asset
value from operations .73 1.64 (.87) 1.52 .75
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.52) (.51) (.53) (.57) (.60)
Distributions in excess of net
investment income -0- (.02) (.01) -0- -0-
Distributions from net realized gains -0- -0- (.39) (.06) (.16)
Total dividends and distributions (.52) (.53) (.93) (.63) (.76)
Net asset value, end of year $10.28 $10.07 $ 8.96 $10.76 $ 9.87
TOTAL RETURN
Total investment return based on net
asset value(b) 7.43% 18.72% (8.69)% 15.82% 7.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $160,425 $165,548 $153,656 $185,876 $149,632
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.02% 1.01% .66% .73% .81%
Expenses, before waivers/reimbursements 1.12% 1.12% 1.11% 1.11% 1.12%
Net investment income, net of waivers/
reimbursements 5.04% 5.37% 5.40% 5.40% 6.04%
Portfolio turnover rate 157% 171% 149% 165% 105%
</TABLE>
See footnote summary on page 49.
38
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INSURED NATIONAL PORTFOLIO
---------------------------------------------------
CLASS B
---------------------------------------------------
JANUARY 4,
1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.07 $ 8.96 $10.76 $10.10
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .44 .45 .46 .40
Net realized and unrealized gain (loss)
on investments .22 1.12 (1.40) .66
Net increase (decrease) in net asset
value from operations .66 1.57 (.94) 1.06
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.45) (.45) (.46) (.40)
Distributions in excess of net
investment income -0- (.01) (.01) -0-
Distributions from net realized gains -0- -0- (.39) -0-
Total dividends and distributions (.45) (.46) (.86) (.40)
Net asset value, end of period $10.28 $10.07 $ 8.96 $10.76
TOTAL RETURN
Total invesment return based on net
asset value(b) 6.74% 17.91% (9.38)% 10.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $52,156 $58,990 $51,439 $42,954
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.73% 1.72% 1.37% 1.45%(d)
Expenses, before waivers/reimbursements 1.83% 1.83% 1.82% 1.83%(d)
Net investment income, net of waivers/
reimbursements 4.32% 4.65% 4.71% 4.31%(d)
Portfolio turnover rate 157% 171% 149% 165%
</TABLE>
See footnote summary on page 49.
39
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INSURED NATIONAL PORTFOLIO
---------------------------------------------------
CLASS C
---------------------------------------------------
MAY 3,1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.07 $ 8.96 $10.76 $10.41
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .44 .45 .46 .24
Net realized and unrealized gain (loss)
on investments .22 1.12 (1.40) .35
Net increase (decrease) in net asset
value from operations .66 1.57 (.94) .59
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.45) (.45) (.46) (.24)
Distributions in excess of net
investment income -0- (.01) (.01) -0-
Distributions from net realized gains -0- -0- (.39) -0-
Total dividends and distributions (.45) (.46) (.86) (.24)
Net asset value, end of period $10.28 $10.07 $ 8.96 $10.76
TOTAL RETURN
Total invesment return based on net
asset value(b) 6.74% 17.91% (9.38)% 5.75%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $22,763 $22,265 $24,112 $28,862
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.72% 1.71% 1.36% 1.45%(d)
Expenses, before waivers/reimbursements 1.82% 1.82% 1.81% 1.83%(d)
Net investment income, net of waivers/
reimbursements 4.34% 4.69% 4.68% 3.98%(d)
Portfolio turnover rate 157% 171% 149% 165%
</TABLE>
See footnote summary on page 49.
40
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO
---------------------------------------------------------------
CLASS A
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.62 $ 8.72 $10.17 $ 9.53 $ 9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .55 .55 .55 .57 .60
Net realized and unrealized gain (loss)
on investments .04 .90 (1.40) .79 .24
Net increase (decrease) in net asset
value from operations .59 1.45 (.85) 1.36 .84
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.55) (.55) (.55) (.58) (.60)
Distributions in excess of net
investment income -0- -0- (.01) -0- -0-
Distributions from net realized gains -0- -0- (.04) (.14) (.01)
Total dividends and distributions (.55) (.55) (.60) (.72) (.61)
Net asset value, end of year $ 9.66 $ 9.62 $ 8.72 $ 10.17 $ 9.53
TOTAL RETURN
Total investment return based on net
asset value(b) 6.30% 17.10% (8.76)% 14.71% 9.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $179,452 $183,987 $182,170 $214,259 $162,549
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .64% .75% .66% .68% .70%
Expenses, before waivers/reimbursements 1.11% 1.12% 1.11% 1.13% 1.13%
Net investment income, net of waivers/
reimbursements 5.66% 5.93% 5.75% 5.76% 6.37%
Portfolio turnover rate 64% 69% 69% 63% 69%
</TABLE>
See footnote summary on page 49.
