This is filed pursuant to Rule 497(e).
File Nos. 33-7812 and 811-04791.
<PAGE>
(LOGO) ALLIANCE MUNICIPAL INCOME FUND, INC.
________________________________________________________________
c/o Alliance Fund Services, 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 1, 2000
________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the Prospectus, dated February 1, 2000, 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 (the "Prospectus") 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 "Prospectus(es)"). 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........................
Management of the Fund......................................
Expenses of the Fund........................................
Purchase of Shares..........................................
Redemption and Repurchase of Shares.........................
Shareholder Services........................................
Net Asset Value.............................................
Dividends, Distributions and Taxes..........................
Brokerage and Portfolio Transactions........................
General Information.........................................
Report of Independent Auditors and Financial
Statements................................................
<PAGE>
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
________________________________________________________________
Alliance Municipal Income Fund, Inc. (the "Fund") is an
open-end investment company comprising the diversified National
and Insured National Portfolios and the non-diversified
California, Insured California and New York Portfolios. 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
designated "fundamental policies" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act") 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.
All of the Portfolios invest at least 65% of their total
assets in municipal securities and the California, Insured
California, and New York Portfolios ("the State Portfolios")
invest at least 65% of their total assets in the municipal
securities of the named state. These policies may not change
without shareholder approval. The average dollar weighted
maturity of the securities in each Portfolio will normally range
between 10 and 30 years. In addition, each Portfolio will invest
at least 80% of its net assets in municipal securities with
interest that is exempt from federal income tax. This policy is
fundamental for each Portfolio except the National Portfolio,
Insured National Portfolio, California Portfolio and New York
Portfolios. With respect to these Portfolios, this policy is not
fundamental but will not be changed without prior notice to
shareholders.
National and Insured National Portfolios
The National Portfolio invests principally in a diversified
portfolio of municipal securities with interest that is wholly
exempt from federal income taxes except when received by a
shareholder who is subject to the AMT. The Insured National
Portfolio invests principally in a diversified portfolio of AMT-
Exempt bonds that also are insured securities. The National and
Insured National Portfolios may invest 25% or more of their total
assets in municipal securities whose issuers are located in the
same state.
2
<PAGE>
The investment policies of the Insured National Portfolio
differ from those of the National Portfolio in two respects:
- the National Portfolio is permitted to invest
without limit in AMT-Subject bonds and the Insured
National Portfolio invests principally in AMT-
Exempt bonds; and
- 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.
State Portfolios
Each of the State Portfolios is non-diversified and
invests principally in municipal securities with interest that is
wholly exempt from federal income tax. Substantially all the
interest from these securities is also exempt from state personal
income tax, or in the case of Florida, the Florida intangible
personal property tax. At least 65% and normally substantially
all of the total assets of each State Portfolio will be invested
in municipal securities of the named state. Each State
Portfolio, other than the Insured California Portfolio, may
invest without limit in AMT-Subject bonds.
California and Insured California Portfolios
As a matter of fundamental policy, at least 80% of the
California Portfolio's total assets normally will be invested in
municipal securities.
As a matter of fundamental policy, the Insured
California Portfolio normally invests at least 80% of its total
assets in municipal bonds, 80% of its total assets in AMT-Exempt
bonds and at least 65% of its total assets in insured securities.
The New York Portfolio may invest in municipal
securities issued by governmental entities (for example, U.S.
territories) outside New York State if the municipal securities
generate interest exempt from federal income tax and personal
income tax in New York State. When Alliance believes that
municipal securities of New York State that meet the Portfolio's
quality standards are not available, the Portfolio may invest up
to 35% of its total assets in securities whose interest payments
are only federal tax-exempt.
3
<PAGE>
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. 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 Portfolio and Insured California
normally will invest at least 65% and 80%, respectively, of their
total assets in insured securities. Based upon the expected
composition of each of the Insured National Portfolio and Insured
California Portfolios, Alliance estimates that the annual
premiums for insurance will range from .12 to 1% to .75 of 1% of
the average net assets of each Portfolio. Although the insurance
feature reduces certain financial risks, the premiums for
insurance, which are paid from each of the Portfolio's assets,
will reduce their current yields. Insurance is not a substitute
for the basic credit of an issuer, but supplements the existing
credit and provides additional credit support. While insurance
for municipal securities held by the Insured National Portfolio
and Insured California Portfolio 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 Portfolio and Insured California Portfolio
may obtain insurance on their municipal securities or purchase
insured municipal securities covered by policies issued by any
insurer having a claims-paying ability rated A or higher by
Moody's, S&P, Duff & Phelps or Fitch. No more than 25% of each
Portfolio's total assets may be invested in insured municipal
securities covered by policies issued by insurers having a
claims-paying ability rated below AA by Moody's, S&P, Duff &
Phelps or Fitch.
The Portfolios will limit their investments in illiquid
securities to 10% of their net assets.
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
4
<PAGE>
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
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.
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
state's issues with those of more diversified portfolios,
5
<PAGE>
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 May 1999 with respect New York and
December 1999 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
6
<PAGE>
on AMT-Subject bonds in which the Portfolios will invest.
Therefore, the general risk factors 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 of the State of New York, dated May 15, 1999,
relating to $250,000,000 City of New York General Obligation
Bonds, Fiscal 1999, Series J, the Annual Information Statement of
the State of New York, dated August 24, 1999, the Annual
Information Statement Update of the State of New York, dated
November 5, 1999.
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
7
<PAGE>
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
the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds. Issuance
of the entire $4.7 billion bond authorization as of March 31,
1996 eliminated the need for the State's annual spring borrowing.
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.
Recent Developments
The national economy has maintained a robust rate of
growth during the past six quarters as the expansion, which is
well into its ninth year, continues.
The national expansion, if it continues through February
2000, will be the longest on record. Since early 1992,
approximately 19 million jobs have been added nationally. Output
growth has averaged 3.2 percent over this period, essentially the
same as the 3.3 percent average annual growth during the post-
World War II period. The State economy has also continued to
expand, with over 600,000 jobs added since late 1992. Employment
growth has been slower than in the nation during this period,
although the State's relative performance has improved in the
last two years. Growth in average wages in New York has
generally outperformed the nation, while growth in personal
income per capita has kept pace with the nation.
The State Division of Budget ("DOB") expects that
national economic growth will be quite robust throughout calendar
year 1999. Growth in real Gross Domestic Product for 1999 is
projected to be 4.0 percent, with a decline in net exports
overwhelmed by continued strong consumer spending. The projected
overall growth rate of the national economy for calendar year
1999 is nearly identical to the consensus forecast of a widely
followed survey of national economic forecasters. Inflation, as
measured by the Consumer Price Index, is projected to be about
2.1 percent, a modest increase despite strong economic growth.
Personal income and wages are projected to increase by 5.1
percent and 6.3 percent respectively.
8
<PAGE>
The forecast of the State's economy shows continued
expansion during the 1999 calendar year, with employment growth
gradually slowing as the year progresses. The financial and
business service sectors are expected to continue to do well,
while employment in the manufacturing sector is expected to post
a modest decline. On an average annual basis, the employment
growth rate in the State is expected to be somewhat lower than in
1998 and the unemployment rate is expected to drop further to 5.1
percent. Personal income is expected to record moderate gains in
1999. Wage growth in 1999 is expected to be slower than in the
previous year as the recent robust growth in bonus payments
moderates.
1999-2000 Fiscal Year
In 1999-2000, General Fund disbursements, including
transfers to support capital projects, debt service and other
funds, are estimated at $27.26 billion, an increase of $868
million or 2.38 percent over 1998-99. Projected spending under
the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments.
This change is the net result of spending actions that occurred
during negotiations on the Budget. The increase in General Fund
spending is comprised of $1.1 billion in legislative additions to
the Executive Budget (primarily in education), offset by various
actions, including reestimates of required spending based on
year-to-date results and the identification of certain other
resources that offset spending, such as $250 million from
commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of
the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. The MMIA was established
in 1983 to provide excess liability insurance to doctors and
medical providers. Legislation enacted with the 1999-2000 budget
initiates the process of MMIA privatization and transfers excess
fund balances to the State.
The 1999-2000 enacted budget provides for $831 million
in new funding for public schools, the largest year-to-year
increase in State history. The budget also enacts several new
tax cuts valued at $375 million when fully phased in by 2003-04.
None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help
offset the costs of previously enacted tax cuts that take effect
after 1999-2000.
9
<PAGE>
On October 29, 1999, the State issued its Mid Year
Update to the 1999-2000 Financial Plan. In the Mid Year Update,
the State continues to project that the State Financial Plan for
1999-2000 will remain in balance. The State now projects total
receipts and transfers from other funds of $39.32 billion in
1999-2000, an increase of $15 million over the amount projected
in the Annual Information Statement. The State also lowered its
disbursement projections by $10 million, with total disbursements
of $37.35 billion now expected for the current fiscal year. The
additional receipts and lowered disbursements increase the
State's projected cash basis surplus by $25 million over the
August Financial Plan. The State earmarked the additional
resources for the Contingency Reserve Fund.
The 1999-2000 Financial Plan projects a closing balance
of $2.87 billion in the General Fund. The balance is comprised
of the $1.82 billion surplus from 1998-99 that has been set aside
to finance already-enacted tax cuts, $473 million in the Tax
Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $132 million in the contingency
Reserve Fund (CRF) (after the proposed deposit of $25 million),
and $200 million in the Community Projects Fund (CPF), which
finances legislative initiatives. The State expects to close
1999-2000 with cash balances in these funds at their highest
level ever.
The State ended the first six months of the 1999-2000
fiscal year with a General Fund cash balance of $5.42 billion,
roughly $295 million lower than projected in the cash flow
accompanying the August Financial Plan. Total receipts,
including transfers from other funds, were approximately $11
million less than expected, with the decrease comprised of lower
tax revenues ($25 million) and transfers from other funds ($8
million) offset in part by $22 million in higher miscellaneous
receipts. Total disbursements through the first six months of
the fiscal year were $16.88 billion, or $284 million higher than
projected in August.
Many complex political, social and economic forces
influence the State's economy and finances, which may in turn
affect the State Financial Plan. These forces may affect the
State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that
are not subject to the State's control. The State Financial Plan
is also necessarily based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to
predict accurately the timing and magnitude of changes in the
national and State economies. The Division of Budget believes
10
<PAGE>
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 in
this AIS, and those projections may be changed materially and
adversely from time to time.
1998-99 Fiscal Year
The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus
as reported by the DOB of $1.82 billion. The cash surplus was
derived primarily from higher-than-projected tax collections as a
result of continued economic growth, particularly in the
financial markets and the securities industries.
The State reported a General Fund closing cash balance
of $892 million, an increase of $254 million from the prior
fiscal year. The balance is held in three accounts within the
General Fund: the Tax Stabilization Reserve Fund (TSRF), the
Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $107 million, following a
deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of
$312 million.
The closing fund balance excludes $2.31 billion that the
State deposited into the tax refund reserve account at the close
of 1998-99 to pay for tax refunds in 1999-2000 of which $521
million was made available as a result of the Local Government
Assistance Corporation (LGAC) financing program and was required
to be on deposit as of March 31, 1999. The tax refund reserve
account transaction has the effect of decreasing reported
personal income tax receipts in 1998-99, while increasing
reported receipts in 1999-2000.
General Fund receipts and transfers from other funds for
the 1998-99 fiscal year totaled $36.74 billion, an increase of
6.34 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.49 billion for the 1998-99
fiscal year, an increase of 6.23 percent from 1997-98 levels.
1997-98 Fiscal Year
The State ended its 1997-98 fiscal year in balance on a
cash basis, with a General Fund cash surplus as reported by DOB
of approximately $2.04 billion. The cash surplus was derived
11
<PAGE>
primarily from higher-than-anticipated receipts and lower
spending on welfare, Medicaid, and other entitlement programs.
The General Fund had a closing balance of $638 million,
an increase of $205 million from the prior fiscal year. The
balance is held in three accounts within the General Fund: the
Tax Stabilization Reserve Fund ("TSRF"), the Contingency Reserve
Fund ("CRF") and the Community Projects Fund ("CPF"). The TSRF
closing balance was $400 million, following a required deposit of
$15 million (repaying a transfer made in 1991-92) and an
extraordinary deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the surplus. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of
$170 million, an increase of $95 million. The General Fund
closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on
deposit on March 31, 1998.
General Fund receipts and transfers from other funds for
the 1997-98 fiscal year (including net tax refund reserve account
activity) totaled $34.55 billion, an annual increase of
$1.51 billion, or 4.57 percent over 1996-97. General Fund
disbursements and transfers to other funds were $34.35 billion,
an annual increase of $1.45 or 4.41 percent.
1996-97 Fiscal Year
The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a 1996-97 General Fund cash
surplus as reported by DOB of approximately $1.42 billion. The
cash surplus was derived primarily from higher-than-expected
receipts and lower-than-expected spending for social services
programs.
The General Fund closing fund balance was $433 million,
an increase of $146 million from the 1995-96 fiscal year. The
balance included $317 million in the TSRF, after a required
deposit of $15 million and an additional deposit of $65 million
in 1996-97. The TSRF can 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 remains on
deposit in the CRF. This fund assists the State in financing any
extraordinary litigation during the fiscal year. The remaining
$75 million reflects amounts then on deposit in the Community
Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not
12
<PAGE>
include $1.86 billion in the tax refund reserve account, of which
$521 million was made available as a result of the LGAC financing
program and was required to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for
the 1996-97 fiscal year totaled $33.04 billion, an increase of
0.7 percent from the previous fiscal year (including net tax
refund reserve account activity). General Fund disbursements and
transfers to other funds totaled $32.90 billion for the 1996-97
fiscal year, an increase of 0.7 percent from the 1995-96 fiscal
year.
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 on an accrual basis in conformance
with 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.
1998-99 Fiscal Year
The State reported a General Fund operating surplus of
$1.078 billion for the 1998-99 fiscal year, as compared to an
operating surplus of $1.562 billion for the 1997-98 fiscal year.
As a result, the State reported an accumulated fund balance of
$1.645 billion in the General Fund. The 1998-99 fiscal year
operating surplus resulted, in part, from an increase in taxes
receivable of $516 million, a decrease in payables to local
government of $262 million, a decrease in accrued liabilities of
$129 million and a decrease in deferred revenues of $69 million.
These gains were partially offset by a decrease in other assets
of $117 million and an increase in tax refunds payable of $102
million.
Revenues increased $1.969 billion (5.7 percent) over the
prior fiscal year with increases in personal income, consumption
and use and other taxes, and miscellaneous revenues. Business
tax revenues fell from the prior fiscal year. Personal income
taxes grew $1.733 billion, an increase of nearly 9.3 percent.
The increase in personal income taxes was caused by strong
employment and wage growth and the continued strong performance
by the financial markets during 1998. Consumption and use taxes
increased $269 million, or 3.8 percent, due to increased consumer
confidence. Other taxes increased $73 million, or 6.9 percent.
13
<PAGE>
Miscellaneous revenues increased $145 million, a 5.6 percent
increase, primarily because of an increase in reimbursement from
regulated industries (e.g., banking and insurance) to fund the
State's administrative costs. Business taxes decreased nearly
$252 million, or 4.9 percent, because of prior year refunds and
carry forwards which were applied against the current year (1998)
liabilities.
Expenditures increased $1.862 billion (5.5 percent) from
the prior fiscal year, with the largest increases occurring in
State aid for education and general purpose aid spending.
Education expenditures grew $1.014 billion (9.1 percent) due
mainly to an increase in spending for support of public schools,
handicapped pupil education and municipal and community colleges.
General purpose aid increased nearly $329 million (56.5 percent)
due to statutory changes in the payment schedule. Personal
service and fringe benefit costs increased due to increases in
wages and continuing fringe benefits required by collective
bargaining agreements.
Net other financing sources decreased $626 million
(159.3 percent) primarily because appropriated transfers from the
Special Revenue Funds declined by over $230 million with
increases of $265 million in appropriated transfers to Special
Revenue, Debt Service and College and University Funds. In
addition, transfers to public benefit corporations increased over
$170 million primarily because of a change in reporting for
Roswell Park Cancer Institute.
An operating deficit of $117 million was reported for
the Special Revenue Funds for the 1998-99 fiscal year which
decreased the accumulated fund balance to $464 million. Revenues
increased $1.108 billion over the prior fiscal year (4.0 percent)
as a result of increases in tax and federal grants revenues.
Expenditures increased $1.308 billion (5.3 percent) as a result
of increased costs for local assistance grants. Net other
financing uses increased $34 million (.10 percent).
Debt Service Funds ended the 1998-99 fiscal year with an
operating surplus of $209 million and, as a result, the
accumulated fund balance increased to $2.07 billion. Revenues
increased $160 million (6.3 percent) primarily because of
increases in dedicated taxes. Debt service expenditures
increased $162 million (6.0 percent). Net other financing
sources increased $253 million (227.4 percent) due primarily to
increases in transfers from the General Fund, patient revenue
transfers and the establishment of the Debt Reduction Reserve
Fund.
14
<PAGE>
1997-98 Fiscal Year
The State completed its 1997-98 fiscal year with a
combined Governmental Funds operating surplus of $1.80 billion,
which included an operating surplus in the General Fund of
$1.56 billion, in Capital Projects Funds of $232 million and in
Special Revenue Funds of $49 million, offset in part by an
operating deficit of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of
$1.56 billion for the 1997-98 fiscal year, as compared to an
operating surplus of $1.93 billion for the 1996-97 fiscal year.
As a result, the State reported an accumulated surplus of
$567 million in the General Fund for the first time since it
began reporting its operations on a GAAP-basis. The 1997-98
fiscal year operating surplus resulted in part from the higher-
than-anticipated personal income tax receipts, an increase in
taxes receivable of $681 million, an increase in other assets of
$195 million and a decrease in pension liabilities of
$144 million. These gains were partially offset by an increases
in payables to local governments of $270 million and tax refunds
payable of $147 million.
Revenues increased $617 million (1.8 percent) over the
prior fiscal year, with increases in personal income, consumption
and use, and business taxes, and decreases reported for other
taxes, federal grants and miscellaneous revenues. Personal
income taxes grew $746 million, an increase of nearly 4.2
percent. The increase in personal income taxes resulted from
strong employment and wage growth and the strong performance by
the financial markets during 1997. Consumption and use taxes
increased $334 million, or 5.0 percent, spurred by increased
consumer spending. Business taxes grew $28 million, an increase
of 0.5 percent. Other taxes fell primarily because revenues for
estate and gift taxes decreased. Miscellaneous revenues decreased
$380 million, or 12.7 percent, due to a decline in receipts from
the Medical Malpractice Insurance Association and medical
provider assessments.
Expenditures increased $137 million (0.4 percent) from
the prior fiscal year, with the largest increases occurring in
education and social services. Education expenditures grew
$391 million (3.6 percent), mainly due mainly to an increase in
State support for public schools. This growth was offset, in
part, by a reduction in spending for municipal and community
colleges. Social services expenditures increased $233 million
(2.6 percent) to fund growth in these programs. Increases in
15
<PAGE>
other State aid spending were offset by a decline in general
purpose aid of $235 million (27.8 percent) due to statutory
changes in the payment schedule. Increases in personal and non-
personal service costs were offset by a decrease in pension
contribution of $660 million, a result of the refinancing of the
State's pension amortization that occurred in 1997.
Net other financing sources decreased $841 million (68.2
percent) due to the nonrecurring use of bond proceeds
($769 million) provided by the Dormitory Authority of the State
of New York to pay the outstanding pension amortization liability
incurred in 1997.
An operating surplus of $49 million was reported for the
Special Revenue Funds for the 1997-98 fiscal year, which
increased the accumulated fund balance to $581 million. Revenues
rose by $884 million over the prior fiscal year (3.3 percent) as
a result of increases in tax and federal grant revenues.
Expenditures increased $795 million (3.3 percent) as a result of
increased costs for local assistance grants. Net other financing
uses decreased $105 million (3.3 percent).
Debt Service Funds ended the 1997-98 fiscal year with an
operating deficit of $43 million and, as a result, the
accumulated fund balance declined to $1.86 billion. Revenues
increased $246 million (10.6 percent) as a result of increases in
dedicated taxes. Debt service expenditures increased
$341 million (14.4 percent). Net other financing sources
increased $89 million (401.3 percent) due primarily to savings
achieved through advance refundings of outstanding bonds.
An operating surplus of $232 million was reported in the
Capital Projects Funds for the State's 1997-98 fiscal year and,
as a result, the accumulated deficit in this fund type decreased
to $381 million. Revenues increased $180 million (8.6 percent)
primarily as a result of a $54 million increase in dedicated tax
revenues and an increase of $101 million in federal grants for
transportation and local waste water treatment projects.
Expenditures increased $146 million (4.5 percent) primarily as a
result of increased capital construction spending for
transportation and local waste water treatment projects. Net
other financing sources increased by $100 million primarily as a
result of a decrease in transfers to certain public benefit
corporations engaged in housing programs.
16
<PAGE>
1996-97 Fiscal Year
The State completed its 1996-97 fiscal year with a
combined Governmental Funds operating surplus of $2.1 billion,
which included an operating surplus in the General Fund of $1.9
billion, in Capital Projects Funds of $98 million and in the
Special Revenue Funds of $65 million, offset in part by an
operating deficit of $37 million in the Debt Service Funds.
The State reported a General Funds operating surplus of
$1.93 billion for the 1996-97 fiscal year, as compared to an
operating surplus of $380 million for the prior fiscal year. The
1996-97 fiscal year GAAP operating surplus reflects several major
factors, including the cash basis operating surplus, the benefit
of bond proceeds which reduced the State's pension liability, an
increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an
increased payable to local governments of $244 million.
Revenues increased $1.91 billion (nearly 6.0 percent)
over the prior fiscal year with increases in all revenue
categories. Personal income taxes grew $620 million, an increase
of nearly 3.6 percent, despite the implementation of scheduled
tax cuts. The increase in personal income taxes was caused by
moderate employment and wage growth and the strong financial
markets during 1996. Consumption and use taxes increased $179
million or 2.7 percent as a result of increased consumer
confidence. Business taxes grew $268 million, an increase of 5.6
percent, primarily as a result of the strong financial markets
during 1996. Other taxes increased primarily because revenues
from estate and gift taxes increased. Miscellaneous revenues
increased $743 million, a 33.1 percent increase, because of an
increase in receipts from the Medical Malpractice Insurance
Association and from medical provider assessments.
Expenditures increase $830 million (2.6 percent) from
the prior fiscal year, with the largest increase occurring in
pension contributions and State aid for education spending.
Pension contribution expenditures increased $514 million (198.2
percent) primarily because the State paid off its 1984-85 and
1985-86 pension amortization liability. Education expenditures
grew $351 million (3.4 percent) due mainly to an increase in
spending for support for public schools and physically
handicapped children offset by a reduction in spending for
municipal and community colleges. Modest increases in other
State aid spending was offset by a decline in social services
expenditures of $157 million (1.7 percent). Social services
17
<PAGE>
spending continues to decline because of cost containment
strategies and declining caseloads.
Net other financing sources increased $475 million (62.6
percent) due mainly to bond proceeds provided by the Dormitory
Authority of the State of New York to pay the outstanding pension
amortization, offset by elimination of prior year LGAC proceeds.
An operating surplus of $65 million was reported for the
Special Revenue Funds for the 1996-97 year, increasing the
accumulated fund balance to $532 million. Revenues increased
$583 million over the prior fiscal year (2.2 percent) as a result
of increases in tax and lottery revenues. Expenditures increased
$384 million (1.6 percent) as a result of increased costs for
departmental operations. Net other financing uses decreased $275
million (8.0 percent) primarily because of declines in amounts
transferred to other funds.
Debt Service Funds ended the 1996-97 fiscal year with an
operating deficit of $37 million and, as a result, the
accumulated fund balance declined to $1.90 billion. Revenues
increased $102 million (4.6 percent) because of increases in both
dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $47 million (2.0 percent). Net other
financing sources decreased $277 million (92.6 percent) due
primarily to an increase in payments on advance refunds.
An operating surplus of $98 million was reported to the
Capital Projects Funds for the State's 1996-97 fiscal year and,
as a result, the accumulated fund balance decreased to a deficit
of $614 million. Revenues increased $100 million (5.0 percent)
primarily because a larger share of the real estate transfer tax
was shifted to the Environmental Protection Fund and federal
grant revenues increased for transportation and local waste water
treatment projects. Expenditures decreased $359 million (10.0
percent) because of declines in capital grants for education,
housing and regional development programs and capital
construction spending. Net other financing sources decreased by
$637 million as a result of a decrease in proceeds from financing
arrangements.
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
18
<PAGE>
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
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 and has a higher proportion of
total jobs than does the rest of the nation.
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. 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 over one-sixth 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 nation's leaders in the production of these
commodities.
19
<PAGE>
Federal, State and local government together are the
third largest sector in terms of nonagricultural jobs, with the
bulk of the employment accounted for by local governments.
Public education is the source of nearly one-half of total state
and local government employment.
The State is likely to be less affected than the nation
as a whole during an economic recession that is concentrated in
manufacturing and construction, but likely to be more affected
during a recession that is concentrated more in the service-
producing section.
In the calendar years 1987 through 1998, the State's
rate of economic growth was somewhat slower than that of the
nation. In particular, during 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, total
personal income in the State has risen more slowly than the
national average since 1988 than personal income for the nation
as a whole, although preliminary data suggests that, in 1998, the
State personal income rose more rapidly.
State per capita personal income has historically been
significantly higher than the national average, although the
ratio has varied substantially. Because New York 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.
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
20
<PAGE>
affected, if any of its Authorities were to default on their
respective obligations, particularly those using State-supported
or State-related financing techniques. As of December 31, 1998,
there were 17 Authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt,
including refunding bonds, of these State public Authorities was
$94 billion, only a portion of which constitutes State-supported
or State-related debt.
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 1999-2000 fiscal year.
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
("NYC MAC") was created in 1975 to provide financing assistance
to the City. To enable NYC MAC to pay debt service on its
obligations, NYC 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
NYC MAC also includes a moral obligation provision. Under its
enabling legislation, NYC MAC's authority to issue moral
obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. In 1995, the State created the
Municipal Assistance Corporation for the City of Troy
21
<PAGE>
("Troy MAC"). The bonds issued by Troy MAC do not include the
moral obligation provisions.
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 entered into service contracts which obligate
the State to pay debt service, subject to annual appropriations,
on bonds issued by the New York State Medical Care Facilities
Finance Agency and now included as debt of 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 1998-99 fiscal year. The legislative authorization to
issue bonds under this program expired on March 1, 1998.
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, charges for public power, electric and gas
utility services, 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
York metropolitan area through the 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
22
<PAGE>
finance the mass transit portion of these operations, the MTA has
depended and will continue to depend on operating support from
the State, local government and TBTA, including loans, grants and
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 percent regional sales and use
tax--that provide revenues for mass transit purposes, including
assistance to the MTA. Since 1987, state law also has required
that the proceeds of a one-quarter of 1 percent mortgage
recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for
operating or capital expenses. In 1993, the State dedicated a
portion of the State petroleum business tax receipts to fund
operating or capital assistance to the MTA. The 1999-2000
enacted budget provides State assistance to the MTA totaling
approximately $1.4 billion, an increase of $55 million over the
1998-99 fiscal year.
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 the $12.17 billion
MTA capital plan for the 1995 through 1999 calendar years (the
"1995-99 Capital Program"). In July 1997, the Capital Program
Review Board approved the 1995-99 Capital Program and
subsequently amended it in August 1997 and in March 1999. The
1995-99 Capital Program 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 rolling 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
$5.2 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 State, the federal government, and
the City of New York, and from various other revenues generated
from actions taken by the MTA.
The MTA plan now totals $12.55 billion. The MTA is
expected to submit a proposed capital plan for 2000 through 2004
by October 1, 1999 for consideration by the CPRB. There can be
23
<PAGE>
no assurance that the proposed capital plan will be approved by
the CPRB without significant modifications, that the plan as
adopted will be adequate to finance the MTA's capital needs over
the plan period, or that funding sources identified in the
approved plan will not be reduced or eliminated.
There can be no assurance that all the necessary
governmental actions for future capital programs will be taken,
that funding sources currently identified will not be decreased
or eliminated, or that the 1995-99 and 2000-04 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 and 2000-04 Capital Program accordingly. If
the 1995-99 and 2000-04 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 New York City (the "City"), which continues
to require significant financial assistance from the State.
State aid contributes to the City's ability to balance its budget
and meet its cash requirements. The State may also be affected
by the ability of the City and certain entities issuing debt for
the City to market their securities successfully in the public
credit markets. 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
24
<PAGE>
stability. Among those actions, the State established the
NYC 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.
The Control Board terminated the Control Period in 1986 when
certain statutory conditions were met. State law requires the
Control Board to reimpose a Control Period 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 or impaired access to
the public credit markets.
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 summarizes 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.
To successfully implement its Financial Plan, the City
and certain entities issuing debt for the benefit of the City
must market their securities successfully. The City issues
securities to finance, refinance and rehabilitate infrastructure
and other capital needs, as well as for seasonal financing needs.
In 1997, the State created the New York City Transitional Finance
Authority ("TFA") to finance a portion of the City's capital
program because the City was approaching its State Constitutional
general debt limit. Without the additional financial capacity of
the TFA, projected contracts for City capital projects would have
exceeded the City's debt limit during City fiscal year 1997-98.
Despite this additional financing mechanism, the City currently
projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. To continue its
capital plan without interruption, the City is proposing an
amendment to the State Constitution to change the methodology
used to calculate the debt limit. Since an amendment to the
Constitution to raise the debt limit could not take effect until
25
<PAGE>
City fiscal year 2001-02 at the earliest, the City has decided to
securitize a portion of its share of the proceeds from the
settlement with the nation's tobacco companies. However, a
number of potential developments may affect both the availability
and level of funding that the City will receive from the tobacco
settlement. City officials have indicated that, should their
efforts to securitize a part of City tobacco settlement proceeds
fail or not be accomplished in a timely manner, the City will
request that the State increase the borrowing authority of the
TFA.
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.
The reports analyze the City's forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well
as evaluate compliance by the City and its Covered Organizations
with the Financial Plan.
According to recent staff reports, while economic growth
in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in
increased tax revenues and generated a substantial surplus for
the City in the City fiscal year 1996-97. Recent staff reports
also indicate that the City projects surplus for City fiscal year
1998-99. Although several sectors of the City's economy have
expanded recently, especially tourism and business and
professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industries and
the course of the national economy. In addition, the size of
recent tax reductions has increased to over $2 billion in City
fiscal year 1999-2000 through the expiration of a personal income
tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less
than $110. Staff reports have indicated that recent City budgets
have been balanced in part through the use of non-recurring
resources and that the City's Financial Plan tends to rely in
part on actions outside its direct control. These reports have
also indicated that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth and that
the City is likely to continue to face substantial gaps between
forecast revenues and expenditures in future years that must be
closed with reduced expenditures and/or increased revenues.
26
<PAGE>
Financing Requirements
The City requires significant amounts of financing for
seasonal and capital purposes. Since 1981, the City has fully
satisfied its seasonal financing needs in the public credit
markets, repaying all short-term obligations within their fiscal
year of issuance. The City issued $500 million of short-term
obligations in the 1999 fiscal year to finance the City's
projected cash flow needs for that year. The City issued $1.075
billion of short-term obligations in fiscal year 1998 to finance
the City's projected cash flow needs for the 1998 fiscal year.
The City issued $2.4 billion of short-term obligations in fiscal
year 1997. The delay in the adoption of the States budget in
certain past fiscal years has required the City to issue short-
term notes in amounts exceeding those expected early in such
fiscal years.
The City makes substantial capital expenditures to
reconstruct and rehabilitate its infrastructure and physical
assets, including mass transit facilities, sewers, streets,
bridges and tunnels, and to make capital investments that will
improve productivity in City operations. City-funded
commitments, which were $344 million in 1979, are projected to
reach $4.8 billion in 1999, and City-funded expenditures, which
more than tripled between fiscal years 1980 and 1985, are
forecast at $3.3 billion in the 1999 fiscal year; total
expenditures are forecast at $3.8 billion in 1999.
In connection with the Financial Plan, the City has
outlined a gap-closing program for the fiscal years 2001, 2002
and 2003 to eliminate the $1.7 billion projected budget gaps for
each such fiscal year. This program, which is not specified in
detail, assumes for the 2001, 2002 and 2003 fiscal years,
respectively, additional agency programs to reduce expenditures
or increase revenues by $879 million, $844 million and $782
million; additional state actions of $400 million, $450 million
and $450 million; additional Federal actions of $300 million,
$350 million and $350 million; and the availability of $100
million, $100 million and $100 million of the General Reserve.
The City's projected budget gaps for the 2002 and 2003
fiscal years do not reflect the savings expected to result from
the prior years' programs to close the gaps set forth in the
Financial Plan. Thus, for example, recurring savings anticipated
from the actions which the City proposes to take to balance the
fiscal year 2001 budget are not taken into account in projecting
the budget gaps for the 2002 and 2003 fiscal years.
27
<PAGE>
Although the City has maintained balanced budgets in
each of its last eight fiscal years and is projected to achieve
balanced operating results for the 1999 and 2000 fiscal years,
there can be no assurance that the gap-closing actions proposed
in the Financial Plan can be successfully implemented or that the
City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure
reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
Other Localities
Certain localities outside the City have experienced
financial problems and have requested and received additional
State assistance during the last several State fiscal years. The
potential impact on the State of any future requests by
localities for additional oversight or financial assistance is
not included in the projections of the State's receipts and
disbursements for the State's 1999-2000 fiscal year.
The State has provided extraordinary financial
assistance to select municipalities, primarily cities, since the
1996-97 fiscal year. Funding has essentially been continued or
increased in each subsequent fiscal year. Such funding in 1999-
2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local government by $27 million to
$550 million, and has continued funding at this new level since
that date.
While the distribution of General Purpose State Aid for
local governments was originally based on a statutory formula, in
recent years both the total amount appropriated and the shares
appropriated to specific localities have been determined by the
Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid
failed to agree on any recommendations for a new formula.
Certain Municipal Indebtedness
Counties, cities, towns, villages and school districts
have engaged in substantial short-term and long-term borrowings.
In 1997, the total indebtedness of all localities in the State,
other than New York City was approximately $21.0 billion. A
small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was
issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations
concerning the budgets of those local government units (other
28
<PAGE>
than New York City) that are authorized by State law to issue
debt to finance deficits during the period that such deficit
financing is outstanding. Twenty-two localities had outstanding
indebtedness for deficit financing at the close of their fiscal
year ending in 1997.
Like the State, local governments must respond to
changing political, economic and financial influences over which
they have little or no control. Such changes may adversely
affect the financial condition of certain local governments. For
example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn,
may require local governments to fund these expenditures from
their own resources. It is also possible that the State, the
City, or any of their respective public authorities may suffer
serious financial difficulties that could jeopardize local access
to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the
State. Localities may also face unanticipated problems resulting
from certain pending litigation, judicial decisions and long-
range economic trends. Other large scale potential problems,
such as declining urban populations, increasing expenditures, and
the loss of skilled manufacturing jobs, may also adversely affect
localities and necessitate State assistance.
Litigation
The State is a defendant in legal proceedings involving
State finances, State programs and miscellaneous civil rights,
tort, real property and contract claim where the monetary damages
sought are substantial, generally in excess of $100 million.
These proceedings could affect adversely the financial condition
of the State in the 1999-2000 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 1999-2000 State Financial Plan. The
State believes that the proposed 1999-2000 State Financial Plan
includes sufficient reserves for the payment of judgments that
may be required during the 1999-2000 fiscal year. There can be
no assurance, however, that an adverse decision in any of these
proceedings would not exceed the amount of all potential 1999-
2000 State Financial Plan resources available for the payment of
judgments, and could therefore affect the ability of the State to
maintain a balanced 1999-2000 State Financial Plan.
29
<PAGE>
Medicaid
In several cases, plaintiffs seek reimbursement for
services provided to Medicaid recipients who were also eligible
for Medicare during the period January 1, 1987 to June 2, 1992.
Included are Matter of New York State Radiological Society v.
Wing, Appel v. Wing, E.F.S. Medical Supplies v. Dowling, Kellogg
v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v.
Wing. These cases were commenced after the State's reimbursement
methodology was held invalid in New York City Health and Hospital
Corp. v. Perales. The State contends that these claims are time-
barred. In a judgment dated September 5, 1996, the Supreme
Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated
November 26, 1997, the Appellate Division, Third Department,
affirmed that judgment. By decision dated June 9, 1998, the
Court of Appeals denied leave to appeal. The time in which to
seek further review has expired in the latter case.
Several cases, including Port Jefferson Health Care
Facility et al. v. Wing (Supreme Court, Suffolk County),
challenge the constitutionality of Public Health Law Section
2807-d, which imposes a tax on the gross receipts that hospitals
and residential health care facilities receive from patient care
services. Plaintiffs allege that the tax assessments were not
uniformly applied, in violation of federal regulations. In a
decision dated June 30, 1997, the Court held that the 1.2 percent
and 3.8 percent assessments on gross receipts imposed pursuant to
Public Health Law Section 2807-d(2)(b)(ii) and Section
2807-d(2)(b)(iii), respectively, are unconstitutional. An order
entered August 27, 1997, enforced the terms of the decision. The
state appealed that order. By decision and order dated
August 31, 1998, the Appellate Division, Second Department,
affirmed that order. On September 30, 1998, the State moved for
re-argument or, in the alternative, for a certified question for
the Court of Appeals to review. By order dated January 7, 1999,
the motion was denied. A final order was entered in Supreme
Court on January 26, 1999. On February 23, 1999, the state
appealed that order to the Court of Appeals. The appeal is
pending before the Court.
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
or ability, as a matter of law, to impose or collect significant
amounts of taxes and revenues.
30
<PAGE>
Year 2000
The State is currently addressing Year 2000 data
processing compliance issues. In 1996, the State created the
Office of Technology ("OFT") to help address statewide technology
issues, including the Year 2000 issue. OFT has estimated that
investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority
computer systems not otherwise scheduled for replacement into
Year 2000 compliance. The State is planning to spend $100
million in the 1998-99 fiscal year for this purpose. The State's
budget provides funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and
finance and welfare management systems, for which Year 2000
compliance is included as part of the project.
OFT is monitoring compliance on a quarterly basis and is
providing assistance and assigning resources to accelerate
compliance for mission critical systems, with most compliance
testing expected to be completed by mid-1999. There can be no
guarantee, however, that all of the State's mission-critical and
high-priority computer systems will be made Year 2000 compliant
in a timely manner and that there will not be an adverse effect
upon State operations or State finances as a result.
CALIFORNIA PORTFOLIO
The following is based on information obtained from an
Official Statement dated December 1, 1999 relating to
$500,000,000 State of California General Obligation Bonds.
Limits on Spending and Taxes
Under California (the "State") constitutional
amendments, the State is subject to an annual appropriations
limit. The limit may be exceeded in cases of emergency. The
State's yearly appropriations limit is based on the limit for the
prior year, adjusted annually 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.
On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute, which
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
31
<PAGE>
("K-14 schools") a minimum share of General Fund revenues. Under
Proposition 98, K-14 schools are guaranteed the greater of a
fixed percentage of General Fund revenues and the prior year's
appropriation adjusted for growth.
During the recession, General Fund revenues for several
years were less than originally projected, so that the original
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 $4,200 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. The settlement in this case 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 1998-99 Budget Act appropriated $250
million as repayment of prior years' loans to schools, as part of
the settlement in this case.
State Indebtedness
As part of its cash management program, the State has
regularly issued short-term obligations to meet cash flow needs.
The State issued $1.0 billion of revenue anticipation notes for
the 1999-2000 Fiscal Year to mature on June 30, 2000.
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
bond-funded and lease-revenue bond-funded projects. As of
October 1, 1999 the Finance Committees had authorized the
32
<PAGE>
issuance of approximately $4,451,734,000 of commercial paper
notes; as of that date only $814,565,000 aggregate principal
amount of general obligation commercial paper notes was
outstanding.
The State has always paid the principal of and interest
on its general obligation bonds, general obligation commercial
paper, lease-purchase debt and short-term obligations, including
revenue anticipation notes and revenue anticipation warrants when
due.
1999-2000 Fiscal Year Budget
On January 8, 1999, Governor Davis released his proposed
budget for Fiscal Year 1999-00 (the "January Governor's Budget").
The January Governor's Budget generally reported that general
fund revenues for FY 1998-99 and FY 1999-00 would be lower than
earlier projections (primarily due to weaker overseas economic
conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget
proposed $60.5 billion of general fund expenditures in FY 1999-
00, with a $415 million Special Fund for Economic Uncertainties
("SFEU") reserve at June 30, 2000.
The May Revision to the 1999-2000 Governor's Budget,
released on May 14, 1999 (the "1999 May Revision"), reported that
stronger than expected economic conditions in the State for the
latter part of 1998 and into 1999 would produce total 1998-99
General Fund revenues of about $57.9 billion, almost $1.0 billion
above the 1998 Budget Act estimates and $1.6 billion above the
initial estimates in the January 1999-2000 Governor's Budget.
The May 1999 Revision projects 1998-99 General Fund expenditures
of $58.6 billion, about $400 million higher than the January
1999-2000 Governor's Budget estimate. Some of this additional
revenue will be directed to K-14 schools pursuant to Proposition
98. The 1999 May Revision projected a balance in the SFEU at
June 30, 1999, of approximately $1.9 billion, $1.3 billion higher
than estimated in January.
The 1999 May Revision showed an additional $4.3 billion
of revenues for combined fiscal years 1998-99 and 1999-00. The
completion of the 1999 Budget Act occurred in a timely fashion.
The final Budget Bill was adopted by the Legislature on June 16,
1999, and was signed by the Governor on June 29, 1999 (the "1999
Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
33
<PAGE>
The final 1999 Budget Act estimated general fund
reserves and transfers of $63.0 billion, and contained
expenditures totaling $63.7 billion after the Governor used his
line-item veto to reduce the legislative Budget Bill expenditures
by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from
special funds and $1.5 billion from bond funds. The
Administration estimated that the SFEU would have a balance at
June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's
vetoes) was "set aside" to provide funds for employee salary
increases (to be negotiated in bargaining with employee unions),
and for litigation reserves. The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include
the following:
1. Proposition 98 funding for K-12 schools was
increased by $1.6 billion in General Fund moneys over revised
1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee. Of the 1999-00 funds, major new
programs included money for reading improvement, new textbooks,
school safety, improving teacher quality, funding teacher
bonuses, providing greater accountability for school performance,
increasing preschool and after school care programs and funding
deferred maintenance of school facilities. The Budget also
includes $310 million as repayment of prior years' loans to
schools, as part of the settlement of the CTA v. Gould lawsuit.
2. Funding for higher education increased
substantially above the actual 1998-99 level. General Fund
support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the
California State University system. In addition, Community
Colleges funding increased by $324.3 million (6.6 percent). As a
result, undergraduate fees at UC and CSU will be reduced for the
second consecutive year, and the per-unit charge at Community
Colleges will be reduced by $1.
3. The Budget included increased funding of nearly
$600 million for health and human services.
4. About $800 million from the General Fund will be
directed toward infrastructure costs, including $425 million in
additional funding for the Infrastructure Bank, initial planning
costs for a new prison in the Central Valley, additional
34
<PAGE>
equipment for train and ferry service, and payment of deferred
maintenance for state parks.
5. The Legislature enacted a one-year additional
reduction of 10 percent of the Vehicle License Fee ("VLF") for
calendar year 2000, at a General Fund cost of about $250 million
in each of FY 1999-00 and 2000-01 to make up lost funding to
local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the
legislation adopted last year. Several other targeted tax cuts,
primarily for businesses, were also approved, at a cost of $54
million in 1999-00.
6. A one-time appropriation of $150 million, to be
split between cities and counties, was made to offset property
tax shifts during the early 1990's. Additionally, an ongoing $50
million was appropriated as a subvention to cities for jail
booking or processing fees charged by counties when an individual
arrested by city personnel is taken to a county detention
facility.
Prior Fiscal Years' Financial Results
The State's financial condition improved markedly during
the fiscal years starting in 1995-96, with a combination of
better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on
actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing occurred over the end
of the last four fiscal years. The last borrowing to spread out
the repayment of a budget deficit over the end of a fiscal year
was $4.0 billion of revenue anticipation warrants issued in July
1994 and which matured in April 1996.
The economy grew strongly during the fiscal years
beginning in 1995-96, and as a result, the General Fund took in
substantially greater tax revenues (around $2.2 billion in 1995-
96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.0
billion in 1998-99) than were initially planned when the budgets
were enacted. The accumulated budget deficit from the recession
years was finally eliminated with the repayment of the revenue
anticipation warrants in April 1996. These additional funds were
largely directed to school spending as mandated by Proposition
98, to make up shortfalls from reduced federal health and welfare
aid in 1995-96 and 1996-97 and particularly in 1998-99 to fund
new program incentives.
35
<PAGE>
The following were major features of the 1998 Budget Act
and certain additional fiscal bills enacted before the end of the
legislative session:
1. The most significant feature of the 1998-99 budget
was agreement on a total of $1.4 billion of tax cuts. The
central element was a bill which provided for a phased-in
reduction of the VLF. Since the VLF is transferred to cities and
counties under existing law, the bill provided for the General
Fund to replace the lost revenues. Starting on January 1, 1999,
the VLF has been reduced by 25 percent, at a cost to the General
Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget
included both temporary and permanent increases in the personal
income tax dependent credit ($612 million General Fund cost in
1998-99, but less in future years), a nonrefundable renters tax
credit ($133 million), and various targeted business tax credits
($106 million).
2. Proposition 98 funding for K-14 schools was
increased by $1.7 billion in General Fund moneys over revised
1997-98 levels, over $300 million higher than the minimum
Proposition 98 guarantee. Of the 1998-99 funds, major new
programs included money for instructional and library materials,
deferred maintenance, support for increasing the school year to
180 days and reduction of class sizes in Grade 9. The Budget
also included $250 million as repayment of prior years' loans to
schools, as part of the settlement of the CTA v. Gould lawsuit.
3. Funding for higher education increased
substantially above the actual 1997-98 level. General Fund
support was increased by $340 million (15.6 percent) for the
University of California and $267 million (14.1 percent) for the
California State University system. In addition, Community
Colleges funding increased by $300 million (6.6 percent).
4. The Budget included increased funding for health,
welfare and social services programs. A 4.9 percent grant
increase was included in the basic welfare grants, the first
increase in those grants in 9 years.
5. Funding for the judiciary and criminal justice
programs increased by about 11 percent over 1997-98, primarily to
reflect increased State support for local trial courts and rising
prison population.
36
<PAGE>
6. Major legislation enacted after the 1998 Budget Act
included new funding for resources projects, a share of the
purchase of the Headwaters Forest, funding for the Infrastructure
and Economic Development Bank ($50 million) and funding for the
construction of local jails. The State realized savings of $433
million from a reduction in the State's contribution to the State
Teacher's Retirement System in 1998-99.
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 high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction
and services sectors.
After suffering through a severe recession, California's
economy has been on a steady recovery since the start of 1994.
More than 300,000 nonfarm jobs were added in the State in 1996,
while personal income grew by more than $55 billion.
California's economic expansion is being fueled by strong growth
in high-technology industries, including computer software,
electronics manufacturing and motion picture production, 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.
The State's unemployment rate of 5.3 percent in May 1999
was the lowest since early 1999. Payroll employment is expanding
at a better than 3 percent pace, and the State is on track to
create nearly 800,000 new jobs over the next two years.
Reflecting double-digit increases in building permit
volume, construction employment is up 11 percent over the past
year, housing permits are averaging near a 140,000-unit annual
pace, and non-residential construction continues to post double-
digit annual gains.
Business services, which includes the computer software
industry, is up over 10 percent and professional consulting,
which includes biotechnology, is advancing at an almost 6 percent
annual pace. Although motion picture industry growth has slowed
to a still-solid 3 percent rise, the amusements and recreation
industry is up a robust 8.4 percent.
Boosted by 10 percent growth in wages and salaries,
personal income is estimated to have increased 8 percent year to
37
<PAGE>
year in both the fourth quarter of 1998 and the first quarter of
1999.
Litigation
The State is currently 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. Following are significant lawsuits
involving the State as of December 1, 1999:
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers
Association et al. v. Kathleen Connell filed a complaint
challenging the authority of the State Controller to make
payments from the State Treasury in the absence of a state
budget. On July 21, 1998, the trial court issued a preliminary
injunction prohibiting the State Controller from paying moneys
from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The
preliminary injunction, among other things, prohibited the State
Controller from making any payments pursuant to any continuing
appropriation.
On July 22, 1998, the State Controller asked the
California Supreme Court to immediately stay the trial court's
preliminary injunction and to overrule the order granting the
preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of
Appeal. Briefs have been submitted, no date has yet been set for
oral argument.
In Thomas Hayes v. Commission on State Mandates, certain
local school districts sought reimbursements for special
education programs for handicapped children. The State Board of
Control, which was succeeded by the Commission on State Mandates
(COSM), decided in favor of the local school districts. The
decision was appealed by the Director of Finance in the trial
court and was remanded to the COSM for redetermination. The COSM
expanded the claim to include supplemental claims filed by seven
additional educational institutions. The potential liability to
the State has been estimated at more than $1 billion. The
Commission on State Mandates issued a decision in December 1998
determining that a small number of components of the State's
special education program are state mandated local costs. The
administrative proceeding is in the "parameters and guidelines"
stage where the Commission is considering whether and to what
extent the costs associated with the state mandated components of
38
<PAGE>
the special education program are offset by funds that the State
already allocates to that program. The State's position is that
all costs are offset by existing funding. The State has the
option to seek judicial review of the mandate finding.
In State v. Stringfellow, the State is seeking recovery
for cleanup costs of a toxic waste site presently owned by the
State. The defendants, however, have filed a counterclaim
against the State for alleged negligent acts, resulting in
significant findings of liability against the State as owner,
operator, and generator of wastes taken to the site. The State
has appealed the rulings. Present estimates of the cleanup range
from $400 million to $600 million.
The State is a defendant in a coordinated action
involving 3,000 plaintiffs seeking recovery for damages caused by
the Yuba River flood of 1986. The State's potential liability to
all plaintiffs in this lawsuit ranges from $800 million to $1.5
billion.
In Capitola Land v. Anderson and other related state and
federal cases, plaintiffs sought payments from the state under
the AFDC-Foster Care program. Judgment was rendered against the
State in Capitola, which the State appealed and lost. The State
then filed a state plan amendment with the federal Department of
Health and Human Services ("DHHS") to enable the State to comply
with the Capitola ruling and receive federal funding. The DHHS
denied the state plan amendment, and the State has filed suit
against DHHS. The State Legislature enacted a statute that
conditioned State compliance with the Capitola judgment on
receipt of federal funding (50% contribution). The State then
refused to implement the Capitola judgment based on the new
statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was
stayed and annulled by the Court of Appeal. The plaintiffs'
petition for review was denied by the California Supreme Court.
However, the State continues to pursue federal funding in federal
court. If, as a result of this litigation, compliance with the
Capitola judgment is required and the judgment is applied
retroactively, liability to the State could exceed $200 million.