41
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO
---------------------------------------------------
CLASS B
---------------------------------------------------
JANUARY 4,
1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.62 $ 8.72 $10.17 $ 9.61
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .48 .48 .48 .41
Net realized and unrealized gain (loss)
on investments .04 .90 (1.41) .56
Net increase (decrease) in net asset
value from operations .52 1.38 (.93) .97
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.48) (.47) (.41)
Distributions in excess of net
investment income -0- -0- (.01) -0-
Distributions from net realized gains -0- -0- (.04) -0-
Total dividends and distributions (.48) (.48) (.52) (.41)
Net asset value, end of period $ 9.66 $ 9.62 $ 8.72 $10.17
TOTAL RETURN
Total investment return based on net
asset value(b) 5.52% 16.19% (9.44)% 10.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $96,959 $94,400 $81,941 $58,504
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.35% 1.45% 1.36% 1.39%(d)
Expenses, before waivers/reimbursements 1.82% 1.83% 1.82% 1.84%(d)
Net investment income, net of waivers/
reimbursements 4.95% 5.21% 5.05% 4.70%(d)
Portfolio turnover rate 64% 69% 69% 63%
</TABLE>
See footnote summary on page 49.
42
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO
----------------------------------------------------
CLASS C
----------------------------------------------------
MAY 3,1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.62 $ 8.72 $10.17 $ 9.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .48 .48 .48 .24
Net realized and unrealized gain (loss)
on investments .04 .90 (1.41) .29
Net increase (decrease) in net asset
value from operations .52 1.38 (.93) .53
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.48) (.47) (.25)
Distributions in excess of net
investment income -0- -0- (.01) -0-
Distributions from net realized gains -0- -0- (.04) -0-
Total dividends and distributions (.48) (.48) (.52) (.25)
Net asset value, end of period $ 9.66 $ 9.62 $ 8.72 $10.17
TOTAL RETURN
Total investment return based on net
asset value(b) 5.52% 16.19% (9.44)% 5.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $34,562 $32,259 $34,646 $38,245
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.34% 1.44% 1.36% 1.38%(d)
Expenses, before waivers/reimbursements 1.81% 1.82% 1.81% 1.84%(d)
Net investment income, net of waivers/
reimbursements 4.95% 5.24% 5.03% 4.42%(d)
Portfolio turnover rate 64% 69% 69% 63%
</TABLE>
See footnote summary on page 49.
43
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
CALIFORNIA PORTFOLIO
---------------------------------------------------------------
CLASS A
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $ 9.43 $10.90 $10.06 $ 9.97
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .58 .59 .59 .61 .65
Net realized and unrealized gain (loss)
on investments .14 1.02 (1.41) .85 .13
Net increase (decrease) in net asset
value from operations .72 1.61 (.82) 1.46 .78
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.59) (.59) (.61) (.65)
Distributions from net realized gains -0- -0- (.06) (.01) (.04)
Total dividends and distributions (.58) (.59) (.65) (.62) (.69)
Net asset value, end of year $10.59 $10.45 $ 9.43 $10.90 $10.06
TOTAL RETURN
Total investment return based on net
asset value(b) 7.15% 17.55% (7.73)% 14.90% 8.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $460,444 $478,535 $470,308 $531,293 $361,661
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .77% .74% .64% .74% .59%
Expenses, before waivers/reimbursements 1.05% 1.04% 1.05% 1.06% 1.07%
Net investment income, net of waivers/
reimbursements 5.57% 5.90% 5.78% 5.74% 6.38%
Portfolio turnover rate 49% 39% 45% 83% 77%
</TABLE>
See footnote summary on page 49.