In January of 1997, California experienced major
flooding in six different areas with preliminary estimates of
property damage of approximately $1.6 to 2.0 billion. A
substantial number of plaintiffs have joined suit against the
State, local agencies, and private companies and contractors
seeking compensation for the damages they suffered as a result of
the 1997 flooding. The State is vigorously defending the action.
39
<PAGE>
In Just Say No to Tobacco Dough Campaign, v. State of
California, the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the
Cigarette and Tobacco Products Surtax Fund for years ended June
30, 1990, through June 30, 1995, for related disease research.
If the State loses, the General Fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products
Surtax Fund, an agency fund, for approximately $166 million.
However, the superior court issued an order in December 1998,
granting the State's demurrer to the entire action and dismissing
the case. The superior court thereafter reconsidered its ruling
and allowed plaintiffs to amend their complaint. The State
demurred to the amended complaint. In July, 1999, the court
again sustained the State's demurrer to the amended complaint,
and issued a judgment dismissing the case. Plaintiffs appealed.
The matter will be briefed and will be scheduled for oral
argument before the court.
The State is a defendant in Ceridian Corporation v.
Franchise Tax Board, a suit which challenges the validity of two
sections of the California Tax Laws. The first relates to
deduction from corporate taxes for dividends received from
insurance companies to the extent the insurance companies have
California activities. The second relates to corporate deduction
of dividends to the extent the earnings of the dividend paying
corporation have already been included in the measure of their
California tax. On August 13, 1998, the court issued a judgment
against the Franchise Tax Board on both issues. The Franchise
Tax Board has appealed the judgment. Briefing is underway. If
both sections of the California tax law are invalidated, and all
dividends become deductible, in the future General Fund
collections would be reduced annually in the $200-$250 million
range for all taxpayers.
The State is a defendant in a statewide action, Emily
Q., et al. v. Belshe, et al., in which plaintiffs seek to compel
a change in early screening procedures for children with mental
health needs. A preliminary injunction was issued, requiring
changes in the screening procedures. The Department of Health
Services, in conjunction with the Department of Mental Health, is
in the process of complying with the injunction. No hearing has
been scheduled on the petition for permanent injunction. The
Department of Mental Health estimates the annual cost to the
State for implementation of a permanent injunction to be
approximately $13 million.
40
<PAGE>
Plaintiffs in County of San Bernardino v. Barlow
Respiratory Hospital and related actions seek mandamus relief
requiring the State to retroactively increase out-patient Medi-
cal reimbursement rates. Plaintiffs have estimated the damages
to be several hundred million dollars. The State is vigorously
defending these cases, as well as related federal cases
addressing the calculation of Medi-Cal reimbursement rates in the
future.
The State is involved in two refund actions, Cigarettes
Cheaper!, et al. v. Board of Equalization, et al. and California
Assn. of Retail Tobacconists (CART), et al. v. Board of
Equalization, et al., that challenge the constitutionality of
Proposition 10, approved by the voters in 1998. Plaintiffs
allege that Proposition 10, which increases the excise tax on
tobacco products, violates 11 sections of the California
Constitution and related provisions of law. Plaintiffs
Cigarettes Cheaper! seek declaratory and injunctive relief and a
refund of over $4 million. The CART case filed by retail
tobacconists in San Diego seeks a refund of $5 million. The
State is vigorously contesting these cases. If the statute is
declared unconstitutional, exposure may include the entire $750
million collected annually with interest.
The State is involved in two cases challenging the
constitutionality of the interest offset provisions of the
Revenue and Taxation Code. Plaintiffs in F.W. Woolworth Co. and
Kinney Shoe Corporation v. Franchise Tax Board seek a refund of
over $15 million. The Woolworth case was tried in July 1995, and
judgment was entered for the Franchise Tax Board. The judgment
was upheld on appeal and the plaintiffs' petition for review in
the California Supreme Court was denied. On June 7, 1999,
plaintiffs filed a petition for writ of certiorari in the United
States Supreme Court. The Franchise Tax Board filed its
opposition to the petition for writ of certiorari on August 5,
1999.
Hunt-Wesson, Inc. v. Franchise Tax Board was tried in
February 1997 with judgment for taxpayer. The judgment was
reversed on appeal and plaintiff's petition for review in the
California Supreme Court was denied. On September 28, 1999, the
United States Supreme Court granted the taxpayer's petition for
writ of certiorari. The Franchise Tax Board estimates that if
the interest-offset provisions are declared unconstitutional, the
result would involve potential reduction of state revenues in the
$90 million range annually, with past year collection and
interest exposure of $500 million.
41
<PAGE>
Guy F. Atkinson Company of California v. Franchise Tax
Board is a corporation tax refund action involving the solar
energy system tax credit provided for under the Revenue &
Taxation Code. The case went to trial in May 1998 and the trial
court entered judgment in favor of the Franchise Tax Board. The
taxpayer has filed an appeal to the California Court of Appeal
and briefing is due to be completed in October 1999. The
Franchise Tax Board estimates that the cost would be $150 million
annually if the plaintiff prevails. Allowing refunds for all
open years would entail a refund of at least $500 million.
Jordan, et al. v. Department of Motor Vehicles, et al.
and Josephs v. Zolin, et al. challenge the validity of the
Vehicle Smog Impact Fee, a $300 fee which is collected by the
Department of Motor Vehicles from vehicle registrants when a
vehicle without a California new-vehicle certification is first
registered in California. The Jordan plaintiffs contend that the
fee violates the interstate commerce and equal protection clauses
of the United States Constitution as well as Article XIX of the
State Constitution. The Josephs case is a class action civil
rights case brought against the current and former directors of
the Department of Motor Vehicles in their individual capacities
claiming the collection of the Vehicle Smog Impact Fee violates
the interstate commerce, equal protection, and privileges and
immunities clauses of the United States Constitution. In October
1999, the Court of Appeals upheld a trial court judgment for the
plaintiffs in the Jordan case, and the State has declined to
appeal further. Although refunds through the court actions could
be limited by a three-year statute of limitations, with a
potential liability of about $350 million, the Governor has
proposed refunding fees collected back to the initiation of these
fees in 1990. The exposure to the State if the fees are refunded
in full could be up to $800 million.
Craig Brown, et al. v. Department of Health and Human
Services, et al. is a Federal Mandate Proceeding. In fiscal
years 1991-92 and 1992-93, the State used credits from three
Public Employees Retirement System (PERS) accounts in place of
General Fund employer pension contributions. The federal
Department of Health and Human Services (DHHS) has determined
that federally funded programs were overcharged in these fiscal
years because they did not receive the pension credits the State
programs received and that California owes the federal government
$120 million for overpayments plus an additional $80 million in
interest through mid 1999. The DHHS Grant Appeals Board upheld
this determination. The present case is aimed at overturning the
DHHS determination. On June 6, 1999, the court ruled against the
State. The State has appealed to the Ninth Circuit. The
42
<PAGE>
estimated potential loss is over $220 million which would be
payable from the General Fund or, possibly, recovered by the
federal government through offsets against current grant payments
to the State.
PTI, Inc., et al. v. Philip Morris, et al. was filed by
five distributors in the cigarette import-/re-entry business,
seeking to overturn the tobacco Master Settlement Agreement (MSA)
entered between 46 states and the tobacco industry in November
1998. See "State Finances - Tobacco Litigation" above. The
primary focus of the complaint is the provision of the MSA
encouraging participating states to adopt a statute requiring
nonparticipating manufacturers to either become participating
manufacturers and share the financial obligations under the MSA
or pay money into an escrow account. Plaintiffs seek
compensatory and punitive damages against the state and state
officials and an order placing tobacco settlement funds into a
trust to be administered by the court for the treatment of
medical expenses of persons injured by tobacco products. A
motion to dismiss the complaint is currently scheduled for
hearing in February 2000. The potential fiscal impact of an
adverse ruling is largely unknown, but could exceed the full
amount of the settlement (estimated to be $1 billion annually, of
which 50% will go directly to the State's General Fund and the
other 50% directly to the State's 58 counties and 4 largest
cities).
Arnett v. California Public Employees Retirement System,
et al., was filed by seven former employees of the State of
California and local agencies, seeking back wages, damages and
injunctive relief. Plaintiffs are former public safety members
who began employment after the age of 40 and are recipients of
Industrial Disability Retirement ("IDR") benefits. Plaintiffs
contend that the formula which determines the amount of IDR
benefits violated the federal Age Discrimination in Employment
Act of 1967. Plaintiffs contend that, but for their ages at
hire, they would receive increased monthly IDR benefits similar
to their younger counterparts who began employment before the age
of 40. On August 17, 1999, the Ninth Circuit Court of Appeals
reversed the District Court's dismissal of the complaint for
failure to state a claim. The State may seek further review in
the United States Supreme Court. However, the case has now been
remanded back to the District Court and trial will most likely
occur in December 2000. In the event of an unfavorable result,
CalPERS has estimated the liability to the State as approximately
$315.5 million.
43
<PAGE>
Year 2000
The State's reliance on information technology in every
aspect of its operations has made Year 2000 related information
technology ("IT") issues a high priority for the State. The
Department of Information Technology ("DOIT"), an independent
office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully
functional before the year 2000. The DOIT has created a year
2000 Task Force and a California 2000 Office to establish
statewide policy requirements; to gather, coordinate, and share
information; and to monitor statewide progress. In December
1996, the DOIT began requiring departments to report on Year 2000
activities and currently requires departmental monthly reporting
of Year 2000 status. The DOIT has emphasized to departments that
efforts should be focused on applications that support mission-
critical business practices.
In its quarterly report for the period ending December
31, 1998 the DOIT unveiled the new administration's strategy for
addressing Year 2000 issues. The key components of this strategy
include centralization and coordination of the State's Year 2000
efforts, delivery of essential services and emergency
preparedness, elimination of obstacles and barriers in an effort
to streamline the current funding request process, and broad-
based collaboration across public and private sectors through a
comprehensive communication plan.
Although substantial progress has been made toward the
goal of Year 2000 compliance, the task is very large and will
likely encounter unexpected difficulties. The State cannot
predict whether all mission critical systems will be ready and
tested by late 1999 or what the impact failure of any particular
IT system(s) or of outside interfaces with IT systems might have.
Insurance Feature
The insurance feature is generally described in the
Prospectus under "--Insurance Feature of the Insured National and
Insured California Portfolios". Although the Insured National
and Insured California Portfolios may purchase municipal notes
that are insured, municipal notes generally are not insured.
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.
44
<PAGE>
The Insured National Portfolios and Insured California
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 "A"
or better by S&P or Moody's. The Adviser is aware of six such
insurers, Municipal Bond Insurance Association Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC"), Ambac
Assurance Corporation ("AMBAC"), a wholly-owned subsidiary of
Ambac Financial Group, Inc., Financial Security Assurance Inc., a
wholly-owned subsidiary of Financial Security Assurance Holdings
Ltd. ("FSA"), American Capital Access Corporation ("ACA"), and
Asset Guaranty Insurance Company ("AGI"), a wholly-owned
subsidiary of Enhance Financial Services Group Inc. 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
credit and provides additional security therefor. Moreover,
while insurance coverage for the municipal securities held by the
Portfolios reduces credit risk by ensuring that a 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.
The information relating to MBIA, FGIC, AMBAC, FSA, ACA
and AGI 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
45
<PAGE>
Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin
Islands and Puerto Rico. As of December 31, 1996, MBIA had total
assets of $8,562 million, and total liabilities of $6,082.3
million. 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.
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, 1996, FGIC
had total assets of $2,654.1 million and total liabilities of
$969.7 million. 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. As of September 30, 1997,
AMBAC held, on a statutory accounting basis, total capital and
claims paying resources of $3,237.9 million. 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 December 31, 1996, FSA held, on a consolidated
basis, total assets of $1,899.5 million and total liabilities of
$1,005.1 million. The registered office of FSA is located at 350
Park Avenue, New York, New York 10022.
ACA. ACA is a Maryland-domiciled insurance company
specializing in guaranteeing transactions in underserved segments
of the municipal, structured finance, international and special
surety markets. ACA is licensed to do business in all 50 states,
the District of Columbia, Puerto Rico, Guam and the U.S. Virgin
Islands. ACA was founded in 1997 with an initial capitalization
of $242 million consisting of $117 million cash capitalization, a
$50 million capital facility from Zurich Reinsurance, N.A., and a
$75 million excess of loss reinsurance policy from Capital
Reinsurance Company. ACA's principal business office is located
at One Liberty Plaza, 52nd Floor, New York, New York 10006.
46
<PAGE>
AGI. AGI is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance
Department. AGI specializes in insuring investment-grade
securities that do not qualify for coverage from the primary
financial guaranty insurance companies. As of June 30, 1997, AGI
held total assets of $253.1 million and total liabilities of
$115.7 million. AGI's principal business office is located at
335 Madison Avenue, 25th Floor, New York, New York 10017-4605.
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, Alliance Capital Management L.P. (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 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
47
<PAGE>
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
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
48
<PAGE>
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
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
49
<PAGE>
Moody's, S&P, Duff & Phelps 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
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 30 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
50
<PAGE>
Portfolio should continue to hold the security. To the extent
that the ratings given by Moody's, S&P, Duff & Phelps 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,
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 the Portfolios'
investment objectives and policies.
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
51
<PAGE>
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 Fund has adopted a policy 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.
The correlation between movements in the price of
futures contracts or options on futures contracts and movements
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 liquid
assets 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
52
<PAGE>
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
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
53
<PAGE>
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
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
54
<PAGE>
monitoring the creditworthiness of such entities. Options
purchased or written in negotiated transactions may be 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.
Each Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis,
depending upon whether the Portfolios hedging its assets
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
55
<PAGE>
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 liquid assets 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
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
56
<PAGE>
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
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
57
<PAGE>
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
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
58
<PAGE>
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
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.
59
<PAGE>
Special Risk Considerations. Securities rated Baa are
considered by Moody's or BB by S&P, Duff & Phelps or Fitch 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.
The ratings of fixed-income securities by Moody's, S&P,
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 differences in credit
risk of securities within each rating category. See Appendix A
for a description of such ratings.
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
60
<PAGE>
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 are fundamental policies which may not be changed
with respect to any 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 of the National, Insured National, California and
New York Portfolios 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
that for purposes of this policy (a) there is no
limitation with respect to investments in municipal
61
<PAGE>
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
Investment Company Act of 1940, as amended (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 (the "Securities Act");
(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
62
<PAGE>
(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
the Prospectus may be considered to be loans;
63
<PAGE>
(4) Have more than 5% of its assets invested in
repurchase agreements with the same dealer; or
(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
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 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 1940 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 1940 Act of at least 300% for all borrowings of the
Portfolio. In addition, under the 1940 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
64
<PAGE>
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.
However, the execution costs for municipal securities are
substantially less than those for equivalent dollar values of
equity securities. See "Financial Highlights" in the Prospectus
for the portfolio turnover rates for each of the Portfolios.
________________________________________________________________
MANAGEMENT OF THE FUND
________________________________________________________________
Adviser
The Fund's investment adviser, Alliance Capital
Management L.P. (the "Adviser"), 1345 Avenue of the Americas, New
York, New York 10105, is a leading international investment
adviser managing client accounts with assets as of December 31,
1999 totaling more than $368 billion (of which more than
$169 billion represented the assets of investment companies). As
of December 31, 1999, the Adviser managed retirement assets for
many of the largest public and private employee benefit plans
(including 31 of the nation's FORTUNE 100 companies), for public
employee retirement funds in 31 states, for investment companies,
and for foundations, endowments, banks and insurance companies
worldwide. The 52 registered investment companies managed by the
Adviser, comprising 105 separate investment portfolios, currently
have approximately 5 million shareholder accounts.
Alliance Capital Management Corporation ("ACMC") is the
general partner of the Adviser and a wholly owned subsidiary of
The Equitable Life Assurance Society of the United States
("Equitable"). Equitable, one of the largest life insurance
companies in the United States, is the beneficial owner of an
approximately 55.4% partnership interest in the Adviser.
Alliance Capital Management Holding L.P. ("Alliance Holding")
owns an approximately 41.9% partnership interest in the Adviser.1
____________________
1. Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
(Footnote continued)
65
<PAGE>
Equity interests in Alliance Holding are traded on the New York
Stock Exchange in the form of units. Approximately 98% of such
interests are owned by the public and management or employees of
the Adviser and approximately 2% are owned by Equitable.
Equitable is a wholly owned subsidiary of AXA Financial, Inc.
("AXA Financial"), a Delaware corporation whose shares are traded
on the New York Stock Exchange. AXA Financial serves as the
holding company for the Adviser, Equitable and Donaldson, Lufkin
& Jenrette, Inc., an integrated investment and merchant bank. As
of June 30, 1999, AXA, a French insurance holding company, owned
approximately 58.2% of the issued and outstanding shares of
common stock of AXA Financial.
Under the Advisory Agreement, 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, 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 certain expenses incurred by the Fund including,
for example, office facilities and certain administrative
services, and 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 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
____________________
(Footnote continued)
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material business
operations. One result of the organization was that the
Advisory Agreement, then between the Fund and Alliance
Holding, was transferred to the Adviser by means of a
technical assignment, and ownership of Alliance Fund
Distributors, Inc. and Alliance Fund Services, Inc., the
Fund's principal underwriter and transfer agent,
respectively, also was transferred to the Adviser.
66
<PAGE>
services will be provided to the Fund at cost and the payments
specifically approved by the Fund's Board of Directors. The Fund
paid to the Adviser a total of $460,000 in respect of such
services during the fiscal year of the Fund ended in 1999.
Under the terms of the Advisory Agreement, the National,
New York and California Portfolios pay 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 Advisory 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 its
average daily net assets. For the Insured California Portfolio,
the Advisory 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 its
average daily net assets. Such fees are accrued daily and paid
monthly. The Adviser has agreed for the current fiscal year to
waive its fee and bear certain expenses so that total operational
expenses do not exceed on an annual basis the amounts set forth
in the prospectus.
For the fiscal year ended October 31, 1997, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounted to $3,829,514, $1,466,189, $1,937,934, $4,430,718 and
$777,943, respectively. Of such amounts, $2,507,326, $293,238,
$1,472,830, $1,953,318, and $-0- was waived by the Adviser.
For the fiscal year ended October 31, 1998, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounted to $3,969,624, $1,508,814, $2,106,298, $4,932,710, and
$843,236 respectively. Of such amounts, $2,699,344, $301,762,
$1,600,787, $2,565,009, and $-0- was waived by the Adviser.
For the fiscal year ended October 31, 1999, advisory
fees payable to the Adviser with respect to the National, Insured
National, New York, California and Insured California Portfolios
amounted to $4,354,805, $1,462,721, $2,434,115, $6,312,842 and
$875,130 respectively. Of such amounts, $2,961,268, $250,000,
$1,849,928, $3,282,677 and $0 was waived by the Adviser.
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
67
<PAGE>
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 for each Portfolio for another annual term at their
Meeting held on July 14, 1999.
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,
and is the investment adviser to the following registered
investment companies: AFD Exchange Reserves, Inc., Alliance All-
Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Disciplined Value Fund, Inc., Alliance Global Dollar Government
Fund, Inc., Alliance Global Environment Fund, Inc., Alliance
Global Small Cap Fund, Inc., Alliance Global Strategic Income
Trust, Inc., Alliance Government Reserves, Alliance Greater China
'97 Fund, Inc., Alliance Health Care Fund, Inc., Alliance High
Yield Fund, Inc., Alliance Growth and Income Fund, Inc., Alliance
International Fund, Alliance International Premier Growth Fund,
68
<PAGE>
Inc., Alliance Institutional Funds, Inc., Alliance Institutional
Reserves, Inc., Alliance Limited Maturity Government Fund, Inc.,
Alliance Money Market Fund, Alliance Mortgage Securities Income
Fund, Inc., Alliance Multi-Market Strategy Trust, 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
Select Investor Series, Inc., Alliance Technology Fund, Inc.,
Alliance Utility Income Fund, Inc., Alliance Variable Products
Series Fund, Inc., Alliance Worldwide Privatization Fund, Inc.,
The Alliance Fund, Inc. and The Alliance Portfolios, 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
All-Market Advantage 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 business and affairs of the Fund are managed under
the direction of the Board of Directors. 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,2 54, is the President, Chief Operating
Officer and a Director of ACMC, with which he has been associated
since prior to 1995.
RUTH BLOCK, 69, was formerly Executive Vice President
and Chief Insurance Officer of Equitable. She is a Director of
Ecolab Incorporated (specialty chemicals) and Amoco Corporation
(oil and gas). Her address is 75 Briar Woods Trail, Stamford,
Connecticut, 06903.
____________________
2. An interested person of the Fund as defined in the 1940 Act.
69
<PAGE>
DAVID H. DIEVLER, 70, is an independent consultant. He
was formerly a Senior Vice President of ACMC, with which he was
associated until 1995. His address is P.O. Box 167, Spring Lake,
New Jersey, 07762.
JOHN H. DOBKIN, 57, is President of Historic Hudson
Valley(historic preservation) since prior to 1995. Previously he
was a Director of the National Academy of Design. His address is
150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, Jr., 67, is an investment adviser and
independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he has been associated since prior to 1995. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06831.
DR. JAMES M. HESTER, 75, is President of the Harry Frank
Guggenheim Foundation with which he has been associated since
prior to 1995. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, NJ
08540.
CLIFFORD L. MICHEL, 60, is a member of the law firm of
Cahill Gordon & Reindel with which he has been associated since
prior to 1995. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is 80 Pine Street, New
York, NY 10005.
DONALD J. ROBINSON, 65, was formerly a partner at
Orrick, Herrington & Sutcliff and is currently Senior Counsel to
that law firm. His address is 98 Hell's Peak Road, Weston, VT
05161.
Officers
JOHN D. CARIFA, Chairman and President, (see biography,
above).
SUSAN P. KEENAN 42, Senior Vice President, is a Senior
Vice President of ACMC with which she has been associated since
prior to 1995.
WAYNE D. LYSKI, 58, Senior Vice President, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1995.
70
<PAGE>
KATHLEEN A. CORBET, 39, Senior Vice President, is an
Executive Vice President of ACMC since prior to 1995.
WILLIAM E. OLIVER 46, Vice President, is a Vice
President of ACMC since prior to 1995.
DAVID M. DOWDEN 34, Vice President, is a Vice President
of ACMC, with which he has been associated since prior to 1995.
TERRANCE T. HULTS 33, Vice President, is Vice President
of ACMC, with which he has been associated since prior to 1995.
EDMUND P. BERGAN, JR., 49, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS") with which
he has been associated since prior to 1995.
DOMENICK PUGLIESE, 38, Assistant Secretary, is Vice
President and Assistant General Counsel of AFD with which he has
been associated since May 1995. Previously, he was Vice
President and Counsel of Concord Financial Holding Corporation
since prior to 1995.
ANDREW L. GANGOLF, 45, Assistant Secretary, has been a
Vice President and Assistant General Counsel of AFD, with which
he has been associated since prior to 1995.
MARK D. GERSTEN 49, Treasurer and Chief Financial
Officer, is a Vice President of AFD and a Senior Vice President
of AFS, with which he has been associated since prior to 1995.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended October 31, 1999, the
aggregate compensation paid to each of the Directors during
calendar year 1999 by all of the funds to which the Adviser
provides investment advisory services (collectively, the
"Alliance Fund Complex") and the total number of registered
investment companies (and separate investment portfolios within
those companies) in the Alliance Fund Complex with respect to
which each of the Directors serves as a director or trustee, are
set forth below. Neither the Fund nor any other fund in the
Alliance Fund Complex provides compensation in the form of
pension or retirement benefits to any of its directors or
trustees. Each of the Directors is a director or trustee of one
or more other registered investment companies in the Alliance
Fund Complex.
71
<PAGE>
Total Number
Total Number of Investment
of Funds in Portfolios
the Alliance within the
Total Fund Complex, Funds,
Compensation Including the Including
from the Fund, as to the Fund, as
Alliance which the to which the
Aggregate Fund Complex, Trustee is Trustee is a
Compensation Including a Director Director or
Name of Director from the Fund the Fund or Trustee Trustee
John D. Carifa -0- -0- 50 103
Ruth Block $3,730 $154,263 38 80
David H. Dievler $3,845 $210,188 45 87
John H. Dobkin $3,846 $206,488 42 84
William H. Foulk, Jr. $3,849 $246,413 45 98
Dr. James M. Hester $3,850 $164,138 39 81
Clifford L. Michel $3,850 $183,388 39 83
Donald J. Robinson $3,095 $154,313 41 92
______________________
As of January 5, 2000, 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" or "AFD"), 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 has been duly adopted and approved in
accordance with Rule 12b-1 under the 1940 Act (the "Rule 12b-1
Plan").
During the fiscal year ended October 31, 1999, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
72
<PAGE>
expenditures under the Agreement, with respect to Class A shares,
in amounts aggregating $1,178,257, $524,176, $660,634,
$1,903,085, and $346,078, respectively, which constituted
approximately .30% of each Portfolio's aggregate average daily
net assets attributable to Class A shares during the period, and
the Adviser made payments from its own resources as described
above aggregating $5,818,625. Of the $10,430,855 paid by the
Fund and the Adviser with respect to the Class A shares under the
Agreement, $363,975 was spent on advertising, $116,945 on the
printing and mailing of prospectuses for persons other than
current shareholders, $4,958,084 for compensation to broker-
dealers and other financial intermediaries (including, $972,788
to the Fund's Principal Underwriter), $1,979,931 for compensation
to sales personnel and $3,011,920 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses.
During the fiscal year ended October 31, 1999, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
expenditures under the Agreement, with respect to Class B shares,
in amounts aggregating $1,893,298, $454,104, $1,196,573,
$2,281,628 and $267,312, respectively, which constituted
approximately 1.0% of the aggregate average daily net assets
attributable to Class B shares during the period, and the Adviser
made payments from its own resources as described above
aggregating $4,802,231. Of the $10,895,146 paid by the Fund and
the Adviser with respect to the Class B shares under the
Agreement, $227,089 was spent on advertising, $67,110 on the
printing and mailing of prospectuses for persons other than
current shareholders, $8,196,295 for compensation to broker-
dealers and other financial intermediaries (including, $595,260
to the Fund's Principal Underwriter), $759,519 for compensation
to sales personnel, $1,076,090 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $569,043 was spent on interest on
Class B shares financing.
During the fiscal year ended October 31, 1999, the
National, Insured National, New York, California and Insured
California Portfolios paid distribution services fees for
expenditures under the Agreement, with respect to Class C shares,
in amounts aggregating $1,146,865, $224,087, $495,897, $1,475,303
and $170,241, respectively, which constituted approximately 1.0%
of each Portfolio's aggregate average daily net assets
attributable to Class C shares during the period, and the Adviser
made payments from its own resources as described above
aggregating $1,771,282. Of the $5,283,675 paid by the Fund and
73
<PAGE>
the Adviser with respect to the Class C shares under the
Agreement, $145,558 was spent on advertising, $44,696 on the
printing and mailing of prospectuses for persons other than
current shareholders, $3,901,184 for compensation to broker-
dealers and other financial intermediaries (including, $367,895
to the Fund's Principal Underwriter), $457,917 for compensation
to sales personnel, $649,245 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $85,075 was spent on interest on
Class C shares financing.
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 contingent deferred sales charges and
distribution services fees on the Class B and 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 the sales
charge and distribution services fee provide for the financing of
the distribution of the relevant class of the Portfolio's shares.
With respect to Class A shares of the Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Fund in subsequent
fiscal years. AFD's compensation with respect to Class B and
Class C shares for any given year, however, will probably exceed
the distribution services fee payable under the Rule 12b-1 Plan
with respect to the class involved and, in the case of Class B
and Class C shares, payments received from contingent deferred
sales charges ("CDSCs"). The excess will be carried forward by
AFD and reimbursed from distribution services fees payable under
the Rule 12b-1 Plan with respect to the class involved and, in
the case of Class B and Class C shares, payments subsequently
received through CDSCs, so long as the Rule 12b-1 Plan is in
effect.
Unreimbursed distribution expenses incurred as of
October 31, 1999, and carried over for reimbursement in future
years in respect of the Class B and Class C shares for the Fund
were, as of that time, as follows:
74
<PAGE>
Amount of Unreimbursed Distribution Expenses Carried
Over (as a percentage of the Class's net assets)
________________________________________________________
Class B Class C
National $4,329,603 (2.3%) $3,541,158 (3.1%)
Insured National $2,447,094 (5.4%) $1,193,429 (5.3%)
California $7,426,911 (3.3%) $3,575,665 (2.4%)
Insured California $1,854,964 (6.9%) $ 909,433 (5.3%)
New York $4,500,004 (3.8%) $1,798,282 (3.6%)
The Rule 12b-1 Plan is 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.
In approving the Agreement, the Directors of the Fund
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
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
such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect 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 1940 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 1940 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
75
<PAGE>
the continuance of the Agreement for another annual term at their
meeting held on July 14, 1999.
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, (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.
Transfer Agency Agreement
AFS, an indirect wholly-owned subsidiary of the Adviser
located at 500 Plaza Drive, Secaucus, New Jersey 07094, receives
a transfer agency fee per account holder of the Class A shares,
Class B shares and Class C shares 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. For the fiscal year ended
October 31, 1999, the Fund paid AFS $1,147,981 for transfer
agency services.
________________________________________________________________
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
76
<PAGE>
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, (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 CB
Richard Ellis, Inc. Generally, a fee-based program must charge
an asset-based or other similar fee and must invest at least
$250,000 in Advisor Class shares of the Fund in order to be
approved by the Principal Underwriter for investment in Advisor
Class shares.
Investors may purchase shares of the Fund either through
selected broker-dealer, agents, financial intermediaries or other
financial representatives, or directly through the Principal
Underwriter. A transaction, service, administrative or other
similar fee may be charged by your broker-dealer, agent,
financial intermediary or other financial representative with
respect to the purchase, sale or exchange of Class A, Class B,
Class C or Advisor Class shares made through such financial
representative. Such financial representative may also impose
requirements with respect to the purchase, sale or exchange of
shares that are different from, or in addition to, those imposed
by the Fund, including requirements as to the minimum initial and
subsequent investment amounts. 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 the
77
<PAGE>
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 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.
78
<PAGE>
Eastern time. The selected dealer, agent or financial
representative, as applicable, is responsible for transmitting
such orders by 5:00 p.m. Eastern time (certain selected dealers,
agents or financial representatives may enter into operating
agreements permitting them to transmit purchase information to
the Principal Underwriter after 5:00 p.m. Eastern time and
receive that day's net asset value.) 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 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.
79
<PAGE>
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 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 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 to locations within or outside the United States. Such
dealer or agent may elect to 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.
80
<PAGE>
Alternative Retail Purchase Arrangements -- Class A, Class B
and Class C Shares3
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
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.
____________________
3. Advisor Class shares are sold only to investors described
above in this section under "--General."
81
<PAGE>
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.
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, 1997,
1998 and 1999, the aggregate amount of underwriting commission
payable with respect to shares of the National Portfolio were
$1,125,797, $1,767,149 and $1,973,713; the Insured National
Portfolio were $393,163, $543,431 and $342,791; the New York
Portfolio were $713,011, $1,518,128 and $1,316,583; the
California Portfolio were $2,050,508, $3,131,732 and $4,861,112;
and the Insured California Portfolio were $266,043, $432,441 and
$426,671; of that amount, the Principal Underwriter, received the
amounts of $12,822, $67,020 and $118,269 for the National
Portfolio; $19,944, $5,051 and $19,762 for the Insured National
Portfolio; $29,137, $9,677 and $43,246 for the New York
Portfolio; $73,095, $31,667 and $216,070 for the California
Portfolio; and, $-0-, $-0- and $29,686 for 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 years
ended in 1997, 1998 and 1999, the Principal Underwriter received
in contingent deferred sales charges with respect to Class B
redemptions $109,119, $109,957 and $212,153 for the National
Portfolio, $29,576, $30,044 and $67,540 for the Insured National
Portfolio, $113,659, $100,769 and $258,101 for the California
Portfolio, $29,098, $17,320 and $16,686 for the Insured
82
<PAGE>
California Portfolio and $78,379, $95,159 and $122,619 for the
New York Portfolio. During the fiscal years ended in 1997, 1998
and 1999, the Principal Underwriter received in contingent
deferred sales charges with respect to Class C redemptions
$19,971, $24,916 and $28,468 for the National Portfolio, $9,128,
$2,888 and $7,642 for the Insured National Portfolio, $25,188,
$27,881 and $66,876 for the California Portfolio, $964, $2,687
and $7,659 for the Insured California Portfolio and $15,274,
$22,830 and $34,467 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.
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
83
<PAGE>
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
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
84
<PAGE>
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.
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 1940 Act, but does not include purchases by any such
company 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
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-Quality Bond Portfolio
-U.S. Government Portfolio
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
85
<PAGE>
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Fund
Alliance International Premier Growth Fund
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income 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 Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors 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.
86
<PAGE>
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.
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
87
<PAGE>
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.
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
88
<PAGE>
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.
Investors may exercise the reinstatement privilege by written
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
89
<PAGE>
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) employer-sponsored qualified
pension or profit-sharing plans (including Section 401(k) plans),
custodial accounts maintained pursuant to Section 403(b)(7)
retirement plans and individual retirement accounts (including
individual retirement accounts to which simplified employee
pension ("SEP") contributions are made), if such plans or
accounts are established or administered under programs sponsored
by administrators or other persons that have been approved 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
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
90
<PAGE>
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.
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
91
<PAGE>
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
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.
92
<PAGE>
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 and, as long as the shares are held for one year or more,
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
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
93
<PAGE>
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 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 Fund will provide the shareholder with at
least 30 days' notice of the conversion. 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
basis of the relative net asset values of the two classes and
94
<PAGE>
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 have a higher expense ratio and 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
Shares--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
95
<PAGE>
employee benefit plan, the shareholder should contact his or her
financial representative.
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,
96
<PAGE>
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.
Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer 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.
Prior to March 1, 1998, this service can be employed only once in
any 30 day period (except for certain omnibus accounts). A
telephone redemption request by electronic funds transfer 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. Each Fund shareholder is
eligible to request redemption by check 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 day. Prior to
March 1, 1998, this service can be employed only once in any 30
day period (except for certain omnibus accounts). Proceeds of
such redemptions are remitted by check to the shareholder's
address of record. 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. Telephone
97
<PAGE>
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.
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 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. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value.) 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
98
<PAGE>
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.
________________________________________________________________
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
99
<PAGE>
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
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.
100
<PAGE>
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 or
electronic funds transfer will be permitted only after the
Alliance Mutual Fund whose shares have been tendered for exchange
is reasonably assured that the check or electronic funds transfer
has cleared, normally up to 15 calendar days following the
purchase date. Exchange of shares of Alliance Mutual Funds will
generally result in the realization of a capital gain or loss for
federal income tax purpose.
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
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.
101
<PAGE>
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.
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 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.
102
<PAGE>
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 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
103
<PAGE>
the address or the "For 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
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
104
<PAGE>
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.
________________________________________________________________
NET ASSET VALUE
________________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Directors of the Fund deem
necessary in order to comply with Rule 22c-1 under the 1940 Act.
The Fund's per share net asset value is calculated by dividing
the value of the Fund's total assets, less its liabilities, by
the total number of its shares then outstanding. A Fund business
day is any weekday on which the Exchange is open for trading.
105
<PAGE>
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Boards duties with respect to the following procedures.
Readily marketable securities listed on the Exchange are valued,
except as indicated below, at the last sale price reflected on
the consolidated tape at the close of the Exchange on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the quoted bid prices on such day. If no bid prices are quoted
on such day, then the security is valued at the mean of the bid
and asked prices at the close of the Exchange on such day as
obtained from one or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, the security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Directors. Securities for which no bid and
asked price quotations are readily available are valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors. Readily marketable
securities not listed on the Exchange or on a foreign securities
exchange are valued in like manner. Portfolio securities traded
on the Exchange and on one or more other foreign or other
national securities exchanges, and portfolio securities not
traded on the Exchange but traded on one or more foreign or other
national securities exchanges are valued in accordance with these
procedures by reference to the principal exchange on which the
securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
106
<PAGE>
at fair value by, or in accordance with procedures established
by, the Board of Directors.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued 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 Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities. Mortgage-backed and asset-backed securities may be
valued at prices obtained from a bond pricing service or at a
price obtained from one or more of the major broker-dealers in
such securities. In cases where broker-dealer quotes are
obtained, the Adviser may establish procedures whereby changes in
market yields or spreads are used to adjust, on a daily basis, a
recently obtained quoted bid price on a security.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
The Board of Directors may suspend the determination of
the Funds net asset value (and the offering and sales of shares),
subject to the rules of the Commission and other governmental
rules and regulations, at a time when: (1) the Exchange is
closed, other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its net assets, or (3) for the
107
<PAGE>
protection of shareholders, the Commission by order permits a
suspension of the right of redemption or a postponement of the
date of payment on redemption.
For purposes of determining the Funds net asset value
per share, all assets and liabilities initially expressed in a
foreign currency will be converted into U.S. Dollars at the mean
of the current bid and asked prices of such currency against the
U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares, Class B
shares, Class C shares and Advisor Class shares will be invested
together in a single portfolio. The net asset value of each
class will be determined separately by subtracting the
liabilities allocated to that class from the assets belonging to
that class in conformance with the provisions of a plan adopted
by the Fund in accordance with Rule 18f-3 under the 1940 Act.
________________________________________________________________
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
108
<PAGE>
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
taxable 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
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.
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
109
<PAGE>
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.
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.
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.
If a shareholder holds shares for six months or less and
during that time receives a distribution of long-term capital
gains, any loss realized on the sale of the 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 distribtuion of
tax-exempt interest income, any loss realized on the sale of the
shares would be disallowed to the extent of the distribution.
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
110
<PAGE>
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
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,
111
<PAGE>
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.
State Taxation of the Portfolios
California Portfolio and Insured California Portfolio. It is
anticipated that substantially all of the dividends paid by the
California Portfolio and Insured California Portfolio will be
exempt from California personal income tax. Dividends will be
exempt from this tax to the extent derived from municipal
securities issued by the State of California or its political
subdivisions. Distributions paid to corporate shareholders will
be subject to the California corporate franchise tax.
New York Portfolio. It is anticipated that substantially all
of the dividends paid by the New York Portfolio will be exempt
from New York State and New York City personal and fiduciary
income taxes. Dividends will be so exempt to the extent that
112
<PAGE>
they are either (i) exempt from regular federal income tax and
attributable to interest from New York municipal securities or
(ii) attributable to interest on U.S. government securities,
provided that the Portfolio qualifies as a regulated investment
company under the Code and provided that, at the close of each
quarter of the Portfolio's year, at least 50% of its total assets
consist of obligations of the U.S. and its possessions.
Distributions of capital gains will be subject to New York State
and New York City personal and fiduciary income taxes. Interest
on indebtedness incurred to buy or carry shares of the New York
Portfolio generally will not be deductible for New York income
tax purposes. Distributions paid to corporate shareholders will
be included in New York entire net income for purposes of the
franchise tax.
________________________________________________________________
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
Portfolios, including transactions in listed securities, are
executed in the over-the-counter market by approximately fifteen
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
113
<PAGE>
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 Conduct Rules 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,
or with Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Adviser. During the fiscal years ended
October 31, 1997, 1998 and 1999 the Fund incurred no brokerage
commissions.
________________________________________________________________
GENERAL INFORMATION
________________________________________________________________
Capitalization
The authorized capital stock of the Fund consists solely
of 45,350,000,000 shares of Common Stock having a par value of
$.001 per share, of which 9,100,000,000 shares are presently
designated for each of the Insured National and National
Portfolios and 9,050,000,000 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
114
<PAGE>
shareholders' meeting for the removal of Directors of the Fund,
similar to those set forth in Section 16(c) of the 1940 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.
It is anticipated that annual shareholder meetings will
not be held; shareholder meetings will be held only when required
by federal or state law. Shareholders have available certain
procedures for the removal of Directors.
A shareholder will be entitled to share pro rata with
other holders of the same class of shares all dividends and
distributions arising from each Portfolio's assets and, upon
redeeming shares, will receive the then current net asset value
of the Portfolio represented by the redeemed shares less any
applicable contingent deferred sales charge. The Fund is
empowered to establish, without shareholder approval, additional
portfolios, which may have different investment objectives and
policies than those of the Fund, and additional classes of shares
within each Portfolio. If an additional portfolio or class were
established in the Fund, each share of the portfolio or class
would normally be entitled to one vote for all purposes.
Generally, shares of each portfolio and class would vote together
as a single class on matters, such as the election of Directors,
that affect each portfolio and class in substantially the same
manner. Class A, B, C and Advisor Class shares have identical
voting, dividend, liquidation and other rights, except that each
class bears its own transfer agency expenses, each of Class A,
Class B and Class C shares of the Fund bears its own distribution
expenses and Class B shares and Advisor Class shares convert to
Class A shares under certain circumstances. Each class of shares
of the Fund votes separately with respect to the Fund's Rule 12b-
1 distribution 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
Directors and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund.
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.
115
<PAGE>
Any issuance of shares of another series would be governed by the
1940 Act and Maryland law.
At January 5, 12000, there were outstanding 245,986,382
voting shares of common stock of the Fund, including, 43,169,211
Class A shares, 14,849,781 Class B shares and 10,815,333 Class C
shares of the National Portfolio; 17,930,749 Class A shares,
3,408,612 Class B shares and 2,182,592 Class C shares of the
Insured National Portfolio; 25,238,721 Class A shares, 11,627,528
Class B shares and 4,795,913 Class C shares of the New York
Portfolio; 65,510,559 Class A shares, 20,682,443 Class B shares
and 14,464,606 Class C shares of the California Portfolio; and
8,405,346 Class A shares, 1,668,899 Class B shares and 1,236,089
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 5, 2000.
NO. OF
SHARES % OF % OF % OF
NAME AND ADDRESS OF CLASS CLASS A CLASS B CLASS C
CALIFORNIA PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith for the
Sole Benefit of its Customers
Attn: Fund Administration (971N7)
4800 Deer Lake Dr.
2nd Floor
Jacksonville, FL 32246-6485 8,306,791 13%
Merrill Lynch, Pierce,
Fenner & Smith for the
Sole Benefit of its Customers
Attn: Fund Administration (97AU6)
4800 Deer Lake Dr.
2nd Floor
Jacksonville, FL 32246-6484 4,620,132 22%
Merrill Lynch, Pierce,
Fenner & Smith for the
Sole Benefit of its Customers
Attn: Fund Administration (97BE6)
4800 Deer Lake Dr.
2nd Floor
Jacksonville, FL 32246-6484 6,425,132 44%
116
<PAGE>
INSURED CALIFORNIA
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (974D4)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 540,547 6%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97AU4)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 329,359 20%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97BE7)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 358,065 29%
NATIONAL PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (971N5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 2,641,457 6%
117
<PAGE>
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97AU5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 2,802,955 19%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97BE5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 4,299,657 40%
INSURED NATIONAL PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (971N6)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 905,067 5%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97AU7)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 868,398 26%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97BE4)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,191,170 55%
118
<PAGE>
NEW YORK PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (971N8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,808,549 7%
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97AU8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,815,621 16%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration (97BE8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 2,285,277 48%
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. 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. 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
119
<PAGE>
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 LLP, New
York, New York. Seward & Kissel LLP has relied upon the opinion
of Venable, Baetjer and Howard, LLP, Baltimore, Maryland, for
matters relating to Maryland law.
Independent Auditors
Ernst & Young LLP, New York, New York, has 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 rate. 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 is substituted for net investment
income per share. The actual distribution rate is computed
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, five and
ten year periods (or the period since the Portfolio's inception).
A Portfolio's actual distribution rate is computed separately for
Class A, Class B and Class C shares. 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
120
<PAGE>
received and the maximum sales charge applicable to purchases of
Portfolio shares is assumed to have been paid.
Yield Calculations
30 Day Tax
30 Day Tax Equivalent Yield
(period ended (period ended Distribution
10/31/99) 10/31/99) Rate
Fund
Insured National
Class A 4.98% 8.25% 4.48%
Class B 4.28% 7.09% 3.98%
Class C 4.29% 7.10% 3.97%
National
Class A 5.21% 8.63% 5.26%
Class B 4.72% 7.81% 4.80%
Class C 4.72% 7.81% 4.80%
New York
Class A 5.39% 9.99% 5.27%
Class B 4.91% 9.10% 4.75%
Class C 4.92% 9.12% 4.75%
California
Class A 5.21% 9.51% 5.03%
Class B 4.71% 8.60% 4.52%
Class C 4.72% 8.62% 4.52%
Insured
California
Class A 4.94% 9.02% 4.56%
Class B 4.45% 8.12% 3.99%
Class C 4.45% 8.12% 3.99%
Total Return Calculations
121
<PAGE>
One Year period Five Year period Ten Year period
Fund ended 10/31/98 ended 10/31/98 ended 10/31/98
Insured National
Class A (9.34)% 6.15% 6.26%
Class B (8.75)% 6.34% 4.75*
Class C (6.88)% 6.36% 4.18*
National
Class A (8.00)% 6.20% 6.55%
Class B (7.36)% 6.39% 4.92*
Class C (5.55)% 6.40% 4.36*
New York
Class A (7.41)% 6.45% 6.49%
Class B (6.71)% 6.60% 4.86*
Class C (4.88)% 6.60% 4.29*
California
Class A (5.95)% 7.11% 6.77%
Class B (5.27)% 7.28% 5.56*
Class C (3.32)% 7.28% 5.07*
Insured
California
Class A (7.81)% 6.45% 6.17%
Class B (7.20)% 6.57% 4.70*
Class C (5.36)% 6.57% 4.13*
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--6.85%,
New York City--3.828% and California--9.30%. 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.
122
<PAGE>
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, 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.
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. 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.
123
<PAGE>
________________________________________________________________
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
________________________________________________________________
ALLIANCE
------------------
MUNICIPAL
------------------
INCOME
------------------
FUND
------------------
Annual Report
October 31, 1999
AllianceCapital [LOGO](R)
<PAGE>
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1999 Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
MUNICIPAL BONDS - 102.2%
LONG TERM MUNICIPAL BONDS - 93.8%
ALASKA - 3.7%
AAA Alaska Hsg Fin Corp
(Mtg Rev)
MBIA Ser 97A
6.00%, 6/01/27.............. $25,000 $ 24,568,500
------------
ARIZONA - 3.1%
AAA Maricopa Cnty IDA MFHR
(Shadow Creek)
FNMA Ser 98C AMT
5.20%, 12/15/21............. 1,500 1,369,395
AA- Mohave Cnty IDR
(Cargill/No Star Steel Proj)
Ser 95A AMT
6.70%, 3/01/20.............. 7,300 7,825,965
B Pima Cnty IDR
(Elec Pwr Co Proj)
Ser 97B Tuscon
6.00%, 9/01/29.............. 13,000 11,677,250
------------
20,872,610
------------
CALIFORNIA - 14.1%
NR Corona Comm
Fac Dist #97-2
(Eagle Glen)
Ser 98
5.75%, 9/01/16.............. 2,505 2,326,293
5.88%, 9/01/23.............. 3,260 2,988,703
Aaa Encinitas Comm
(Encinitas Ranch)
Fac Dist #1
Ser 95A Pre-refunded
7.38%, 9/01/05 (b).......... 18,155 20,782,936
NR Encinitas Comm
(Encinitas Ranch)
Fac Dist #1
Ser 98A
5.88%, 9/01/20.............. 10,020 9,451,265
NR Fontana Comm
Fac Dist #11
(Heritage West End)
Ser 99B
6.50%, 9/01/28.............. 8,150 7,816,013
NR La Verne Comm
Fac Dist #88-1 Spec Tax
5.88%, 3/01/14.............. 6,920 6,695,031
NR Los Angeles Cnty Comm
Fac Dist #3
(Valencia/Newhall Area)
Ser 95A
7.13%, 9/01/20.............. 5,500 5,807,615
NR Los Angeles Cnty Comm
Fac Dist #4
(Calabasas Area)
Ser 92A Pre-refunded
7.65%, 9/01/01.............. 5,000 5,404,700
NR Los Angeles Cnty Comm
Fac Dist #92-1 (Castaic
Union SD/Northlake Proj)
Ser 92
9.00%, 10/01/19............. 8,710 9,517,417
AAA No Calif Trans Agy
Elec Rev
(Calif-Oregon Trans)
MBIA Ser 93
7.34%, 4/29/24.............. 10,000 8,700,700
NR Sacramento Comm
Fac Lease/Rev
(No Natomas Proj)
Ser 99A
6.25%, 9/01/23.............. 6,435 6,188,025
NR San Diego Comm
Fac Dist #1
(Miramar Ranch North)
Ser 95B Pre-refunded
7.10%, 9/01/20 ............. 7,000 7,984,760
NR Santa Margarita Wtr Dist
Fac Dist #99-1 (Talega)
Ser 99
6.20%, 9/01/20.............. 1,100 1,066,164
------------
94,729,622
------------
COLORADO - 1.5%
Aaa Denver City & Cnty
(Arpt Sys Rev)
Ser 92C AMT Pre-refunded
6.75%, 11/15/02 (b) ........ 1,995 2,151,628
BBB+ Denver City & Cnty
(Arpt Sys Rev)
Ser 92C AMT
6.75%, 11/15/22............. 7,505 7,716,716
------------
9,868,344
------------
9
<PAGE>
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
CONNECTICUT - 1.5%
BB- Connecticut Dev Auth PCR
(Ct Light & Pwr Co Proj)
Ser 93 AMT
5.95%, 9/01/28.............. $11,000 $ 9,836,420
------------
DISTRICT OF COLUMBIA - 0.3%
AAA Washington DC GO
Ser 98B MBIA
5.75%, 6/01/09.............. 1,900 1,966,367
------------
FLORIDA - 12.2%
Aaa Clay Cnty HFA SFMR
(Mortgage Rev)
Ser 99 GNMA/FNMA
5.30%, 10/01/29 (b)......... 4,710 4,253,978
NR Collier Cnty Comm
Fac Dist
(Fiddlers Creek)
Ser 99A
5.88%, 5/01/21.............. 9,305 8,733,580
NR Collier Cnty Comm
Dev Dist (Heritage Greens)
Ser 97
8.25%, 5/01/18.............. 4,150 4,279,771
A Collier Cnty HFA MFHR
(Whistlers Grn Apts)
Ser 99A AMT
5.40%, 12/01/27............. 1,890 1,706,141
NR Collier Cnty IDR
(Southern St Util)
Ser 96 AMT
6.50%, 10/01/25............. 12,605 12,746,554
Aaa Escambia Cnty HFA SFMR
MBIA Ser 99 AMT
5.20%, 4/01/32 (b).......... 5,000 4,348,300
AA+ Florida GO
Board of Education
Ser 98B
6.00%, 6/01/04.............. 1,900 2,007,787
AAA Florida HFC MFHR
(Crossing at Univ Apt)
AMBAC Ser 98Q-1 AMT
5.25%, 12/01/38............. 6,545 5,745,921
NR Lee Cnty Comm Fac
(Stoneybrook)
Ser 98B
5.70%, 5/01/08 ............. 3,350 3,251,376
Aa3 North Miami Hlth Fac Auth
(Catholic Hlth Svcs Oblig Grp)
Ser 96
6.00%, 8/15/24 (b).......... 1,200 1,171,164
NR Northern Palm Beach Cnty
Imp Dist #9A (ABACOA)
Ser 96A
7.30%, 8/01/27.............. 15,600 16,505,580
A3 Orange Cnty HFA MFHR
(Seminole Pt Proj)
Ser 99L AMT
5.80%, 6/01/32 (b).......... 6,855 6,400,513
A Pasco Cnty HFA MFHR
(Pasco Woods Apts)
Ser 99A
5.90%, 8/01/39.............. 3,690 3,449,892
NR St. John's Cnty Comm Dev
(Julington Creek Plantation)
Ser 97
6.70%, 5/01/07.............. 2,830 2,927,465
7.13%, 5/01/19.............. 1,695 1,785,123
A Suwannee Cnty Hlth Fac
(Advent Christian Vlg Inc.)