44
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CALIFORNIA PORTFOLIO
---------------------------------------------------
CLASS B
---------------------------------------------------
JANUARY 4,
1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.45 $9.43 $10.90 $10.27
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .51 .51 .52 .44
Net realized and unrealized gain (loss)
on investments .14 1.02 (1.41) .63
Net increase (decrease) in net asset
value from operations .65 1.53 (.89) 1.07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.52) (.44)
Distributions from net realized gains -0- -0- (.06) -0-
Total dividends and distributions (.51) (.51) (.58) (.44)
Net asset value, end of period $10.59 $10.45 $9.43 $10.90
TOTAL RETURN
Total investment return based on net
asset value(b) 6.37% 16.64% (8.43)% 10.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $164,895 $166,759 $160,879 $126,688
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.47% 1.45% 1.35% 1.44%(d)
Expenses, before waivers/reimbursements 1.75% 1.75% 1.75% 1.78%(d)
Net investment income, net of waivers/
reimbursements 4.87% 5.19% 5.07% 4.66%(d)
Portfolio turnover rate 49% 39% 45% 83%
</TABLE>
See footnote summary on page 49.
45
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CALIFORNIA PORTFOLIO
---------------------------------------------------
CLASS C
---------------------------------------------------
MAY 3,1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.45 $ 9.43 $10.90 $10.54
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .51 .51 .52 .26
Net realized and unrealized gain (loss)
on investments .14 1.02 (1.41) .36
Net increase (decrease) in net asset
value from operations .65 1.53 (.89) .62
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.52) (.26)
Distributions from net realized gains -0- -0- (.06) -0-
Total dividends and distributions (.51) (.51) (.58) (.26)
Net asset value, end of period $10.59 $10.45 $ 9.43 $10.90
TOTAL RETURN
Total investment return based on net
asset value(b) 6.38% 16.64% (8.43)% 5.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $90,917 $87,793 $103,622 $117,379
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.47% 1.44% 1.34% 1.44%(d)
Expenses, before waivers/reimbursements 1.75% 1.74% 1.75% 1.78%(d)
Net investment income, net of waivers/
reimbursements 4.87% 5.22% 5.06% 4.42%(d)
Portfolio turnover rate 49% 39% 45% 83%
</TABLE>
See footnote summary on page 49.
46
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
INSURED CALIFORNIA PORTFOLIO
---------------------------------------------------------------
CLASS A
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $13.32 $11.79 $14.25 $12.99 $12.80
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .69 .68 .69 .70 .76
Net realized and unrealized gain (loss)
on investments .06 1.54 (1.99) 1.30 .18
Net increase (decrease) in net asset
value from operations .75 2.22 (1.30) 2.00 .94
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.68) (.68) (.69) (.71) (.75)
Dividends in excess of net
investment income -0- (.01) -0- -0- -0-
Distributions from net realized gains -0- -0- (.47) (.03) -0-
Total dividends and distributions (.68) (.69) (1.16) (.74) (.75)
Net asset value, end of year $13.39 $13.32 $11.79 $14.25 $12.99
TOTAL RETURN
Total investment return based on net
asset value(b) 5.79% 19.29% (9.73)% 15.64% 7.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $101,542 $103,940 $94,857 $120,734 $90,477
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.08% 1.04% .82% .94% .78%
Expenses, before waivers/reimbursements 1.08% 1.09% 1.08% 1.08% 1.09%
Net investment income, net of waivers/
reimbursements 5.19% 5.34% 5.29% 5.06% 5.77%
Portfolio turnover rate 118% 103% 100% 186% 60%
</TABLE>
See footnote summary on page 49.
47
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INSURED CALIFORNIA PORTFOLIO
---------------------------------------------------
CLASS B
---------------------------------------------------
JANUARY 4,
1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.32 $11.79 $14.25 $13.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .60 .58 .60 .49
Net realized and unrealized gain (loss)
on investments .05 1.54 (2.00) .89
Net increase (decrease) in net asset
value from operations .65 2.12 (1.40) 1.38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.58) (.59) (.50)
Distributions in excess of net
investment income -0- (.01) -0- -0-
Distributions from net realized gains -0- -0- (.47) -0-
Total dividends and distributions (.58) (.59) (1.06) (.50)
Net asset value, end of period $13.39 $13.32 $11.79 $14.25
TOTAL RETURN
Total investment return based on net
asset value(b) 4.99% 18.35% (10.43)% 10.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $26,696 $27,816 $24,591 $21,234
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.79% 1.74% 1.53% 1.65%(d)
Expenses, before waivers/reimbursements 1.79% 1.80% 1.78% 1.79%(d)
Net investment income, net of waivers/
reimbursements 4.49% 4.61% 4.60% 3.85%(d)
Portfolio turnover rate 118% 103% 100% 186%
</TABLE>
See footnote summary on page 49.