ACA Ser 99
5.25%, 4/01/24.............. 1,300 1,136,759
Baa2 Volusia Cnty Ed Fac Auth
(Embry-Riddle Aero Univ)
Ser A
5.75%, 10/15/29 (b)......... 2,000 1,860,160
------------
82,310,064
------------
INDIANA - 8.0%
BB+ Indianapolis Arpt Auth
(United Airlines
Maintenance Ctr Proj)
Ser 95A AMT
6.50%, 11/15/31............. 55,570 54,039,046
------------
MARYLAND - 0.2%
NR Maryland Dev Fin Auth Eco Dev
(Med Waste Assoc)
Ser 89 AMT
8.75%, 11/15/10............. 1,365 1,383,796
------------
MASSACHUSETTS - 4.5%
BBB Massachusetts Dev Fin Agcy
(Ogden Haverhill Proj)
Ser 98B AMT
5.50%, 12/01/19............. 2,735 2,422,171
AAA Massachusetts HFA MFHR
AMBAC Ser 95E AMT
6.00%, 7/01/37.............. 2,680 2,613,375
10
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
A+ Massachusetts HFA SFMR
(Residential Mtg)
Ser 40 AMT
6.65%, 12/01/27............. $ 5,000 $ 5,140,150
AAA Massachusetts HFA SFMR
(Residential Mtg)
Ser 73 AMT
5.90%, 12/01/23............. 8,000 7,740,240
Baa3 Massachusetts Hlth & Ed
Fac Auth
(Lasell College)
Ser 99A
5.63%, 7/01/29 (b).......... 7,490 6,640,709
AAA Massachusetts Port Auth
Spec Fac (US Air Proj)
MBIA Ser 96A AMT
5.88%, 9/01/23.............. 5,600 5,374,432
------------
29,931,077
------------
MICHIGAN - 3.6%
BB- Detroit
(Daimler/Chrysler Jefferson
North Assembly Plant)
Ser 98A
5.50%, 5/01/21.............. 2,070 1,862,958
AAA Detroit Swr Sys Rev
FGIC Ser 93
7.62%, 7/01/23 ............. 1,300 1,182,909
AAA Kent Cnty Arpt Rev
(Kent Cnty Int'l)
Ser 95 AMT Pre-refunded
6.10%, 1/01/25.............. 3,300 3,526,677
AAA Michigan HDA MFHR
(Rental Hsg Rev)
MBIA Ser 99A AMT
5.30%, 10/01/37............. 14,520 12,868,060
AA+ Michigan HDA SFMR
Ser 96B AMT
6.20%, 6/01/27.............. 4,945 4,964,236
------------
24,404,840
------------
MINNESOTA - 4.3%
AAA Brooklyn Park MFHR
(Brooks Landing)
FNMA Ser 99A AMT
5.50%, 7/01/19.............. 1,355 1,283,253
AAA Duluth (Arpt Lease Rev) GO
Ser 95C AMT
6.25%, 8/01/14.............. 3,430 3,539,554
A- Golden Valley Hlth Fac
(Covenant Retmt Cmnty)
Ser 99A
5.50%, 12/01/29............. 3,750 3,265,688
AAA Minneapolis HFA MFHR
(Riverside Plaza Proj)
GNMA Ser 98 AMT
5.20%, 12/20/30............. 4,400 3,940,156
AAA Minnesota HFA MFHR
(Rental Hsg)
MBIA Ser 95D
6.00%, 2/01/22.............. 3,685 3,708,215
AA+ Minnesota HFA SFMR
(Home Mortgage)
Ser 96G AMT
6.25%, 7/01/26.............. 5,675 5,703,205
Baa1 Minnesota Higher Ed Fac Auth
(Hamline Univ)
Ser 99-5B
6.00%, 10/01/29 (b)......... 1,250 1,204,575
AA+ Rochester Hosp Rev
(Mayo Med Ctr)
Ser 92H
8.08%, 11/15/15 (c)......... 3,000 3,063,840
Aaa Saint Paul MFHR
(Wellington Proj)
FHMLC Ser 99A
5.10%, 2/01/24 (b).......... 2,280 2,076,168
BBB- So St Paul Hosp Rev
(Healtheast Proj)
Ser 94
6.75%, 11/01/09............. 1,370 1,367,041
------------
29,151,695
------------
NEW HAMPSHIRE - 1.4%
BB- New Hampshire PCR
(Conn Pwr & Light Co Proj)
Ser 86 AMT
5.90%, 11/01/16............. 10,000 9,186,000
------------
NEW JERSEY - 4.0%
NR New Jersey Eco Dev Auth
(Kapkowski Rd)
Ser 98B AMT
6.50%, 4/01/31.............. 1,000 990,670
Baa1 New Jersey Eco Dev Auth
(NUI Corp)
Ser 98A AMT
5.25%, 11/01/33 (b)......... 12,700 10,731,881
11
<PAGE>
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
A+ New Jersey Eco Dev Auth
Swr Rev (Anheuser-Busch)
Ser 95 AMT
5.85%, 12/01/30............. $ 2,600 $ 2,527,382
AAA New Jersey Hgr Ed Loan
(Student Loan) MBIA
Ser 99A
5.25%, 6/01/18.............. 1,500 1,413,360
AAA New Jersey Hsg & Mort Fin
Agy Rev SFMR
(Home Buyer Rev)
MBIA AMT
5.90%, 10/01/29............. 11,350 10,948,210
------------
26,611,503
------------
NEW YORK - 2.6%
Aaa Glen Cove IDR
(The Regency At
Glen Cove)
ETM Ser 92B
Zero coupon, 10/15/19 (b)... 15,000 4,445,400
AAA Niagara Frontier Trans
Airport Rev (Buffalo Niagara)
MBIA AMT
5.63%, 4/01/29.............. 2,000 1,863,020
A+ NYS Energy Res &
Dev Auth
(Consolidated Edison)
Ser 94A AMT
7.13%, 12/01/29............. 5,000 5,419,750
AAA NYS Energy Res &
Dev Auth PCR
(NYS Elec & Gas)
MBIA Ser 88 AMT
5.95%, 12/01/27............. 3,500 3,462,130
AA- Port Auth of NY & NJ
Cons Rev (95th Ser) AMT
6.13%, 7/15/29.............. 2,000 2,000,320
------------
17,190,620
------------
OHIO - 5.1%
AAA Akron Hgr Ed
(Univ of Akron)
FGIC Ser 99
5.75%, 1/01/29.............. 3,000 2,873,160
BBB Dayton Spec Fac
(Emery Air Freight)
Ser 96D AMT
6.20%, 10/01/09............. 3,620 3,714,048
A Hamilton Cnty Hlth Fac
(Twin Towers)
Ser 99A
5.80%, 10/01/23............. 1,775 1,661,826
Baa1 Ohio Air Quality Dev Auth
PCR (Columbus So Pwr)
Ser 85B
6.25%, 12/01/20 (b)......... 5,000 5,009,700
AAA Ohio Air Quality Dev Auth
(JMG Funding/
Ohio Pwr Co)
AMBAC Ser 94B AMT
6.38%, 4/01/29.............. 5,315 5,474,450
AAA Ohio HFA SFMR
(Residental Dev)
GNMA Ser 97 AMT
6.15%, 3/01/29.............. 8,700 8,711,832
A+ Ohio Wtr Dev Auth Swr Rev
(Anheuser-Busch Proj)
Ser 99 AMT
6.00%, 8/01/38.............. 2,250 2,194,920
A- Ohio Wtr Dev Auth
Solid Waste
(North Star/BHP) AMT
6.45%, 9/01/20.............. 4,600 4,712,884
------------
34,352,820
------------
OKLAHOMA - 0.3%
Aaa Oklahoma HFA SFMR
(Mortgage Rev)
Ser 99B-2 AMT
5.40%, 3/01/25 (b).......... 2,000 1,825,200
------------
PENNSYLVANIA - 5.3%
NR Harrisburg Air Fac
(Susquehanna Aero Proj)
AMT
5.50%, 1/01/24.............. 1,490 1,267,841
A Allegheny Cnty Higher Ed
(Thiel College)
ACA Ser 99A
5.38%, 11/15/29............. 2,000 1,761,600
BBB Crawford Cnty Hosp Hlth Fac
(Wesbury Methodist)
Ser 99
6.25%, 8/15/29.............. 2,100 1,953,063
BB- New Morgan IDA
Solid Waste
(Browning-Ferris)
Ser 94 AMT
6.50%, 4/01/19.............. 4,000 3,846,440
12
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
AA Northampton Cnty Higher Ed
(Moravian College)
Ser 99
5.13%, 7/01/29.............. $ 1,000 $ 839,530
BBB Pennsylvania Eco Dev Auth
Waste Wtr Revs (Sun Co)
Ser 94A AMT
7.60%, 12/01/24............. 5,000 5,435,500
AA+ Pennsylvania HFA SFMR
(Home Mortgage)
Ser 94-41B AMT
6.65%, 4/01/25.............. 5,000 5,122,500
AA+ Pennsylvania HFA SFMR
(Home Mortgage)
Ser 99-66A AMT
5.65%, 4/01/29.............. 6,900 6,424,245
AAA Pennsylvania Higher Ed
Student Loan Rev
AMBAC Ser 88D AMT
6.05%, 1/01/19.............. 5,900 5,866,370
BBB+ Philadelphia Hosp Rev
(Temple Univ)
Ser A
6.63%, 11/15/23............. 3,250 3,141,677
------------
35,658,766
------------
TENNESSEE - 0.1%
BBB Memphis Shelby Cnty Spec Fac
(Federal Express)
Ser 93 AMT
6.20%, 7/01/14........... 1,000 1,017,050
------------
TEXAS - 13.1%
BBB- Alliance Arpt Auth
Fac Imp (American Airlines)
Ser 90 AMT
7.50%, 12/01/29............. 11,690 12,197,580
BBB Alliance Arpt Auth
Spec Fac (Federal Express)
Ser 96 AMT
6.38%, 4/01/21.............. 23,000 22,720,780
BBB- Dallas Fort Wrth Texas
International Airport
American Airlines
Series 99 AMT
6.38%, 5/01/35.............. 15,000 14,381,550
BB Harris Cnty Arpt Rev
(Continental Airlines)
Ser 98 AMT
5.38%, 7/01/19.............. 3,155 2,644,079
BB Houston Arpt Rev
(Continental Airlines)
Ser 97B AMT
6.13%, 7/15/27.............. 8,000 7,283,360
AAA Houston Arpt Sys Rev
FGIC Ser 98B AMT
5.00%, 7/01/25.............. 29,000 24,523,270
AA San Antonio Util Rev
(Elec & Gas)
Ser 92
5.80%, 2/01/06 ............. 3,825 4,005,272
------------
87,755,891
------------
VIRGINIA - 4.0%
Baa2 Bedford Cnty IDR
(Nekoosa Pkg/GA-Pacific)
Ser 99 AMT
6.30%, 12/01/25 (b)......... 3,000 2,910,270
Baa2 Goochland Cnty IDR
(Nekoosa Pkg/GA-Pacific)
Ser 98 AMT
5.65%, 12/01/25 (b)......... 12,600 11,276,748
A+ James Cnty Swr
(Anheuser-Busch Proj)
Ser 97 AMT
6.00%, 4/01/32.............. 2,200 2,153,734
AAA Metro Wash DC Arpt
Auth Rev
Ser A FGIC AMT
5.00%, 10/01/27............. 5,000 4,237,150
AA- Metro Washington Arpt Auth
Ser 97B AMT
5.50%, 10/01/23............. 6,700 6,126,614
------------
26,704,516
------------
WASHINGTON - 0.6%
A- Pilchuck Dev Pub Corp
Spec Fac
(BF Goodrich)
Ser 93 AMT
6.00%, 8/01/23.............. 4,500 4,213,665
------------
WISCONSIN - 0.3%
AA Wisconsin GO
(Veterans Hsg)
Ser 99-1 AMT
5.30%, 5/01/20.............. 2,505 2,256,128
------------
TOTAL LONG TERM
MUNICIPAL BONDS
(cost $635,198,454)...... 629,834,540
------------
13
<PAGE>
NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
SHORT TERM
MUNICIPAL NOTES (d) - 8.4%
CALIFORNIA - 0.3%
A-2 Assoc Bay Area Gov't IDR
(Reliance Tech Service Inc.)
Ser 95A AMT VRDN
5.10%, 10/01/19............. $ 1,891 $ 1,891,000
------------
CONNECTICUT - 0.5%
A-1+ Connecticut Hlth & Ed Fac
Auth (Yale Univ)
Ser 99U VRDN
3.55%, 7/01/33.............. 3,500 3,500,000
------------
DISTRICT OF
COLUMBIA - 0.3%
A-1+ District of Columbia GO
Ser 91B-3 VRDN
3.75%, 6/01/03.............. 2,200 2,200,000
------------
FLORIDA - 0.0%
VMIG-1 Palm Beach IDR
(Florida Convalescent
Ctr Proj)
AMT VRDN
4.00%, 11/01/11 (b)......... 275 275,000
------------
HAWAII - 0.2%
VMIG-2 Hawaii Hsg Fin &
Dev Corp MFHR
(Rental Hsg)
Ser 90B VRDN
4.30%, 7/01/25 (b).......... 1,100 1,100,000
------------
ILLINOIS - 0.6%
VMIG-2 Illinois Dev Fin
Auth IDR
(THK America Proj)
Ser 91 AMT VRDN
4.85%, 7/01/11 (b).......... 3,700 3,700,000
------------
KENTUCKY - 0.4%
A-2 Russellville IDR
(JS Technos Corp Proj)
Ser 89 AMT VRDN
4.85%, 12/01/09............. 2,900 2,900,000
------------
MASSACHUSETTS - 0.5%
VMIG-1 Massachusetts HFA
MFHR
(Princeton Crossing Proj)
Ser 96A AMT VRDN
3.65%, 6/01/31 (b).......... 3,300 3,300,000
------------
MICHIGAN - 0.4%
A-1+ Detroit MBIA
(Sewage Disposal Sys Rev)
Ser 98B VRDN
3.55%, 7/01/23.............. 3,000 3,000,000
------------
NEW YORK - 1.6%
A-2 New York City IDA
(Nippon Cargo Air Proj)
Ser 92 AMT VRDN
4.75%, 11/01/15............. 10,600 10,600,000
------------
NORTH CAROLINA - 0.3%
A-1+ Halifax Cnty
(Louisville Gas & Elec)
Ser 93 AMT VRDN
3.70%, 6/01/21.............. 2,300 2,300,000
------------
OHIO - 1.1%
A-1+ Ohio Air Qual Dev Auth
Rev IDR (Jmg Funding LP)
Ser 94A AMT VRDN
3.55%, 4/01/28 ............. 5,100 5,100,000
A-2 Ohio HFA MFHR
(Pine Crossing)
GNMA
Ser 97A AMT VRDN
4.80%, 9/01/36.............. 2,065 2,065,000
------------
7,165,000
------------
PENNSYLVANIA - 1.7%
A-1+ Emmaus GO
Ser 89G-12 VRDN
3.55%, 3/01/24.............. 5,000 5,000,000
A-1 Northampton GO
(Citizens Utilities Co Proj)
Ser 96 AMT VRDN
3.55%, 9/01/18.............. 3,500 3,500,000
A-1+ Pennsylvania Hgr Ed Fac
(Univ Penn)
Ser 94B VRDN
3.55%, 1/01/24.............. 3,000 3,000,000
------------
11,500,000
------------
VIRGINIA - 0.3%
A-1+ Richmond Arpt Rev
(Richmond Intl Proj)
AMBAC
Ser 95C AMT VRDN
3.70%, 7/01/23.............. 2,000 2,000,000
------------
14
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
WISCONSIN - 0.2%
P-1 Carlton Elec Rev
(Wisconsin Pwr & Light Proj)
AMT VRDN
3.55%, 8/01/15 (b).......... $ 1,200 $ 1,200,000
------------
TOTAL SHORT TERM
MUNICIPAL NOTES
(cost $56,631,000)....... 56,631,000
------------
TOTAL INVESTMENTS - 102.2%
(cost $691,829,454)...... $686,465,540
Other assets less
liabilities - (2.2%)..... (14,713,693)
------------
NET ASSETS - 100%........... $671,751,847
============
- --------------------------------------------------------------------------------
See footnote summary on page 28.
See Glossary of Terms on page 28.
See notes to financial statements.
15
<PAGE>
INSURED NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1999 Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
MUNICIPAL BONDS - 97.9%
LONG TERM MUNICIPAL BONDS - 88.2%
ALASKA - 4.5%
AAA Alaska Hsg Fin Corp SFMR
(Mtg Rev)
MBIA Ser 97A
6.10%, 12/01/37............. $10,000 $ 9,940,800
------------
ARIZONA - 3.5%
AAA Mesa IDA Hlth Fac
(Discovery Hlth Sys)
MBIA Ser 99A
5.75%, 1/01/25.............. 2,300 2,216,947
AAA Mesa IDA Hlth Fac
(Lutheran Hlth Sys)
MBIA Series 98A
5.00%, 1/01/19.............. 2,000 1,769,720
AAA Pima Cnty IDR
(Tucson Elec Pwr)
FSA Ser 88A
7.25%, 7/15/10.............. 2,140 2,308,675
AAA Tempe MFHR
(Quadrangles)
FHA Ser 93A
6.25%, 6/01/26.............. 1,300 1,326,351
------------
7,621,693
------------
CALIFORNIA - 3.8%
A California Infra & Eco Dev
(American Ctr/Wine
Food & Art)
Ser 99 ACA
5.75%, 12/01/24............. 3,000 2,818,320
5.80%, 12/01/29............. 6,000 5,650,920
------------
8,469,240
------------
COLORADO - 2.8%
AAA Denver City & Cnty
(Arpt Sys Rev)
MBIA Ser 95A
5.70%, 11/15/25............. 6,375 6,206,318
------------
DELAWARE - 0.7%
AAA Sussex Cunty Swr Rev
(West Rehoboth)
MBIA Ser 94 Pre-refunded
6.60%, 6/15/04.............. 1,500 1,631,010
------------
DISTRICT OF COLUMBIA - 1.9%
AAA Washington DC
(Natl Academy/Science)
AMBAC Ser 99A
5.00%, 1/01/28.............. 5,000 4,182,050
------------
GEORGIA - 3.7%
AAA Atlanta Wtr & Swr Rev
FGIC Ser 99
5.00%, 11/01/38............. 10,000 8,243,400
------------
ILLINOIS - 8.6%
AAA Chicago Parking Rev
(Lakefront Facs)
MBIA Ser 98
5.13%, 1/01/28.............. 4,500 3,848,580
AAA Illinois Hlth Fac Auth
(Alexian Brothers Hlth)
FSA Ser 99
5.13%, 1/01/28.............. 12,145 10,401,099
AAA Metro Pier & Expo Auth
(McCormick Place Expo)
FGIC Ser 93A
Zero coupon, 6/15/19........ 15,850 4,812,060
------------
19,061,739
------------
MASSACHUSETTS - 8.2%
AAA Chelsea GO
AMBAC Ser 94 Pre-refunded
6.00%, 6/15/04.............. 1,965 2,108,288
AAA Holyoke GO
FSA Ser 93B
6.13%, 8/01/13.............. 1,435 1,508,773
AA Massachusetts Dev Fin Auth
(Worcester Redev)
Asset Gty Ser 99
6.00%, 6/01/24.............. 1,300 1,291,667
AA+ Massachusetts Hlth & Ed Fac
(Wellesley College)
Series 99F
5.13%, 7/01/39.............. 8,500 7,134,730
AAA Massachusetts Muni
Wholesale Elec
(Pwr Supply Sys)
MBIA Ser 92A
6.00%, 7/01/18.............. 1,000 1,001,120
Aaa Massachusetts Trpk Auth
(Metro Highway System)
AMBAC Ser 99A
5.00%, 1/01/39 (b).......... 6,000 4,982,220
------------
18,026,798
------------
16
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
MICHIGAN - 14.1%
AAA Detroit GO
FGIC Ser 93
6.35%, 4/01/14.............. $ 1,690 $ 1,781,023
AAA Detroit Swr Sys Rev
FGIC Ser 93 Pre-refunded
7.62%, 7/01/03 (c).......... 10,100 11,216,555
AAA Grand Rapids Swr Sys Rev
MBIA
Ser 92 Pre-refunded
6.00%, 1/01/02.............. 2,500 2,625,875
AAA Kalamazoo Hosp Fin Auth
Hosp Rev (Borgess Med Ctr)
FGIC Ser 94
6.31%, 6/01/11 (c).......... 7,500 7,170,000
AAA Michigan Hosp Fin Auth
(St. John's Hospital)
ETM AMBAC Ser A
6.00%, 5/15/13.............. 1,000 1,028,350
AAA Michigan Strategic Fund
(Detroit Edison Co)
MBIA Ser 95AA
6.40%, 9/01/25.............. 3,310 3,462,856
AAA Saginaw Hosp Fin Auth
Hosp Rev (Covenant
Med Ctr)
MBIA Ser 99E
5.50%, 7/01/24.............. 2,000 1,838,260
AAA Three Rivers GO
Dist MBIA
Ser 96 Pre-refunded
6.00%, 5/01/06.............. 1,000 1,069,580
AA Troy Downtown
Dev Auth
Ser 95A
6.38%, 11/01/18............. 1,000 1,031,850
------------
31,224,349
------------
MINNESOTA - 4.1%
AAA Bloomington Port Auth
(Mall of America Proj)
FSA Series 96A
5.35%, 2/01/13 (b).......... 2,025 2,002,138
AAA Minneapolis COP
(Spec School Dist 1)
MBIA Ser 96A
5.90%, 2/01/17.............. 3,330 3,334,795
AAA Minnesota Agric & Econ
Dev Brd Hlth Fac
(Benedictine Hlth Sys)
MBIA Ser 99A
5.13%, 2/15/29.............. 4,200 3,638,712
------------
8,975,645
------------
NEBRASKA - 1.5%
AAA Nebraska Inv Fin Auth
Hosp Rev (Bishop Clarkson
Mem) MBIA Ser 91
9.23%, 12/08/16 (c)......... 3,000 3,215,700
------------
OHIO - 6.2%
AAA Cuyahoga Cnty Hosp Rev
(Meridia Hlth Sys)
Ser 95 Pre-refunded
6.25%, 8/15/05.............. 2,600 2,831,868
AAA Ohio Air Quality
Dev Auth
(Ohio Pwr)
AMBAC Ser 99C
5.15%, 5/01/26.............. 10,000 8,795,200
AAA Ohio Capital Corp MFHR
(Sect 8 Assist)
FHA MBIA Ser 95E
6.35%, 1/01/22.............. 1,965 2,003,730
------------
13,630,798
------------
PENNSYLVANIA - 21.3%
Aaa Lehigh Cnty Gen Auth Hosp Rev
(Lehigh Valley Hlth)
MBIA Ser 99A
5.25%, 7/01/29 (b).......... 3,500 3,068,170
AAA Pennsylvania Conv Ctr
MBIA Ser 94A
6.75%, 9/01/19.............. 2,500 2,712,425
AAA Pennsylvania Gas Rev
FSA 16th Ser
5.25%, 7/01/29.............. 7,500 6,620,775
5.50%, 7/01/15.............. 2,000 1,940,640
FSA 2nd Ser
5.50%, 7/01/15.............. 3,410 3,308,791
AAA Pennsylvania Higher Ed
Hlth Fac (Univ of Pitt Med Ctr)
FSA Ser 99A
5.00%, 8/01/29.............. 25,000 20,857,750
AAA Philadelphia GO
FSA Ser 98
5.00%, 3/15/28.............. 10,000 8,429,600
------------
46,938,151
------------
17
<PAGE>
INSURED NATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
VIRGINIA - 2.4%
AAA Harrisonburg Redev &
Hsg Auth MFHR
(Battery Heights Assoc)
GNMA Ser 96A
6.25%, 4/20/36.............. $ 5,185 $ 5,301,300
------------
WEST VIRGINIA - 0.9%
AAA West Virginia Eco Dev
(Parkway Proj)
FGIC Ser 93
7.54%, 5/16/19 (c).......... 2,100 2,014,131
------------
TOTAL LONG TERM
MUNICIPAL BONDS
(cost $196,013,261)...... 194,683,122
------------
SHORT TERM MUNICIPAL
NOTES (d) - 9.7%
GEORGIA - 4.7%
A-1+ Burke Cnty GA
Dev Authority FRN
(Oglethorpe Power)
Ser 93A FGIC VRDN
3.50%, 1/01/16 (b).......... 10,500 10,500,000
------------
ILLINOIS - 5.0%
VMIG-1 Illinois Dev Fin Auth
(Jewish Federation Proj)
AMBAC Ser 99 VRDN
3.50%, 9/01/24 (b).......... 11,000 11,000,000
------------
TOTAL SHORT TERM
MUNICIPAL NOTES
(cost $21,500,000)........ 21,500,000
------------
TOTAL INVESTMENTS - 97.9%
(cost $217,513,261)....... 216,183,122
Other assets less
liabilities - 2.1%........ 4,652,116
------------
NET ASSETS - 100%........... $220,835,238
============
- --------------------------------------------------------------------------------
See footnote summary on page 28.