48
ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INSURED CALIFORNIA PORTFOLIO
---------------------------------------------------
CLASS C
---------------------------------------------------
MAY 3,1993(C)
YEAR ENDED OCTOBER 31, TO
------------------------------------- OCTOBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.32 $11.79 $14.25 $13.78
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) .60 .58 .60 .29
Net realized and unrealized gain (loss)
on investments .05 1.54 (2.00) .48
Net increase (decrease) in net asset
value from operations .65 2.12 (1.40) .77
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.58) (.59) (.30)
Distributions in excess of net
investment income -0- (.01) -0- -0-
Distributions from net realized gains -0- -0- (.47) -0-
Total dividends and distributions (.58) (.59) (1.06) (.30)
Net asset value, end of period $13.39 $13.32 $11.79 $14.25
TOTAL RETURN
Total investment return based on net
asset value(b) 4.99% 18.35% (10.43)% 5.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $12,826 $14,323 $12,472 $15,971
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.78% 1.74% 1.52% 1.65%(d)
Expenses, before waivers/reimbursements 1.78% 1.79% 1.77% 1.79%(d)
Net investment income, net of waivers/
reimbursements 4.49% 4.64% 4.59% 3.74%(d)
Portfolio turnover rate 118% 103% 100% 186%
</TABLE>
(a) Net of fees waived and expenses reimbursed by the Adviser.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charge or contingent
deferred sales charge is not reflected in the calculation of total investment
return. Total investment return calculated for a period less than one year is
not annualized.
(c) Commencement of distribution.
(d) Annualized
49
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE MUNICIPAL INCOME FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS ALLIANCE MUNICIPAL INCOME FUND, INC.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of Alliance Municipal Income Fund,
Inc. (comprising, respectively, the National, Insured National, New York,
California, and Insured California Portfolios) as of October 31, 1996, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Alliance Municipal Income Fund,
Inc. at October 31, 1996, the results of their operations for the year then
ended, the changes in their net assets for each of the two years in the period
then ended, and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
New York, New York
December 3, 1996
50
<PAGE>
_______________________________________________________________
APPENDIX A: BOND AND COMMERCIAL PAPER RATINGS
_______________________________________________________________
Standard & Poor's Bond Ratings
A Standard & Poor's municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to
a specific obligation. Debt rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt
rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
a debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest
and to repay principal for debt in this category than for higher
rated categories.
Debt rated "BB", "B", "CCC" or "CC" is regarded, on
balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal are in
arrears.
The ratings from "AAA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Bond Ratings
Excerpts from Moody's description of its municipal bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations; Baa
- - considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured and have speculative
A-1
<PAGE>
characteristics as well; Ba, B, Caa, Ca, C - protection of
interest and principal payments is questionable; Ba indicates
some speculative elements while Ca represents a high degree of
speculation and C represents the lowest rated class of bonds;
Caa, Ca and C bonds may be in default. Moody's applies numerical
modifiers 1, 2 and 3 in each generic rating classification from
Aa to B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic 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.
S&P's highest rating for short-term municipal loans is
SP-1. S&P 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. 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 S&P (S&P 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 S&P 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
A-2
<PAGE>
obligations. Commercial paper issuers rated "A" by S&P 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.
Fitch Investors Service Bond Ratings
AAA. Securities of this rating are regarded as strictly
high-grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other than through changes in the money rate.
The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public
utility fields, though some industrial obligations have this
rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with
such stability of applicable earnings that safety is beyond
reasonable question whatever changes occur in conditions. Other
features may enter in, such as a wide margin of protection
through collateral security or direct lien on specific property
as in the case of high class equipment certificates or bonds that
are first mortgages on valuable real estate. Sinking funds or
voluntary reduction of the debt by call or purchase are often
factors, while guarantee or assumption by parties other than the
original debtor may also influence the rating.
AA. Securities in this group are of safety virtually
beyond question, and as a class are readily salable while many
are highly active. Their merits are not greatly unlike those of
the AAA class, but a security so rated may be of junior though
strong lien--in many cases directly following an AAA security--or
the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured but
influenced as to ratings by the lesser financial power of the
enterprise and more local type of market.
A. A securities are strong investments and in many
cases of highly active market, but are not so heavily protected
as the two upper classes or possibly are of similar security but
less quickly salable. As a class they are more sensitive in
standing and market to material changes in current earnings of
the company. With favoring conditions such securities are likely
to work into a high rating, but in occasional instances changes
cause the rating to be lowered.
BBB. BBB rated bonds are considered to be investment
grade and of satisfactory quality. The obligor's ability to pay
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interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds with
higher ratings.
Fitch Commercial Paper and
Certificate of Deposit Ratings
Fitch Commercial Paper Ratings are assigned at the
request of an issuer to debt obligations with an original
maturity not in excess of 270 days. The ratings reflect Fitch
current appraisal of the degree of assurance of timely payment of
such debt. Fitch compensated for this service by an annual fee
paid by the issuer under a contractual agreement which specifies
among other things that ratings may be changed or withdrawn at
any time if, in Fitch's sole judgment, changing circumstances
warrant such action.
Fitch Certificate of Deposit ratings are assigned at the
request of the issuer to deposits with maturities of up to three
years. Ratings apply to uninsured principal and interest and
reflect only those credit characteristics inherent in
certificates of deposit. Such ratings should be considered only
in the context of ratings assigned to certificates of deposit and
not to ratings which may be assigned to non-deposit liabilities.
Ratings for Cds with maturities over 3 years will be assigned
bond rating symbols. For definitions refer to page 1 of the
Rating Register.
Fitch commercial paper ratings are grouped into four
categories, two of which are defined below:
Fitch-1 (Highest Grade) Commercial paper assigned this
rating is regarded as having the strongest degree of assurance
for timely payment.
Fitch-2 (Very Good Grade) issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than the strongest issues.
Fitch Investment Note Ratings
Fitch investment Note Ratings are grouped into four
categories with the indicated symbols. The ratings on notes with
maturities generally up to three years reflect Fitch's current
appraisal of the degree of assurance of timely payment, whatever
the source.
FIN-1 -- Notes assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
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FIN-2 -- Notes assigned this rating reflect a degree of
assurance for timely payment only slightly less in degree than
the highest category.
A plus symbol may be used in the three highest
categories to indicate relative standing. The Note Ratings will
usually correspond with Bond Ratings, although certain security
enhancements or market access may mean that notes will not track
bond.
Further Rating Distinctions
While ratings provide an assessment of the obligor's
capacity to pay debt service, it should be noted that the
definition of obligor expands as layers of security are added. If
municipal securities are guaranteed by third parties then the
"underlying" issuers as well as the "primary" issuer will be
evaluated during the rating process. In some cases, depending on
the scope of the guaranty, such as bond insurance, bank letters
of credit or collateral, the credit enhancement will provide the
sole basis for the rating given.
Minimum Rating(s) Requirements
For minimum rating(s) requirements for the Portfolios'
securities, please refer to "Description of Portfolio(s):
Municipal Securities - Further Information" in the Prospectuses.
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APPENDIX B: FUTURES CONTRACTS AND RELATED OPTIONS
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Futures Contracts
Each Portfolio may enter into contracts for the purchase
or sale for future delivery of municipal securities or U.S.
Government Securities, or contracts based on financial indices
including any index of municipal securities or U.S. Government
Securities. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, a Portfolio must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1/2%-5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Portfolio would provide or receive cash that reflects any decline
or increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
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Interest Rate Futures
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as the Portfolios of
the Fund, which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from
fluctuations in interest rates without actually buying or selling
fixed-income securities. For example, if interest rates were
expected to increase, the Portfolio might enter into futures
contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the
debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt securities in the Portfolio would
decline, but the value of the futures contracts to the Portfolio
would increase at approximately the same rate, thereby keeping
the net asset value of the Portfolio from declining as much as it
otherwise would have. The Portfolio could accomplish similar
results by selling debt securities and investing in bonds with
short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique
allows the Portfolio to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, a Portfolio could
take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could then buy debt securities on
the cash market. To the extent the Portfolio enters into futures
contracts for this purpose, the assets in the segregated account
maintained to cover the Portfolio's obligations with respect to
such futures contracts will consist of cash, cash equivalents or
high-quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the
initial and variation margin payments made by the Portfolio with
respect to such futures contracts.