See Glossary of Terms on page 28.
See notes to financial statements.
18
<PAGE>
NEW YORK PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1999 Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
MUNICIPAL BONDS - 98.7%
A- Essex Cnty IDR
(Int'l Paper)
Ser 95A AMT
5.80%, 12/01/19............. $ 7,000 $ 6,665,120
AAA Glen Cove IDR
(The Regency at Glen Cove)
ETM Ser 92B
Zero coupon, 10/15/19....... 20,010 5,930,164
Aaa Horseheads NY Series 99
(Appleridge Retirement Comm)
5.75%, 9/01/41 (b).......... 4,000 3,835,240
AAA Islip Res Rec Agy
AMBAC
Ser 94B AMT
6.13%, 7/01/12.............. 2,020 2,111,183
AA Monroe County IDA
Hgr Ed (St John Fisher
Coll Asset Gty)
Ser 99
5.38%, 6/01/24.............. 3,070 2,784,674
AAA Nassau Cnty NY FSA Hlth Fac
(Nassau Hlth Sys Rev)
Ser 99
5.75%, 8/01/29.............. 10,000 9,534,400
AAA New York City GO
MBIA Ser 93E Pre-refunded
6.00%, 5/15/03.............. 4,050 4,299,601
Ser 93D
6.00%, 5/15/11.............. 950 985,198
A- New York City GO
Ser 92A Pre-refunded
6.25%, 8/01/02.............. 1,975 2,093,559
Ser 92A
6.25%, 8/01/18.............. 4,025 4,067,223
A- New York City GO
Ser 93D
8.92%, 8/01/14 (c).......... 10,000 10,260,500
A- New York City GO
Ser 94B Pre-refunded
7.25%, 8/15/04.............. 3,465 3,879,622
A-1 New York City GO
Ser 96-J Pre-refunded
6.00%, 2/15/06.............. 2,380 2,550,265
Ser 96-J
6.00%, 2/15/24.............. 11,200 11,016,096
A- New York City GO
Ser 96A
6.25%, 8/01/17.............. 21,250 21,590,425
Baa1 New York City IDR
(American Airlines)
Ser 90 AMT
5.40%, 7/01/20 (b).......... 3,500 3,157,140
BBB- New York City IDR
(American Airlines)
Ser 94 AMT
6.90%, 8/01/24.............. 7,000 7,273,630
A New York City IDR
(British Airways)
Ser 98 AMT
5.25%, 12/01/32............. 36,805 31,728,854
AAA New York City IDR
(Japan Airlines)
FSA AMT
Ser 91 6.00%, 11/01/15...... 4,155 4,350,950
A New York City IDR
(Terminal One LP)
Ser 94 AMT
6.13%, 1/01/24.............. 36,500 35,753,210
AAA Niagara Frontier Trans
Arpt Rev (Gtr Buffalo Int'l)
AMBAC
Ser 94A AMT
6.25%, 4/01/24.............. 16,125 16,482,008
AAA Niagara Frontier Trans Rev
(Buffalo Niagara )
MBIA AMT
5.63%, 4/01/29.............. 1,900 1,769,869
Aaa NYS Dorm Auth Rev
(Brooklyn Hosp Ctr)
FHA Ser 99
5.20%, 2/01/39 (b).......... 3,000 2,563,770
AA NYS Dorm Auth Rev
(Long Island Univ)
Asset 6th Ser 99
5.13%, 9/01/23.............. 1,750 1,525,090
5.25%, 9/01/28.............. 1,400 1,220,576
AAA NYS Energy Res &
Dev Auth
(Brooklyn Union Gas)
MBIA AMT
7.41%, 7/08/26.............. 6,000 5,268,180
AAA NYS Energy Res &
Dev Auth
(Brooklyn Union Gas)
MBIA
Ser 89B AMT
6.75%, 2/01/24.............. 7,500 7,887,600
19
<PAGE>
NEW YORK PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
A+ NYS Energy Res &
Dev Auth
(Consolidated Edison)
Ser 94A AMT
7.13%, 12/01/29............. $ 17,000 $ 18,427,150
A- NYS Energy Res &
Dev Auth
(Long Island Ltg Co)
Ser 95A
5.30%, 8/01/25.............. 7,500 6,716,100
AAA NYS Energy Res &
Dev Auth
(Rochester Gas & Elec)
MBIA AMT
6.50%, 5/15/32.............. 6,460 6,702,831
AAA NYS Energy Res &
Dev Auth PCR
(NYS Elec & Gas)
MBIA Ser 87A AMT
6.15%, 7/01/26.............. 15,000 15,291,750
AAA NYS Energy Res &
Dev Auth PCR
(NYS Elec & Gas)
MBIA Ser 88 AMT
5.95%, 12/01/27............. 3,200 3,165,376
BBB+ NYS Envir Fac Auth IDR
(Occidental Petroleum)
Ser 93A AMT
5.70%, 9/01/28.............. 6,950 6,262,437
AAA NYS Envir Fac Corp
Wtr Fac (Spring Valley Wtr)
AMBAC Ser 94A AMT
6.30%, 8/01/24.............. 11,800 12,104,322
Aa1 NYS HFA MFHR
(Westchester/
Onondaga/Rockland Proj)
Ser 92F AMT
6.70%, 8/15/25 (b).......... 6,000 6,187,620
Aa2 NYS Mtg Agy SFMR
(Homeowner Mort)
Ser 73A AMT
5.30%, 10/01/28 (b)......... 5,000 4,440,850
Aa2 NYS Mtg Agy SFMR
(Homeowner Mort)
Ser 82
5.65%, 4/01/30 (b).......... 20,000 18,578,800
Aa2 NYS Mtg Agy SFMR
Ser 42
6.65%, 4/01/26 (b).......... 4,500 4,615,875
Aa2 NYS Mtg Agy
SFMR Ser 46 AMT
6.65%, 10/01/25 (b)......... 18,785 19,241,475
Aa2 NYS Mtg Agy
SFMR Ser 79 AMT
5.30%, 4/01/29 (b).......... 12,750 11,299,560
A Oneida County IDA
(Mohawk Valley Proj)
ACA Ser 99
5.35%, 3/15/29.............. 1,000 878,340
AAA Onondaga Cnty PCR
(Bristol-Myers Squibb)
AMT 5.75%, 3/01/24.......... 4,000 3,907,520
AAA Port Auth of NY & NJ
(JFK Int'l Proj)
MBIA
Ser 97-6 AMT
5.75%, 12/01/22............. 16,205 15,662,132
AA- Port Auth of NY & NJ
Cons Rev (95th Ser) AMT
6.13%, 7/15/29.............. 7,775 7,776,244
AAA Port Auth of NY & NJ
Cons Rev (96th Ser)
FGIC AMT
6.60%, 10/01/23............. 10,000 10,574,700
NR Suffolk County IDR
(Nissequogue Cogen Fac)
Ser 98 AMT
5.50%, 1/01/23.............. 3,000 2,630,100
AAA Yonkers IDA
Health Fac (Malotz Pavil proj)
Ser 99
5.65%, 2/01/39.............. 4,500 4,211,595
------------
TOTAL INVESTMENTS - 98.7%
(cost $388,026,129)...... 389,258,924
Other assets less
liabilities - 1.3% ....... 5,064,473
------------
NET ASSETS - 100%........... $394,323,397
============
================================================================================
See footnote summary on page 28.
See Glossary of Terms on page 28.
See notes to financial statements.
20
<PAGE>
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1999 Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
MUNICIPAL BONDS - 97.1%
LONG TERM MUNICIPAL BONDS - 92.3%
CALIFORNIA - 84.4%
NR Alameda
Assess Dist
(Harbor Bay Bus Park)
5.00%, 9/02/05.............. $ 1,870 $ 1,820,127
5.50%, 9/02/12.............. 9,830 9,402,100
AAA Assoc Bay Area Gov
MFHR (Civic Cntr Dr Apt)
Ser 99-A AMT
5.88%, 3/01/32.............. 7,705 7,476,624
NR Calabasas Comm
Fac Dist 98-1 Spec Tax
5.75%, 9/01/28.............. 1,000 888,580
A+ California GO
(Veterans Hsg)
Ser 95 AMT
6.40%, 2/01/20.............. 17,400 17,451,504
AAA California GO
(Veterans Hsg)
Ser 95 AMT
6.38%, 2/01/27.............. 4,835 4,838,916
AAA California HFA MFHR
(Home Mtg Rev)
MBIA Ser 91A AMT
7.20%, 2/01/26.............. 3,450 3,583,481
AAA California HFA MFHR
(Home Mtg Rev)
MBIA Ser 91C AMT
7.00%, 8/01/23.............. 1,475 1,520,474
AAA California HFA SFHR
(Home Mtg Rev)
MBIA Ser 97I AMT
5.75%, 2/01/29.............. 14,075 13,460,626
A+ California HFA MFHR
(Multi-Unit Rental Hsg)
Ser 92A AMT
6.50%, 2/01/14.............. 4,865 4,992,706
AAA California HFA SFMR
(Home Mtg Rev)
AMBAC Ser 96H AMT
6.20%, 2/01/27.............. 8,000 8,025,840
AA- California HFA SFMR
(Home Mtg Rev)
Ser 91G AMT
7.05%, 8/01/27.............. 3,030 3,091,509
AA- California HFA SFMR
(Home Mtg Rev)
Ser 94E AMT
6.70%, 8/01/25.............. 7,335 7,515,441
AA- California HFA SFMR
(Home Mtg Rev)
Ser 94H AMT
7.50%, 8/01/25.............. 1,155 1,176,760
AAA California HFA SFMR
(Home Mtg Rev)
Ser 95A-2 AMT
6.45%, 8/01/25.............. 12,160 12,339,968
AA California HFA SFMR
(Home Mtg Rev)
Ser 99A-2 AMT
5.25%, 8/01/26.............. 7,550 6,708,100
AAA California HFA SFMR
(Home Mtg Rev)
Ser R AMT
6.15%, 8/01/27.............. 3,285 3,287,004
AAA California HFA SFMR
(Mtg Rev)
Ser 97M AMT
5.60%, 8/01/29.............. 4,350 4,024,707
A California Poll Ctl Fin Auth
(Tracy Material Recovery)
Ser 99A ACA AMT
5.70%, 8/01/14.............. 3,670 3,605,078
BB- California Poll Ctl Fin Auth
PCR (Keller Canyon/
Browning-Ferris Ind)
Ser 92 AMT
6.88%, 11/01/27............. 5,000 5,005,200
AA- California Poll Ctl Fin Auth
PCR (Pacific Gas & Elec)
Ser 93A AMT
5.88%, 6/01/23.............. 45,345 44,520,174
AA- California Poll Ctl Fin Auth
PCR (Pacific Gas & Elec)
Ser 93B AMT
5.85%, 12/01/23............. 56,000 54,794,320
A+ California Poll Ctl Fin Auth
PCR (San Diego Gas & Elec)
Ser 93A AMT
5.85%, 6/01/21 ............. 32,335 31,865,819
AAA California Poll Ctl Fin Auth
PCR (So Calif Edison)
MBIA Ser 99C AMT
5.55%, 9/01/31.............. 7,950 7,369,730
A+ California Poll Ctl Fin Auth
PCR (So Calif Edison)
Ser 92B AMT
6.40%, 12/01/24............. 36,030 37,816,367
21
<PAGE>
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
AAA California Rural MFA SFMR
(Mtg Rev)
GNMA FNMA
Ser 99A AMT
5.40%, 12/01/30............. $ 5,000 $ 4,514,600
NR California Statewide Comm
Dev Auth
(San Diego Space & Science)
Ser 96
7.50%, 12/01/16............. 3,410 3,709,296
NR California Statewide Comm
Dev Auth
(Sonoma Cntry Day Schl)
Ser 99
6.00%, 1/01/29 ............. 14,000 13,036,660
BB+ California Statewide Comm
Dev Auth
(United Airlines)
Ser 97 AMT
5.63%, 10/01/34 ............ 26,000 22,873,500
AAA California Statewide Comm
Dev Auth MFHR
(Santa Paula
VLG Apt) FNMA
Ser 98D AMT
5.43%, 5/01/28.............. 2,090 1,915,004
NR Capistrano Sch Dist
Comm Fac 98-1(Ladera)
Ser 99
5.30%, 9/01/11.............. 1,800 1,669,734
NR Capistrano Sch Dist
Comm Fac 98-2 (Ladera)
Ser 99
5.70%, 9/01/20.............. 9,500 8,568,335
NR Chino Comm
Fac Dist 99-1
(Spectrum West)
6.35%, 9/01/29.............. 3,000 2,929,110
A+ Chula Vista
(San Diego Gas & Elec)
Ser 92A AMT
6.40%, 12/01/27............. 28,240 29,599,191
Aaa Contra Costa Cnty MFHR
(Byron Park Proj)
GNMA Ser 93C AMT
6.40%, 1/20/31 (b).......... 11,860 12,145,470
NR Encinitas Comm
Fac Dist 1
(Encinitas Ranch)
Ser 98A
4.80%, 9/01/03 ............. 1,675 1,653,661
6.00%, 9/01/30 ............. 21,170 19,845,816
NR Encinitas Rec Rev
(Encinitas Ranch Golf
Course)
Ser 96A
7.75%, 9/01/26.............. 10,660 11,478,795
NR Fontana Comm
Fac Dist 11
Ser 99A
6.50%, 9/01/27.............. 2,350 2,254,261
NR Fontana Comm
Fac Dist 3
(Hunters Ridge)
Ser 90A Pre-refunded
8.70%, 10/01/00............. 8,000 8,505,680
AAA Fremont FHA MFHR
(Regency Sq Apts)
Ser 86A AMT
7.75%, 11/01/28 ............ 1,500 1,583,610
AAA Garden Grove MFHR
(Tudor Grove)
GNMA Collat AMT
7.25%, 5/20/32 ............. 7,095 7,077,901
AA- Long Beach
(Harbor Rev)
Ser 93 AMT
5.13%, 5/15/18 ............. 17,325 15,500,158
AAA Los Angeles Cnty Arpt
(Ontario Int'l Arpt)
FGIC Ser 96A AMT
6.00%, 5/15/22 ............. 12,780 12,686,067
NR Los Angeles Cnty Comm
Fac Dist 4 (Calabasas Area)
Ser 92A Pre-refunded
7.65%, 9/01/01.............. 2,500 2,702,350
BB Los Angeles Comm Redev
MFHR (Grand Ctrl Proj)
Ser 93A AMT
5.85%, 12/01/26............. 4,030 3,702,845
AAA Los Angeles Harbor Rev
MBIA Ser 96B AMT
6.20%, 8/01/25.............. 10,000 10,215,200
AA Los Angeles Harbor Rev
Ser 95B AMT
6.63%, 8/01/25.............. 24,000 25,259,760
22
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
AA Los Angeles Harbor Rev
Ser 96B AMT
5.38%, 11/01/23............. $13,250 $ 12,063,065
AAA Mojave Wtr Agy
Imp Dist M
(Morongo Basin Pipeline)
FGIC Ser 96
5.80%, 9/01/22.............. 5,000 4,955,800
AAA North Calif Trans Agy
Elec Rev
(Calif-Oregon Trans)
MBIA Ser 93A
7.34%, 4/29/24.............. 9,250 8,048,147
NR Novato Comm
Fac Dist 94-1
(Hamilton Field)
ETM Ser 95
7.38%, 9/01/25.............. 12,400 13,244,316
AAA Orange Cnty Arpt Rev
(John Wayne Int'l)
MBIA Ser 93 AMT
5.50%, 7/01/18.............. 4,500 4,287,825
NR Orange Cnty Comm
Fac Dist 87-2
(Portola Hills)
Ser 91A Pre-refunded
9.30%, 8/15/01.............. 8,750 9,683,362
NR Orange Cnty Comm
Fac Dist 92-1
(Las Flores/Capistrano USD)
Ser 97 Pre-refunded
7.10%, 9/01/07.............. 3,200 3,597,856
BBB- Orange Cnty Sr Lien
Foothill/Eastern Corridor
ETM Ser 95A
Zero coupon, 1/01/25........ 15,000 3,323,550
Zero coupon, 1/01/27........ 10,000 1,945,000
Zero coupon, 1/01/28........ 10,000 1,831,200
AAA Orange Cnty Sr Lien
San Joaquin Hills
Trans Corridor
ETM Ser 93
Zero coupon, 1/01/17........ 16,000 5,898,720
Zero coupon, 1/01/19........ 20,000 6,442,800
Zero coupon, 1/01/20........ 20,000 5,990,400
Zero coupon, 1/01/21........ 20,000 5,642,600
Zero coupon, 1/01/23........ 35,000 8,781,500
Zero coupon, 1/01/25........ 18,100 4,010,417
7.00%, 1/01/30.............. 13,400 14,696,182
AAA Palm Springs COP
ETM Ser 91B
Zero coupon, 4/15/21........ 35,525 9,628,341
AAA Palm Springs Fin Auth
Arpt Rev
(Palm Springs
Regional Arpt)
MBIA
Ser 92 AMT
6.00%, 1/01/22.............. 6,860 6,851,013
A- Placer Cnty Res Rec
(Wtrn Placer Wst Mgmt)
Ser 94 AMT
6.75%, 7/01/14.............. 5,800 6,019,240
AAA Port of Oakland
MBIA
Ser 92E AMT
6.40%, 11/01/22............. 23,370 24,319,056
6.50%, 11/01/16............. 8,000 8,376,720
BBB+ Port of Oakland Spec Fac
(Mitsui OSK Lines)
Ser 92A AMT
6.80%, 1/01/19.............. 3,700 3,863,466
NR Riverside Cnty Asses
Dist 161
(Winchester Prop)
Ser 94C
10.00%, 9/02/14............. 5,035 5,402,102
NR Roseville Comm
Fac Dist 1
(No Central Roseville)
Ser 99
5.00%, 9/01/04.............. 1,015 1,000,831
5.10%, 9/01/05.............. 2,590 2,542,525
5.80%, 9/01/17.............. 15,250 14,643,507
AAA Sacramento Cnty Arpt
Sys Rev
FGIC Ser 92A AMT
Pre-refunded
6.00%, 7/01/02.............. 7,045 7,401,900
FGIC Ser 92A AMT
6.00%, 7/01/20.............. 4,705 4,708,340
AAA Sacramento Cnty Arpt
Sys Rev
MBIA Ser 96A AMT
5.90%, 7/01/24.............. 5,050 4,965,817
23
<PAGE>
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
=============================================================
NR Sacramento Comm
Fac Dist 97-01
(No Natomas Proj)
Ser 97A
6.70%, 9/01/17.............. $ 6,615 $ 6,792,216
6.75%, 9/01/27.............. 9,370 9,620,554
NR Sacramento Con Ctr Hotel
(Sheraton Grand)
Ser 99A
6.25%, 1/01/30.............. 12,000 11,347,440
NR Sacramento City &
Cnty Comm
Fac Dist4
(No Natomas Proj)
Ser 99A
5.70%, 9/01/23.............. 6,215 5,750,304
AAA San Bernardino Cnty
Solid Waste
(Inland Empire)
FSA Ser 96B AMT
6.00%, 8/01/16.............. 2,500 2,538,775
NR San Clemente
Assessment Dist 98-1
Ser 99
6.05%, 9/02/28.............. 4,000 3,806,320
AAA San Diego HFA
MFHR Rental Housing Rev
Ser 98C AMT
5.25%, 1/20/40.............. 6,380 5,673,415
AAA San Francisco City & Cnty
Int'l Arpt
AMBAC Ser 94 II-6 AMT
6.60%, 5/01/24.............. 5,000 5,298,850
AAA San Francisco City & Cnty
Int'l Arpt
FGIC Ser 94 II-5 AMT
6.50%, 5/01/24.............. 11,000 11,544,940
AAA San Francisco City & Cnty
Int'l Arpt
FGIC Ser 96-II AMT
6.25%, 5/01/26.............. 7,000 7,138,110
AAA San Francisco City & Cnty
Int'l Arpt
MBIA Ser 10A AMT
5.70%, 5/01/26 ............. 9,385 8,977,785
AAA San Francisco City & Cnty
Int'l Arpt
MBIA Ser 93 AMT
6.10%, 5/01/13 ............. 2,650 2,746,089
AAA San Francisco City & Cnty
Int'l Arpt
MBIA Ser 93-3 AMT
Pre-refunded
6.20%, 5/01/03.............. 8,920 9,575,977
AAA San Francisco City & Cnty
Int'l Arpt
MBIA Ser 93 AMT
Pre-refunded
6.10%, 5/01/03.............. 4,240 4,538,241
MBIA Ser 93 AMT
6.20%, 5/01/20.............. 5,580 5,715,315
AAA San Jose Arpt Rev
(San Jose Arpt)
FGIC Ser 93 AMT
5.70%, 3/01/18.............. 8,825 8,696,067
NR Santa Margarita Wtr
Fac Dist 99-1
Ser 99
6.25%, 9/01/29.............. 27,545 26,569,632
AAA So Calif HFA
SFMR GNMA/FNMA
Ser 91B AMT
6.90%, 10/01/24............. 1,290 1,323,992
AAA So Calif HFA
SFMR GNMA/FNMA
Ser 92A AMT
6.75%, 9/01/22.............. 1,110 1,130,679
NR Stockton
(West 8th St Proj)
Ser 99
6.30%, 9/02/21.............. 4,200 4,091,766
BBB+ Westminster Redev Agy
MFHR
(Rose Garden Apt)
Ser 93A AMT
6.75%, 8/01/24.............. 4,300 4,369,316
NR Winchester Hills Comm
Fac Dist 98-1
(Winchester Hills)
Ser 98A
6.30%, 9/01/18.............. 4,555 4,437,071
6.38%, 9/01/28.............. 6,700 6,514,343
AAA Yolo Cnty Hsg Auth
MFHR
(Waggener
Ranch Apts)
FHA Ser 91 AMT
7.00%, 10/01/33............. 9,000 9,509,490
------------
901,880,444
------------
24
<PAGE>
Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
MASSACHUSETTS - 1.9%
AAA Massachusetts Port Auth
(Boston fuel Corp)
MBIA Ser 97 AMT
6.00%, 7/01/36.............. $20,960 $ 20,353,837
------------
NEW YORK - 2.5%
Aa2 New York Mtg Agy
SFMR (Homeowner Mort)
Ser 84 AMT
5.95%, 4/01/30 (b).......... 28,035 27,116,293
------------
PENNSYLVANIA - 1.2%
AA+ Pennsylvania HFA
SFMR (Home Mtg)
Ser 99-67A
5.90%, 10/01/30............. 13,300 12,806,038
------------
PUERTO RICO - 2.3%
AAA Puerto Rico HFC
SFMR (Home Mtg Rev)
GNMA Ser 98A AMT
5.20%, 12/01/32............. 22,040 19,232,545
BBB- Puerto Rico Port Auth
(American Airlines)
Series 96A AMT
6.25%, 6/01/26.............. 5,475 5,349,896
------------
24,582,441
------------
TOTAL LONG TERM
MUNICIPAL BONDS
(cost $962,786,542)...... 986,739,053
------------
SHORT TERM
MUNICIPAL NOTES (d) - 4.8%
CALIFORNIA - 4.8%
NR Auburn IDR
(Coherent Inc Proj)
Ser 88 AMT VRDN
4.90%, 10/01/08............. 1,600 1,600,000
A-1+ Calif Statewide IDR
(Pasco Proj)
Ser 94B AMT VRDN
3.55%, 12/01/14............. 2,295 2,295,000
A-1+ California IDR
(APM Inc Proj)
Ser 94A AMT VRDN
3.55%, 6/01/04.............. 750 750,000
A-1+ California IDR
(DV Industries Inc Proj)
Ser 94A AMT VRDN
3.55%, 8/01/19.............. 1,450 1,450,000
A-1+ California IDR
(Johnson Proj)
Ser 95E AMT VRDN
3.55%, 11/01/20............. 1,600 1,600,000
A-1+ California IDR
(Merrill Packaging Proj)
Ser 93 AMT VRDN
3.55%, 12/01/18............. 1,510 1,510,000
A-1+ California IDR
(Packaging Innovators Corp)
Ser 94A AMT VRDN
3.55%, 6/01/19.............. 2,675 2,675,000
A-1+ California IDR
(Sunclipse Union City Proj)
Ser 89 VRDN
3.55%, 9/01/04.............. 2,135 2,135,000
A-1+ California IDR
(Watt Four, LLC)
Ser 97 AMT VRDN
3.55%, 5/01/22.............. 2,630 2,630,000
A-1 California Poll Ctl
Fin Auth PCR
(Wadham Energy Proj)
Ser 87A ATM VRDN
3.90%, 11/01/17............. 5,475 5,475,000
A-1 California Poll Ctl
Fin Auth PCR
(Wadham Energy Proj)
Series 87C AMT VRDN
3.90%, 11/01/17............. 4,700 4,700,000
A-1+ California Poll Ctl
Fin Auth
Solid Waste Rev
(Nummi Mfg)
Ser 98A AMT VRDN
3.20%, 4/01/18.............. 9,015 9,015,000
VMIG-1 California Statewide
Dev Auth Indl Dev
(Karcher Property)
Ser 94C AMT VRDN
3.55%, 12/01/19............. 2,000 2,000,000
A-1 Chula Vista
(San Diego Gas & Elec)
Ser 96B AMT VRDN
3.80%, 12/01/21............. 1,500 1,500,000
A-1+ San Bernardino IDR
(NRI Inc Proj)
Ser 89 AMT VRDN
3.55%, 5/01/09.............. 1,425 1,425,000
25
<PAGE>
CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
A-2 Santa Cruz Cnty HFA
MFHR
(Paloma Del Mar Apts)
Ser 92A AMT VRDN
5.00%, 6/01/22.............. $ 7,700 $ 7,700,000
A-1+ Santa Cruz Cnty IDR
Wilson Entities Ltd)
Ser 93 AMT VRDN
2.60%, 11/01/18............. 2,505 2,505,000
--------------
TOTAL SHORT TERM
MUNICIPAL NOTES
(cost $50,965,000)....... 50,965,000
--------------
TOTAL INVESTMENTS - 97.1%
(cost $1,013,751,542).... $1,037,704,053
Other assets less
liabilities - 2.9% ....... 30,842,527
--------------
NET ASSETS - 100%........... $1,068,546,580
==============
- --------------------------------------------------------------------------------
See footnote summary on page 28.
See Glossary of Terms on page 28.
See notes to financial statements.
26
<PAGE>
INSURED CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1999 Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
CALIFORNIA MUNICIPAL BONDS - 98.4%
AAA Alhambra COP
Assess Dist 91-1 (Police Fac)
AMBAC Ser 92
6.75%, 9/01/23.............. $ 5,000 $ 5,252,750
AAA Brea Pub Fin Auth
Tax Alloc Redev (Proj B)
MBIA Ser 91A
7.00%, 8/01/15.............. 1,470 1,552,202
AAA California HFA MFHR
(Home Mtg Rev)
AMBAC Ser 95A
6.25%, 2/01/37.............. 5,000 5,089,550
AAA Castaic Lake Wtr Agy
(Wtr Sys Proj)
AMBAC Ser 99
Zero coupon, 8/01/28........ 10,445 1,800,823
Zero coupon, 8/01/29........ 10,445 1,693,970
AAA Coronado Comm Dev Proj
Tax Alloc FSA Ser 96
6.00%, 9/01/26.............. 8,700 8,764,293
AAA Encinitas Comm
Fac Dist 1
(Encinitas Ranch)
Ser 95A Pre-refunded
7.38%, 9/01/05.............. 4,600 5,265,850
AAA Fontana Pub Fin Auth
Tax Alloc (No Fontana)
MBIA Ser 93A
5.63%, 9/01/24.............. 8,805 8,501,756
AAA Glendale Hlth Fac Rev
(Glendale Mem Hosp)
CONNIE LEE
ETM Ser 95A
5.60%, 11/15/25............. 2,000 1,910,420
AAA La Mirada Redev Agy
Tax Alloc
(Commercial Redev)
FSA Ser 95B
5.90%, 8/15/24.............. 5,000 5,002,550
Aa Lancaster Redev Agy
MFHR (High Valley Apts)
FHA Ser 96A
6.00%, 6/01/27 (b).......... 4,170 4,177,298
AAA Los Angeles Cnty
Metro Trans Auth
MBIA Ser 93A
5.63%, 7/01/18.............. 3,000 2,947,080
AAA Los Angeles Cnty Comm Redev
Tax Alloc (Bunker Hill Proj)
FSA Ser 93H
5.60%, 12/01/28 ............ 9,000 8,626,230
AAA Los Angeles Cnty Trans
Comm
FGIC Ser 91B
6.50%, 7/01/15 ............. 5,000 5,219,650
AAA Madera Cnty COP
Hosp Rev (Valley Children's
Hosp)
MBIA Ser 95 Pre-refunded
6.13%, 3/15/05.............. 4,000 4,365,600
AAA Mojave Wtr Agy Imp Dist M
(Morongo Basin Pipeline)
FGIC Ser 96
5.80%, 9/01/22.............. 5,000 4,955,800
AAA Orange Cnty
(Saddleback Valley)
FSA Ser 95A
5.65%, 9/01/17.............. 2,000 1,982,100
AAA Orange Cnty Recovery
MBIA Ser 96A
6.00%, 7/01/26 ............. 3,000 3,021,840
AAA Orange Cnty Sr Lien
Foothill/Eastern Corr Agy
ETM Ser 95A
Zero coupon, 1/01/24........ 10,255 2,418,129
Zero coupon, 1/01/30........ 27,935 4,534,409
AAA Rancho Wtr Dist Fin Auth
AMBAC Ser 91 Pre-refunded
9.27%, 9/11/01.............. 3,000 3,354,540
AAA Redding COP
Elec Sys Rev
MBIA Ser 92
9.12%, 7/01/22 (c).......... 2,000 2,235,120
NR Riverside Comm
Fac Dist 90-1
(Highlander Proj)
Ser 91A
8.50%, 9/01/15.............. 2,000 2,136,060
AAA Sacramento Cnty Arpt
Sys Rev
MBIA Ser 96B Pre-refunded
5.75%, 7/01/06 ............. 3,260 3,517,018
AAA Sacramento Muni Util Dist
Elec Rev
MBIA Ser 93E
5.75%, 5/15/22.............. 5,000 4,925,400
27
<PAGE>
INSURED CALIFORNIA PORTFOLIO
PORTFOLIO OF INVESTMENTS (continued) Alliance Municipal Income Fund
================================================================================
Standard & Principal
Poor's Amount
Ratings (a) (000) Value
- -------------------------------------------------------------
AAA San Bernardino Cnty Redev
(Ontario Proj 1)
ETM MBIA Ser 93
5.80%, 8/01/23.............. $10,000 $ 10,238,900
AAA San Bernardino Cnty
Redev Agy
Tax Alloc (Joint Pwr Fin)
FSA Ser 95A
5.75%, 10/01/25............. 5,000 4,907,250
AAA San Francisco City & Cnty
Int'l Arpt
MBIA Ser 93 II-4
6.00%, 5/01/14.............. 4,095 4,241,929
A San Francisco Univ Ed Fac
(Student Hsg Rev)
ACA Ser 99
5.25%, 7/01/32.............. 18,000 15,548,760
AAA Shasta Lake
Elec Sys Rev FSA
Ser 96-2
6.00%, 4/01/16.............. 2,895 2,967,809
AAA So Tahoe Joint Pwr Fin Auth
CAP MAC Ser 95A
5.75%, 10/01/25............. 4,500 4,416,525
AAA Univ of California Regents
(UCLA Med Ctr)
MBIA Ser 94
5.50%, 12/01/20 ............ 1,685 1,606,159
------------
TOTAL INVESTMENTS - 98.4%
(cost $144,341,034)...... 147,177,770
Other assets less
liabilities - 1.6% ....... 2,376,370
------------
NET ASSETS - 100%........... $149,554,140
============
- --------------------------------------------------------------------------------
(a) Unaudited.
(b) Moody's or Fitch Rating (unaudited).
(c) Inverse floater security - security with variable or floating interest
rate that moves in opposite direction of short-term interest rates.
(d) 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.
Glossary of Terms:
ACA American Capital Access Financial Guaranty Corporation
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CAP MAC Capital Markets Assurance Corporation
CONNIE LEE Connie Lee Insurance Company
COP Certificate of Participation
ETM Escrow to Maturity
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Administration
FHLMC Federal Home Loan Mortgage Corp
FNMA Federal National Mortgage Association
FSA Financial Security Assurance Inc.
GNMA Government National Mortgage Association
GO General Obligation
HDA Housing Development Authority
HFA Housing Finance Authority
HFC Home Finance Corporation
IDA Industrial Development Authority
IDR Industrial Development Revenue
MBIA Municipal Bond Investors Assurance
MFA Mortgage Finance Authority
MFHR Multi-Family Housing Revenue
NR Rating not applied for
PCR Pollution Control Revenue
SFMR Single Family Mortgage Revenue
See notes to financial statements.
28
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1999 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: $691,829,454; $217,513,261;
$388,026,129; $1,013,751,542 and
$144,341,034, respectively) ............... $686,465,540 $216,183,122 $389,258,924 $1,037,704,053 $147,177,770
Cash.......................................... -0- 1,181,865 764,430 480,062 194,612
Interest receivable........................... 11,904,945 3,394,581 6,031,324 18,558,567 2,382,941
Receivable for capital stock sold............. 7,036,509 2,667,187 3,593,372 7,958,205 878,775
Receivable for investment securities sold..... 1,127,814 2,679,541 372,908 18,846,840 -0-
------------ ------------ ------------ -------------- ------------
Total assets.................................. 706,534,808 226,106,296 400,020,958 1,083,547,727 150,634,098
------------ ------------ ------------ -------------- ------------
LIABILITIES
Due to custodian.............................. 324,485 -0- -0- -0- -0-
Payable for investment securities purchased... 26,138,253 2,213,961 -0- 3,904,561 -0-
Payable for capital stock redeemed............ 6,669,658 2,540,840 4,780,933 8,526,480 627,406
Dividends payable ............................ 1,033,185 293,747 604,840 1,577,788 180,010
Distribution fee payable...................... 338,108 89,872 196,965 505,413 61,053
Advisory fee payable.......................... 115,597 95,034 49,904 274,151 70,188
Unclaimed dividends........................... 78,007 -0- -0- 90,989 90,989
Accrued expenses.............................. 85,668 37,604 64,919 121,765 50,312
------------ ------------ ------------ -------------- ------------
Total liabilities............................. 34,782,961 5,271,058 5,697,561 15,001,147 1,079,958
------------ ------------ ------------ -------------- ------------
NET ASSETS....................................... $671,751,847 $220,835,238 $394,323,397 $1,068,546,580 $149,554,140
============ ============ ============ ============== ============
COMPOSITION OF NET ASSETS
Capital stock, at par......................... $ 67,108 $ 23,676 $ 41,713 $ 100,964 $ 11,411
Additional paid-in capital.................... 709,373,695 232,448,742 403,373,391 1,072,863,860 150,919,614
Distributions in excess of net investment
income..................................... (1,033,185) (293,747) (604,840) (1,577,788) (67,665)
Accumulated net realized loss on
investment transactions.................... (31,290,937) (10,013,294) (9,719,662) (26,792,967) (4,145,956)
Net unrealized appreciation (depreciation)
of investments............................. (5,364,834) (1,330,139) 1,232,795 23,952,511 2,836,736
------------ ------------ ------------ -------------- ------------
$671,751,847 $220,835,238 $394,323,397 $1,068,546,580 $149,554,140
============ ============ ============ ============== ============
Class A Shares
Net assets.................................... $402,922,170 $168,571,546 $234,835,219 $ 684,403,255 $111,535,451
============ ============ ============ ============== ============
Shares of capital stock outstanding........... 40,229,105 18,065,329 24,839,812 64,660,148 8,510,750
============ ============ ============ ============== ============
Class B Shares
Net assets.................................... $157,090,148 $ 32,585,168 $111,283,440 $ 224,924,226 $ 21,627,704
============ ============ ============ ============== ============
Shares of capital stock outstanding........... 15,707,147 3,498,379 11,774,538 21,256,860 1,650,085
============ ============ ============ ============== ============
Class C Shares
Net assets.................................... $111,739,529 $ 19,678,524 $48,204,738 $ 159,219,099 $ 16,390,985
============ ============ ============ ============== ============
Shares of capital stock outstanding........... 11,171,754 2,111,833 5,098,486 15,047,147 1,250,331
============ ============ ============ ============== ============
</TABLE>
29
<PAGE>
Statements Of Assets And Liabilities (cont.) Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
Insured Insured
National National New York California California
------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
CALCULATION OF MAXIMUM
OFFERING PRICE
Class A Shares
Net asset value and redemption price
per share.................................. $10.02 $9.33 $9.45 $10.58 $13.11
Sales charge -- 4.25% of public offering
price...................................... .44 .41 .42 .47 .58
------ ----- ----- ------ ------
Maximum offering price........................ $10.46 $9.74 $9.87 $11.05 $13.69
====== ===== ===== ====== ======
Class B Shares
Net asset value and offering price per
share...................................... $10.00 $9.31 $9.45 $10.58 $13.11
====== ===== ===== ====== ======
Class C Shares
Net asset value and offering price per
share...................................... $10.00 $9.32 $9.45 $10.58 $13.11
====== ===== ===== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
30
<PAGE>
STATEMENTS OF OPERATIONS
Year Ended October 31, 1999 Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
Insured Insured
National National New York California California
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest......................................... $ 38,407,090 $ 12,715,851 $ 22,293,746 $ 56,332,469 $ 8,969,894
------------ ------------ ------------ ------------ ------------
EXPENSES
Advisory fee .................................... 4,354,805 1,462,721 2,434,115 6,312,842 875,130
Distribution fee - Class A....................... 1,178,257 524,176 660,634 1,903,085 346,078
Distribution fee - Class B....................... 1,893,298 454,104 1,196,573 2,281,628 267,312
Distribution fee - Class C....................... 1,146,865 224,087 495,897 1,475,303 170,241
Transfer agency.................................. 546,831 146,561 288,060 472,038 73,518
Custodian........................................ 178,455 100,070 122,587 213,208 83,765
Registration..................................... 100,181 35,648 13,440 35,747 3,880
Administrative................................... 92,000 92,000 92,000 92,000 92,000
Printing......................................... 86,009 24,616 39,144 93,495 15,918
Audit and legal.................................. 67,713 35,194 48,762 76,996 33,149
Taxes............................................ 51,068 20,948 28,205 66,980 13,324
Directors' fees.................................. 6,151 6,151 6,151 6,151 6,151
Miscellaneous.................................... 26,912 13,652 11,403 32,653 3,737
------------ ------------ ------------ ------------ ------------
Total expenses................................... 9,728,545 3,139,928 5,436,971 13,062,126 1,984,203
------------ ------------ ------------ ------------ ------------
Less: advisory fee waived (see note B)........... (2,961,268) (250,000) (1,849,928) (3,282,677) -0-
------------ ------------ ------------ ------------ ------------
Net expenses..................................... 6,767,277 2,889,928 3,587,043 9,779,449 1,984,203
------------ ------------ ------------ ------------ ------------
Net investment income ........................... 31,639,813 9,825,923 18,706,703 46,553,020 6,985,691
------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on investment transactions..... (31,290,937) (10,013,294) (8,256,144) (20,431,904) (3,924,423)
Net change in unrealized appreciation/depreciation
of investments................................ (31,236,200) (12,859,783) (25,161,193) (49,987,983) (9,384,578)
------------ ------------ ------------ ------------ ------------
Net loss on investments.......................... (62,527,137) (22,873,077) (33,417,337) (70,419,887) (13,309,001)
------------ ------------ ------------ ------------ ------------
NET DECREASE IN NET ASSETS FROM
OPERATIONS ......................................... $(30,887,324) $(13,047,154) $(14,710,634) $(23,866,867) $ (6,323,310)
============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
National Insured National
----------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income................ $ 31,639,813 $ 29,641,197 $ 9,825,923 $ 9,694,579
Net realized gain (loss) on
investment transactions........... (31,290,937) 11,054,812 (10,013,294) 6,650,920
Net change in unrealized
appreciation/depreciation
of investments.................... (31,236,200) (660,042) (12,859,783) (168,400)
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets from operations............ (30,887,324) 40,035,967 (13,047,154) 16,177,099
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A........................... (18,867,293) (17,277,432) (7,389,653) (7,331,490)
Class B........................... (7,943,915) (8,200,493) (1,629,052) (1,655,195)
Class C........................... (4,828,605) (4,163,272) (807,218) (707,894)
Distributions in excess of net
investment income
Class A........................... (1,721,256) (1,076,316) (328,139) (882,481)
Class B........................... (724,721) (510,858) (72,338) (199,233)
Class C........................... (440,512) (259,356) (35,845) (85,208)
Net realized gain on investments
Class A........................... (3,219,099) -0- (3,797,073) (3,321,194)
Class B........................... (1,765,332) -0- (1,065,551) (878,080)
Class C........................... (974,028) -0- (476,055) (370,918)
CAPITAL STOCK
TRANSACTIONS
Net increase (decrease).............. 72,852,855 51,860,472 (261,978) 13,768,898
------------ ------------ ------------ ------------
Total increase (decrease)............ 1,480,770 60,408,712 (28,910,056) 14,514,304
NET ASSETS
Beginning of year.................... 670,271,077 609,862,365 249,745,294 235,230,990
------------ ------------ ------------ ------------
End of year.......................... $671,751,847 $670,271,077 $220,835,238 $249,745,294
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
32
<PAGE>
Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
New York
-----------------------------------------
Year Ended Year Ended
October 31, 1999 October 31, 1998
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income............................................................ $ 18,706,703 $ 15,989,493
Net realized gain (loss) on investment
transactions.................................................................. (8,256,144) 2,109,069
Net change in unrealized
appreciation of investments................................................... (25,161,193) 4,593,642
------------ ------------
Net increase (decrease) in net assets from
operations.................................................................... (14,710,634) 22,692,204
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A....................................................................... (11,259,004) (9,784,034)
Class B....................................................................... (5,262,517) (4,539,871)
Class C....................................................................... (2,185,182) (1,665,588)
Distributions in excess of net
investment income
Class A....................................................................... (141,491) (329,150)
Class B....................................................................... (66,134) (152,729)
Class C....................................................................... (27,461) (56,033)
CAPITAL STOCK
TRANSACTIONS
Net increase..................................................................... 61,469,975 43,586,484
------------ ------------
Total increase................................................................... 27,817,552 49,751,283
NET ASSETS
Beginning of year................................................................ 366,505,845 316,754,562
------------ ------------
End of year...................................................................... $394,323,397 $366,505,845
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
33
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (cont.) Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
California Insured California
----------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income................ $ 46,553,020 $ 37,386,117 $ 6,985,691 $ 6,625,535
Net realized gain (loss) on
investment transactions........... (20,431,904) 6,234,155 (3,924,423) 112,114
Net change in unrealized.............
appreciation of investments....... (49,987,983) 16,056,939 (9,384,578) 4,135,620
-------------- ------------ ------------ ------------
Net increase (decrease) in net
assets from operations............ (23,866,867) 59,677,211 (6,323,310) 10,873,269
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A........................... (30,803,448) (24,897,286) (5,199,011) (4,943,558)
Class B........................... (9,555,417) (7,973,937) (1,008,516) (1,139,926)
Class C........................... (6,194,155) (4,514,894) (644,427) (542,051)
Distributions in excess of net
investment income
Class A........................... (1,624,504) (1,151,725) -0- (287,347)
Class B........................... (503,931) (368,867) -0- (66,259)
Class C........................... (326,665) (208,855) -0- (31,507)
CAPITAL STOCK
TRANSACTIONS
Net increase......................... 258,928,720 134,072,838 3,657,065 10,150,493
-------------- ------------ ------------ ------------
Total increase (decrease)............ 186,053,733 154,634,485 (9,518,199) 14,013,114
NET ASSETS
Beginning of year.................... 882,492,847 727,858,362 159,072,339 145,059,225
-------------- ------------ ------------ ------------
End of year.......................... $1,068,546,580 $882,492,847 $149,554,140 $159,072,339
============== ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1999 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 an 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 of the State Portfolios are non-diversified. 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% for
purchases not exceeding $1,000,000. With respect to purchases of $1,000,000 or
more, Class A shares redeemed within one year of purchase may be subject to a
contingent deferred sales charge of 1%. Class B shares are currently 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 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, except that each class
bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan. The financial statements have been prepared in
conformity with generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements and amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies followed by the Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange are 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. If no bid prices are
quoted, then the security is valued at the mean of the bid and asked prices as
obtained on that day from one or more dealers regularly making a market in that
security. Securities traded on the over-the-counter market are valued at the
mean of the closing bid and asked prices provided by two or more dealers
regularly making a market in such securities. U.S. government securities and
other debt securities which mature in 60 days or less are valued at amortized
cost unless this method does not represent fair value. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by, or in accordance with procedures approved by, the
Board of Directors. Fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
2. Taxes
It is the policy 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 any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. Investment Income and Investment Transactions
Interest income is accrued daily. Investment transactions are accounted for on
the trade date securities are purchased or sold. The Fund amortizes premiums,
accretes original issue discounts and market discounts as adjustments to
interest income. Investment gains and losses are determined on the identified
cost basis.
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. Income and Expenses
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each settled class of shares, based on proportionate interest in the
Fund represented by the net assets of such class, except that the Fund's Class B
and Class C shares bear higher distribution and transfer agent fees than Class A
shares.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance Municipal Income Fund
================================================================================
Income dividends and capital gains distributions are determined in accordance
with federal tax regulations and may differ from those determined in accordance
with generally accepted accounting principles. To the extent these differences
are permanent, such amounts are reclassified within the capital accounts based
on their federal tax basis treatment; temporary differences do not require such
reclassification. During the current fiscal year, certain portfolios had
permanent defferences, primarily due to distributions in excess of net
tax-exempt investment income which resulted in a net decrease in distributions
in excess of net investment income and a corresponding decrease in additional
paid-in capital for those portfolios. This reclassification had no effect on net
assets.
- --------------------------------------------------------------------------------
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 its 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 its
average daily net assets. Such fees are accrued daily and paid monthly.
For the year ended October 31, 1999, the Adviser has 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: $2,961,268,
$250,000, $1,849,928 and $3,282,677, respectively. Pursuant to the advisory
agreement, the Fund paid $462,686 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 Transfer Agency Agreement for providing
personnel and facilities to perform transfer agency services for each Portfolio.
Such compensation amounted to: National Portfolio, $416,441; Insured National
Portfolio, $107,214; New York Portfolio, $214,608; California Portfolio,
$358,118 and Insured California Portfolio, $51,600 for the year ended October
31, 1999.
In addition, for the year ended October 31, 1999, the Fund's expenses were
reduced by: National Portfolio $28,827; Insured National Portfolio $7,598; New
York Portfolio $14,955; California Portfolio $24,716 and Insured California
Portfolio, $3,646 under an expense offset arrangement with Alliance Fund
Services, Inc.
Alliance Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Adviser, serves as the Distributor of the Fund's shares. The Distributor
has advised the Fund that it has recieved front-end sales charges for the
respective Portfolio's Class A shares for the year ended October 31, 1999 were:
National Portfolio, $118,269; Insured National Portfolio, $19,762; New York
Portfolio, $43,246; California Portfolio, $216,070; Insured California, $29,686.
The amount of contingent deferred sales charge imposed upon redemptions by
shareholders of Class A shares were: National Portfolio, $16,578; New York,
$18,246; California Portfolio, $64,334; Insured National, $11,949; Insured
California Portfolio, $5,819. The amount of contingent deferred sales charges
imposed upon redemptions by shareholders of Class B shares were: National
Portfolio, $212,153; Insured National Portfolio, $67,540; New York Portfolio,
$122,619; California Portfolio, $258,101; and Insured California Portfolio,
$16,686. The amount of contingent deferred sales charges imposed upon
redemptions by shareholders of Class C shares were: National Portfolio, $28,468;
Insured National Portfolio, $7,642; New York Portfolio, $34,467; California
Portfolio, $66,876; and Insured California, $7,659.
36
<PAGE>
Alliance Municipal Income Fund
================================================================================
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. Under the
Agreement, each Portfolio pays distribution and servicing fees 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 both Class B and Class C shares. The
fees are accrued daily and paid monthly. The Agreement provides that the
Distributor will use such payments in their entirety for distribution assistance
and promotional activities. The Distributor has advised the Fund that it has
incurred expenses in excess of the distribution costs reimbursed by each
Portfolio as follows:
Portfolio Class B Class C
- --------- ---------- ----------
National...................... $4,329,603 $3,541,158
Insured National.............. 2,447,094 1,193,429
New York...................... 4,500,004 1,798,282
California.................... 7,426,911 3,575,665
Insured California............ 1,854,964 909,433
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.
- --------------------------------------------------------------------------------
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term investments
and U.S. government securities) for the year ended October 31, 1999 were as
follows:
Portfolio Purchases Sales
- --------- -------------- --------------
National................. $2,476,271,975 $2,308,441,468
Insured National......... 688,826,837 629,014,936
New York................. 602,412,891 487,712,313
California............... 1,095,312,691 772,441,188
Insured California....... 176,906,398 145,250,127
There were no purchases or sales of U.S. government and government agency
obligations for the year ended October 31, 1999.