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
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liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
each Portfolio believes that use of such contracts will benefit
the Portfolio, if the Adviser's investment judgment about the
general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged
against the possibility of an increase in interest rates which
would adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Portfolio will
lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but
will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Futures Contracts
Each Portfolio intends to purchase and write options on
futures contracts for hedging purposes. The Portfolios are not
commodity pools and all transactions in futures contracts and
options on futures contracts engaged in by the Portfolios must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates.
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The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security which is deliverable upon exercise of the futures
contract or securities comprising an index. If the futures price
at expiration of the option is below the exercise price, a
Portfolio that has written a call will retain the full amount of
the option premium which provides a partial hedge against any
decline that may have occurred in its portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security which is
deliverable upon the exercise of futures contract or securities
comprising an index. If the futures price at the expiration of
the option is higher than the exercise price, a Portfolio that
has written a put will retain the full amount of the option
premium which provides a partial hedge against any increase in
the price of securities which it intends to purchase. If a put
or call option a Portfolio has written is exercised, that
Portfolio will incur a loss which will be reduced by the amount
of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may
purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases
an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
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APPENDIX C: OPTIONS ON MUNICIPAL AND U.S. GOVERNMENT SECURITIES
________________________________________________________________
Options on Municipal and U.S. Government Securities
Each Portfolio will only write "covered" put and call
options on municipal securities and U.S. Government Securities,
unless such options are written for cross-hedging purposes. The
manner in which such options will be deemed "covered" is
described in the Prospectus under the heading "Investment
Policies and Restrictions -- Additional Investment Policies --
Options on Municipal and U.S. Government Securities."
The writer of an option may have no control when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing
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transaction will permit the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other
Portfolio investments. If a Portfolio desires to sell a
particular security from its portfolio on which it has written a
call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Portfolio will realize a profit from a closing
transaction if the price of the purchase transaction is less than
the premium received from writing the option or the price
received from a sale transaction is more than the premium paid to
purchase the option; a Portfolio will realize a loss from a
closing transaction if the price of the purchase transaction is
more than the premium received from writing the option or the
price received from a sale transaction is less than the premium
paid to purchase the option. Because increases in the market of
a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by a
Portfolio.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that a Portfolio would have to exercise the options in order to
realize any profit. If a Portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following: (i)
there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities
exchange ("National Exchange") on opening transactions or closing
transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on a
National Exchange, (v) the facilities of an National Exchange or
the Options Clearing Corporation may not at all times be adequate
to handle current trading volume, or (vi) one or more National
Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which
event the secondary market on that National Exchange (or in that
class or series of options) would cease to exist, although
outstanding options on that National Exchange that had been
issued by the Options Clearing Corporation as a result of trades
on that National Exchange would continue to be exercisable in
accordance with their terms.
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Each Portfolio may write options in connection with buy-
and-write transactions; that is, a Portfolio may purchase a
security and then write a call option against that security. The
exercise price of the call a Portfolio determines to write will
depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-
the-money"), equal to ("at-the-money") or above ("out-of-the-
money") the current value of the underlying security at the time
the option is written. Buy-and-write transactions using in-the-
money call options may be used when it is expected that the price
of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-
the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance
moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is
expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, a
Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the
difference between the Portfolio's purchase price of the security
and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, a Portfolio may elect to
close the position or take delivery of the security at the
exercise price and a Portfolio's return will be the premium
received from the put options minus the amount by which the
market price of the security is below the exercise price. Out-of-
the-money, at-the-money, and in-the-money put options may be used
by the Fund in the same market environments that call options are
used in equivalent buy-and-write transactions.
Each Portfolio may purchase put options to hedge against
a decline in the value of its portfolio. By using put options in
this way, a Portfolio will reduce any profit it might otherwise
have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
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Each Portfolio may purchase call options to hedge
against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Portfolio.
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