At October 31, 1999, the cost of investments for federal income tax purposes,
gross unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation/depreciation of investments for each Portfolio were as follows:
<TABLE>
<CAPTION>
Net
Gross Unrealized Unrealized
------------------------------------------ Appreciation
Tax Cost Appreciation (Depreciation) (Depreciation)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
National................................ $ 695,390,013 $ 5,080,216 $(14,004,689) $(8,924,473)
Insured National........................ 218,640,832 1,674,986 (4,132,696) (2,457,710)
New York................................ 389,027,190 6,207,844 (5,976,110) 231,734
California.............................. 1,019,713,685 31,542,507 (13,552,139) 17,990,368
Insured California...................... 145,245,094 3,424,380 (1,491,704) 1,932,676
</TABLE>
NOTE E: Taxes
For Federal income tax purposes at October 31, 1999, the Fund had capital loss
carryforwards for the following Portfolios: $27,730,378 expiring in 2007 for the
National Portfolio; $8,885,723 expiring in 2007 for the Insured National
Portfolio; $1,444,926 expiring in 2003 and $7,273,675 expiring in 2007 for the
New York Portfolio; $4,309,001 expiring in 2003, $2,052,062 expiring in 2004 and
$14,469,769 expiring in 2007 for the California Portfolio; $221,533 expiring in
2002 and $3,020,363 expiring in 2007 for the Insured California Portfolio.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance Municipal Income Fund
================================================================================
NOTE F: Capital Stock
There are 3,000,000,000 shares of $.001 par value capital stock authorized,
divided into three classes, designated Class A, Class B and Class C shares. Each
class consists of 200,000,000 authorized shares. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
National Portfolio
--------------------------------------- -----------------------------------------
SHARES AMOUNT
--------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............................. 8,506,866 7,594,850 $ 91,581,471 $ 83,693,512
Shares issued in reinvestment of
dividends and distributions.......... 1,335,920 958,894 14,384,705 10,582,438
Shares converted from Class B........... 5,270,047 899,961 56,148,358 9,934,458
Shares redeemed......................... (7,742,184) (6,731,237) (82,450,186) (74,127,641)
---------- ---------- ------------ ------------
Net increase............................ 7,370,649 2,722,468 $ 79,664,348 $ 30,082,767
========== ========== ============ ============
Class B
Shares sold............................. 5,776,146 4,004,496 $ 62,149,399 $ 44,261,765
Shares issued in reinvestment of
dividends and distributions.......... 652,921 532,635 7,053,644 5,876,000
Shares converted to Class A............. (5,270,047) (899,961) (56,148,358) (9,934,458)
Shares redeemed......................... (3,274,019) (3,238,840) (35,084,961) (35,717,016)
---------- ---------- ------------ ------------
Net increase (decrease)................. (2,114,999) 398,330 $(22,030,276) $ 4,486,291
========== ========== ============ ============
Class C
Shares sold............................. 3,122,435 2,677,765 $ 33,601,967 $ 29,579,521
Shares issued in reinvestment of
dividends and distributions.......... 492,277 392,655 5,318,617 4,329,223
Shares redeemed......................... (2,217,831) (1,506,893) (23,701,801) (16,617,330)
---------- ---------- ------------ ------------
Net increase............................ 1,396,881 1,563,527 $ 15,218,783 $ 17,291,414
========== ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Insured National Portfolio
--------------------------------------- -----------------------------------------
SHARES AMOUNT
--------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............................. 1,460,910 1,642,188 $ 14,626,498 $ 17,152,883
Shares issued in reinvestment of
dividends and distributions.......... 735,233 702,615 7,458,642 7,318,564
Shares converted from Class B........... 1,461,900 111,070 14,407,154 1,163,290
Shares redeemed......................... (2,601,120) (1,706,766) (26,087,146) (17,848,065)
---------- ---------- ------------ ------------
Net increase............................ 1,056,923 749,107 $ 10,405,148 $ 7,786,672
========== ========== ============ ============
</TABLE>
38
<PAGE>
Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
Insured National Portfolio (continued)
---------------------------- ----------------------------
Shares Amount
---------------------------- ----------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class B
Shares sold .................... 1,130,671 1,034,758 $ 11,487,371 $ 10,829,842
Shares issued in reinvestment of
dividends and distributions . 203,847 190,011 2,072,901 1,977,801
Shares converted to Class A .... (1,461,900) (111,070) (14,407,154) (1,163,290)
Shares redeemed ................ (1,010,373) (817,274) (10,137,552) (8,543,696)
------------ ------------ ------------ ------------
Net increase (decrease) ........ (1,137,755) 296,425 $(10,984,434) $ 3,100,657
============ ============ ============ ============
Class C
Shares sold .................... 532,822 402,996 $ 5,412,387 $ 4,220,683
Shares issued in reinvestment of
dividends and distributions . 118,257 115,304 1,203,366 1,200,682
Shares redeemed ................ (630,452) (243,043) (6,298,445) (2,539,796)
------------ ------------ ------------ ------------
Net increase ................... 20,627 275,257 $ 317,308 $ 2,881,569
============ ============ ============ ============
<CAPTION>
New York Portfolio
---------------------------- ----------------------------
Shares Amount
---------------------------- ----------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class A
Shares sold .................... 6,028,955 4,204,543 $ 59,952,589 $ 43,008,797
Shares issued in reinvestment of
dividends and distributions . 692,717 610,190 6,951,513 6,244,173
Shares converted from Class B .. 2,262,106 70,171 22,454,536 719,730
Shares redeemed ................ (4,256,586) (2,761,081) (42,415,433) (28,246,100)
------------ ------------ ------------ ------------
Net increase ................... 4,727,192 2,123,823 $ 46,943,205 $ 21,726,600
============ ============ ============ ============
Class B
Shares sold .................... 4,452,853 2,973,222 $ 44,805,273 $ 30,435,248
Shares issued in reinvestment of
dividends and distributions . 369,247 336,709 3,709,916 3,444,476
Shares converted to Class A .... (2,262,106) (70,171) (22,454,536) (719,730)
Shares redeemed ................ (1,932,939) (1,605,906) (19,340,640) (16,421,860)
------------ ------------ ------------ ------------
Net increase ................... 627,055 1,633,854 $ 6,720,013 $ 16,738,134
============ ============ ============ ============
</TABLE>
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
New York Portfolio (continued)
------------------------------ ------------------------------
Shares Amount
------------------------------ ------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Class C
Shares sold .................... 1,772,374 1,797,741 $ 18,029,331 $ 18,408,602
Shares issued in reinvestment of
dividends and distributions . 179,795 185,639 1,811,071 1,897,746
Shares redeemed ................ (1,199,740) (1,486,617) (12,033,645) (15,184,598)
------------- ------------- ------------- -------------
Net increase ................... 752,429 496,763 $ 7,806,757 $ 5,121,750
============= ============= ============= =============
<CAPTION>
California Portfolio
------------------------------ ------------------------------
Shares Amount
------------------------------ ------------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Class A
Shares sold .................... 19,207,355 10,042,110 $ 214,251,881 $ 112,726,624
Shares issued in reinvestment of
dividends and distributions . 1,409,134 1,185,228 15,636,654 13,289,149
Shares converted from Class B .. 4,408,895 114,030 48,518,625 1,283,090
Shares redeemed ................ (8,938,147) (5,372,737) (98,544,498) (60,189,528)
------------- ------------- ------------- -------------
Net increase ................... 16,087,237 5,968,631 $ 179,862,662 $ 67,109,335
============= ============= ============= =============
Class B
Shares sold .................... 9,703,601 5,018,694 $ 107,880,190 $ 56,293,953
Shares issued in reinvestment of
dividends and distributions . 540,254 488,172 6,008,232 5,472,448
Shares converted to Class A .... (4,408,895) (114,030) (48,518,625) (1,283,090)
Shares redeemed ................ (2,905,493) (2,159,593) (32,206,885) (24,224,615)
------------- ------------- ------------- -------------
Net increase ................... 2,929,467 3,233,243 $ 33,162,912 $ 36,258,696
============= ============= ============= =============
Class C
Shares sold .................... 6,358,649 3,787,068 $ 70,880,631 $ 42,523,071
Shares issued in reinvestment of
dividends and distributions . 479,445 411,862 5,335,024 4,614,537
Shares redeemed ................ (2,740,920) (1,466,724) (30,312,509) (16,432,801)
------------- ------------- ------------- -------------
Net increase ................... 4,097,174 2,732,206 $ 45,903,146 $ 30,704,807
============= ============= ============= =============
</TABLE>
40
<PAGE>
Alliance Municipal Income Fund
================================================================================
<TABLE>
<CAPTION>
Insured California Portfolio
---------------------------- ----------------------------
Shares Amount
---------------------------- ----------------------------
Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class A
Shares sold .................... 1,336,511 1,208,098 $ 18,648,962 $ 17,010,840
Shares issued in reinvestment of
dividends and distributions . 175,146 183,708 2,430,609 2,585,734
Shares converted from Class B .. 395,355 13,557 5,457,034 192,508
Shares redeemed ................ (1,334,892) (930,895) (18,418,230) (13,086,251)
------------ ------------ ------------ ------------
Net increase ................... 572,120 474,468 $ 8,118,375 $ 6,702,831
============ ============ ============ ============
Class B
Shares sold .................... 395,432 439,858 $ 5,504,873 $ 6,185,442
Shares issued in reinvestment of
dividends and distributions . 53,821 53,385 752,744 751,134
Shares converted to Class A .... (395,355) (13,557) (5,457,034) (192,508)
Shares redeemed ................ (506,189) (392,027) (7,072,654) (5,515,049)
------------ ------------ ------------ ------------
Net increase (decrease) ........ (452,291) 87,659 $ (6,272,071) $ 1,229,019
============ ============ ============ ============
Class C
Shares sold .................... 369,407 251,196 $ 5,117,248 $ 3,555,671
Shares issued in reinvestment of
dividends ................... 39,344 38,215 547,906 537,625
Shares redeemed ................ (282,163) (133,253) (3,854,393) (1,874,653)
------------ ------------ ------------ ------------
Net increase ................... 126,588 156,158 $ 1,810,761 $ 2,218,643
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
NOTE G: Bank Borrowing
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility")
intended to provide short-term financing if necessary, subject to certain
restrictions, in connection with abnormal redemption activity. Commitment fees
related to the Facility are paid by the participating funds and are included in
miscellaneous expenses in the statement of operations. The Fund did not utilize
the Facility during the year ended October 31, 1999.
41
<PAGE>
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,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.09 $ 10.94 $ 10.51 $ 10.45 $ 9.41
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (a) ............................ .52(b) .55(b) .57(b) .58 .58
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.93) .18 .44 .06 1.04
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.41) .73 1.01 .64 1.62
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.52) (.55) (.58) (.58) (.58)
Distributions in excess of net investment income ..... (.04) (.03) -0- -0- -0-
Distributions from net realized gains ................ (.10) -0- -0- -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.66) (.58) (.58) (.58) (.58)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 10.02 $ 11.09 $ 10.94 $ 10.51 $ 10.45
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (3.93)% 6.82% 9.88% 6.32% 17.73%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $402,922 $364,429 $329,540 $325,288 $338,311
Ratios to average net assets of:
Expenses, net of fee waivers ...................... .66% .66% .69% .69% .71%
Expenses, before fee waivers ...................... 1.12% 1.08% 1.11% 1.10% 1.09%
Net investment income, net of fee waivers ......... 4.86% 4.98% 5.40% 5.55% 5.84%
Portfolio turnover rate .............................. 393% 56% 72% 137% 118%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
42
<PAGE>
Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
National Portfolio
------------------------------------------------------------------
Class B
------------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.08 $ 10.94 $ 10.51 $ 10.45 $ 9.41
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................ .44(b) .46(b) .50(b) .51 .51
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.93) .19 .44 .06 1.04
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.49) .65 .94 .57 1.55
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.44) (.46) (.50) (.51) (.51)
Distributions in excess of net investment income ..... (.05) (.05) (.01) -0- -0-
Distributions from net realized gains ................ (.10) -0- -0- -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.59) (.51) (.51) (.51) (.51)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 10.00 $ 11.08 $ 10.94 $ 10.51 $ 10.45
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (4.65)% 6.05% 9.16% 5.61% 16.91%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $157,090 $197,517 $190,530 $214,994 $252,357
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.37% 1.37% 1.40% 1.40% 1.42%
Expenses, before fee waivers ...................... 1.74% 1.79% 1.79% 1.81% 1.80%
Net investment income, net of fee waivers ......... 4.12% 4.28% 4.69% 4.85% 5.13%
Portfolio turnover rate .............................. 393% 56% 72% 137% 118%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
43
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
National Portfolio
----------------------------------------------------------------
Class C
----------------------------------------------------------------
Year Ended October 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.08 $ 10.94 $ 10.51 $ 10.45 $ 9.41
-------- -------- ------- ------- --------
Income From Investment Operations
Net investment income (a) ............................ .45(b) .47(b) .50(b) .51 .51
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.94) .18 .44 .06 1.04
-------- -------- ------- ------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.49) .65 .94 .57 1.55
-------- -------- ------- ------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.45) (.47) (.50) (.51) (.51)
Distributions in excess of net investment income ..... (.04) (.04) (.01) -0- -0-
Distributions from net realized gains ................ (.10) -0- -0- -0- -0-
-------- -------- ------- ------- --------
Total dividends and distributions .................... (.59) (.51) (.51) (.51) (.51)
-------- -------- ------- ------- --------
Net asset value, end of year ......................... $ 10.00 $ 11.08 $ 10.94 $ 10.51 $ 10.45
======== ======== ======= ======= ========
Total Return
Total investment return based on net asset value (c) . (4.65)% 6.06% 9.18% 5.62% 16.93%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $111,740 $108,325 $89,792 $96,134 $108,068
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.36% 1.36% 1.39% 1.39% 1.41%
Expenses, before fee waivers ...................... 1.79% 1.82% 1.81% 1.80% 1.78%
Net investment income, net of fee waivers ......... 4.15% 4.28% 4.70% 4.85% 5.16%
Portfolio turnover rate .............................. 393% 56% 72% 137% 118%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
44
<PAGE>
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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.52 $ 10.49 $ 10.28 $ 10.07 $ 8.96
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................ .43(b) .44(b) .50(b) .51 .51
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.95) .28 .37 .22 1.13
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.52) .72 .87 .73 1.64
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.43) (.44) (.50) (.52) (.51)
Distributions in excess of net investment income ..... (.02) (.05) (.02) -0- (.02)
Distributions from net realized gains ................ (.22) (.20) (.14) -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.67) (.69) (.66) (.52) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 9.33 $ 10.52 $ 10.49 $ 10.28 $ 10.07
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (5.28)% 7.15% 8.77% 7.43% 18.72%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $168,572 $179,003 $170,631 $160,425 $165,548
Ratios to average net assets of:
Expenses, net of fee waivers ...................... .99% 1.00% 1.02% 1.02% 1.01%
Expenses, before fee waivers ...................... 1.10% 1.12% 1.15% 1.12% 1.12%
Net investment income, net of fee waivers ......... 4.25% 4.21% 4.85% 5.04% 5.37%
Portfolio turnover rate .............................. 322% 27% 98% 157% 171%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
45
<PAGE>
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 B
-------------------------------------------------------------
Year Ended October 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.52 $ 10.49 $ 10.28 $ 10.07 $ 8.96
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income (a) ............................ .36(b) .37(b) .42(b) .44 .45
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.97) .28 .38 .22 1.12
------- ------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.61) .65 .80 .66 1.57
------- ------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.36) (.37) (.42) (.45) (.45)
Distributions in excess of net investment income ..... (.02) (.05) (.03) -0- (.01)
Distributions from net realized gains ................ (.22) (.20) (.14) -0- -0-
------- ------- ------- ------- -------
Total dividends and distributions .................... (.60) (.62) (.59) (.45) (.46)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 9.31 $ 10.52 $ 10.49 $ 10.28 $ 10.07
======= ======= ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (6.10)% 6.48% 8.07% 6.74% 17.91%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $32,585 $48,751 $45,542 $52,156 $58,990
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.70% 1.71% 1.75% 1.73% 1.72%
Expenses, before fee waivers ...................... 1.79% 1.87% 1.86% 1.83% 1.83%
Net investment income, net of fee waivers ......... 3.52% 3.49% 4.12% 4.32% 4.65%
Portfolio turnover rate .............................. 322% 27% 98% 157% 171%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
46
<PAGE>
Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Insured National Portfolio
-------------------------------------------------------------
Class C
-------------------------------------------------------------
Year Ended October 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.52 $ 10.49 $ 10.28 $ 10.07 $ 8.96
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income (a) ............................ .36(b) .37(b) .42(b) .44 .45
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.96) .28 .38 .22 1.12
------- ------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.60) .65 .80 .66 1.57
------- ------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.36) (.37) (.42) (.45) (.45)
Distributions in excess of net investment income ..... (.02) (.05) (.03) -0- (.01)
Distributions from net realized gains ................ (.22) (.20) (.14) -0- -0-
------- ------- ------- ------- -------
Total dividends and distributions .................... (.60) (.62) (.59) (.45) (.46)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 9.32 $ 10.52 $ 10.49 $ 10.28 $ 10.07
======= ======= ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (6.00)% 6.48% 8.07% 6.74% 17.91%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $19,679 $21,992 $19,057 $22,763 $22,265
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.70% 1.70% 1.72% 1.72% 1.71%
Expenses, before fee waivers ...................... 1.80% 1.83% 1.84% 1.82% 1.82%
Net investment income, net of fee waivers ......... 3.55% 3.51% 4.15% 4.34% 4.69%
Portfolio turnover rate .............................. 322% 27% 98% 157% 171%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
47
<PAGE>
FINANCIAL HIGHLIGHTS (continued) 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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.29 $ 10.10 $ 9.66 $ 9.62 $ 8.72
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................ .51(b) .51(b) .53(b) .55 .55
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.83) .21 .46 .04 .90
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.32) .72 .99 .59 1.45
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.51) (.51) (.54) (.55) (.55)
Distributions in excess of net investment income ..... (.01) (.02) (.01) -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.52) (.53) (.55) (.55) (.55)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 9.45 $ 10.29 $ 10.10 $ 9.66 $ 9.62
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (3.27)% 7.31% 10.52% 6.30% 17.10%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $234,835 $207,031 $181,745 $179,452 $183,987
Ratios to average net assets of:
Expenses, net of fee waivers ...................... .61% .61% .65% .64% .75%
Expenses, before fee waivers ...................... 1.11% 1.08% 1.12% 1.11% 1.12%
Net investment income, net of fee waivers ......... 5.12% 5.04% 5.45% 5.66% 5.93%
Portfolio turnover rate ........................... 134% 18% 34% 64% 69%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
48
<PAGE>
Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
New York Portfolio
---------------------------------------------------------------
Class B
---------------------------------------------------------------
Year Ended October 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.29 $ 10.10 $ 9.66 $ 9.62 $ 8.72
-------- -------- ------- ------- -------
Income From Investment Operations
Net investment income (a) ......................... .44(b) .44(b) .46(b) .48 .48
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.83) .21 .46 .04 .90
-------- -------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.39) .65 .92 .52 1.38
-------- -------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.44) (.44) (.47) (.48) (.48)
Distributions in excess of net investment income ..... (.01) (.02) (. 01) -0- -0-
-------- -------- ------- ------- -------
Total dividends and distributions .................... (.45) (.46) (.48) (.48) (.48)
-------- -------- ------- ------- -------
Net asset value, end of year ......................... $ 9.45 $ 10.29 $ 10.10 $ 9.66 $ 9.62
======== ======== ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (3.96)% 6.57% 9.72% 5.52% 16.19%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $111,283 $114,739 $96,119 $96,959 $94,400
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.32% 1.32% 1.35% 1.35% 1.45%
Expenses, before fee waivers ...................... 1.76% 1.80% 1.84% 1.82% 1.83%
Net investment income, net of fee waivers ......... 4.38% 4.34% 4.75% 4.95% 5.21%
Portfolio turnover rate .............................. 134% 18% 34% 64% 69%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
49
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
New York Portfolio
-------------------------------------------------------------
Class C
-------------------------------------------------------------
Year Ended October 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 10.29 $ 10.10 $ 9.66 $ 9.62 $ 8.72
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income (a) ............................ .44(b) .44(b) .46(b) .48 .48
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.83) .21 .46 .04 .90
------- ------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.39) .65 .92 .52 1.38
------- ------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.44) (.44) (.47) (.48) (.48)
Distributions in excess of net investment income ..... (.01) (.02) (.01) -0- -0-
------- ------- ------- ------- -------
Total dividends and distributions .................... (.45) (.46) (.48) (.48) (.48)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 9.45 $ 10.29 $ 10.10 $ 9.66 $ 9.62
======= ======= ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (3.96)% 6.57% 9.72% 5.52% 16.19%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $48,205 $44,736 $38,890 $34,562 $32,259
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.31% 1.31% 1.35% 1.34% 1.44%
Expenses, before fee waivers ...................... 1.77% 1.82% 1.82% 1.81% 1.82%
Net investment income, net of fee waivers ......... 4.41% 4.33% 4.75% 4.95% 5.24%
Portfolio turnover rate .............................. 134% 18% 34% 64% 69%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
50
<PAGE>
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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.34 $ 11.04 $ 10.59 $ 10.45 $ 9.43
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................ .54(b) .56(b) .58(b) .58 .59
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.73) .32 .45 .14 1.02
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.19) .88 1.03 .72 1.61
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.54) (.56) (.58) (.58) (.59)
Distributions in excess of net investment income ..... (.03) (.02) -0- -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.57) (.58) (.58) (.58) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 10.58 $ 11.34 $ 11.04 $ 10.59 $ 10.45
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (1.80)% 8.20% 10.07% 7.15% 17.55%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $684,403 $550,626 $470,444 $460,444 $478,535
Ratios to average net assets of:
Expenses, net of fee waivers ...................... .71% .72% .78% .77% .74%
Expenses, before fee waivers ...................... 1.04% 1.04% 1.05% 1.05% 1.04%
Net investment income, net of fee waivers ......... 4.88% 4.99% 5.43% 5.57% 5.90%
Portfolio turnover rate .............................. 88% 22% 20% 49% 39%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
51
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
California Portfolio
------------------------------------------------------------------
Class B
------------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.34 $ 11.04 $ 10.59 $ 10.45 $ 9.43
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................ .46(b) .48(b) .51(b) .51 .51
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.73) .33 .45 .14 1.02
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.27) .81 .96 .65 1.53
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.46) (.48) (.51) (.51) (.51)
Distributions in excess of net investment income ..... (.03) (.03) -0- -0- -0-
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.49) (.51) (.51) (.51) (.51)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 10.58 $ 11.34 $ 11.04 $ 10.59 $ 10.45
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (2.47)% 7.46% 9.29% 6.37% 16.64%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $224,924 $207,751 $166,672 $164,895 $166,759
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.41% 1.43% 1.48% 1.47% 1.45%
Expenses, before fee waivers ...................... 1.72% 1.75% 1.76% 1.75% 1.75%
Net investment income, net of fee waivers ......... 4.14% 4.30% 4.72% 4.87% 5.19%
Portfolio turnover rate .............................. 88% 22% 20% 49% 39%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
52
<PAGE>
Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
California Portfolio
---------------------------------------------------------------
Class C
---------------------------------------------------------------
Year Ended October 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 11.33 $ 11.04 $ 10.59 $ 10.45 $ 9.43
-------- -------- ------- ------- -------
Income From Investment Operations
Net investment income (a) ............................ .46(b) .48(b) .51(b) .51 .51
Net realized and unrealized gain (loss) on investment
transactions ...................................... (.72) .32 .45 .14 1.02
-------- -------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.26) .80 .96 .65 1.53
-------- -------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.46) (.48) (.51) (.51) (.51)
Distributions in excess of net investment income ..... (.03) (.03) -0- -0- -0-
-------- -------- ------- ------- -------
Total dividends and distributions .................... (.49) (.51) (.51) (.51) (.51)
-------- -------- ------- ------- -------
Net asset value, end of year ......................... $ 10.58 $ 11.33 $ 11.04 $ 10.59 $ 10.45
======== ======== ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (2.39)% 7.46% 9.29% 6.38% 16.64%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $159,219 $124,115 $90,742 $90,917 $87,793
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.41% 1.42% 1.48% 1.47% 1.44%
Expenses, before fee waivers ...................... 1.74% 1.76% 1.74% 1.75% 1.74%
Net investment income, net of fee waivers ......... 4.17% 4.29% 4.73% 4.87% 5.22%
Portfolio turnover rate .............................. 88% 22% 20% 49% 39%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
53
<PAGE>
FINANCIAL HIGHLIGHTS (continued) 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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 14.25 $ 13.89 $ 13.39 $ 13.32 $ 11.79
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income ................................ .64(b) .64(b) .69(b) .69 .68(a)
Net realized and unrealized gain (loss) on investment
transactions ...................................... (1.15) .39 .50 .06 1.54
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value from
operations ........................................ (.51) 1.03 1.19 .75 2.22
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................. (.63) (.64) (.68) (.68) (.68)
Distributions in excess of net investment income ..... -0- (.03) (.01) -0- (.01)
-------- -------- -------- -------- --------
Total dividends and distributions .................... (.63) (.67) (.69) (.68) (.69)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 13.11 $ 14.25 $ 13.89 $ 13.39 $ 13.32
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (c) . (3.74)% 7.60% 9.18% 5.79% 19.29%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $111,535 $113,102 $103,647 $101,542 $103,940
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.05% 1.05% 1.11% 1.08% 1.04%
Expenses, before fee waivers ...................... 1.05% 1.05% 1.11% 1.08% 1.09%
Net investment income, net of fee waivers ......... 4.59% 4.52% 5.09% 5.19% 5.34%
Portfolio turnover rate .............................. 100% 0% 35% 118% 103%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
54
<PAGE>
Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Insured California Portfolio
-------------------------------------------------------------
Class B
-------------------------------------------------------------
Year Ended October 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 14.25 $ 13.89 $ 13.39 $ 13.32 $ 11.79
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income ................................ .53(b) .54(b) .59(b) .60 .58(a)
Net realized and unrealized gain (loss) on investment
transactions ...................................... (1.14) .39 .50 .05 1.54
------- ------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.61) .93 1.09 .65 2.12
------- ------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.53) (.54) (.59) (.58) (.58)
Distributions in excess of net investment income ..... -0- (.03) -0- -0- (.01)
------- ------- ------- ------- -------
Total dividends and distributions .................... (.53) (.57) (.59) (.58) (.59)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 13.11 $ 14.25 $ 13.89 $ 13.39 $ 13.32
======= ======= ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (4.44)% 6.84% 8.37% 4.99% 18.35%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $21,628 $29,957 $27,976 $26,696 $27,816
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.76% 1.76% 1.81% 1.79% 1.74%
Expenses, before fee waivers ...................... 1.76% 1.76% 1.81% 1.79% 1.80%
Net investment income, net of fee waivers ......... 3.85% 3.82% 4.39% 4.49% 4.61%
Portfolio turnover rate .............................. 100% 0% 35% 118% 103%
</TABLE>
- --------------------------------------------------------------------------------
See footnote summary on page 56.
55
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Municipal Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Insured California Portfolio
-------------------------------------------------------------
Class C
-------------------------------------------------------------
Year Ended October 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 14.25 $ 13.89 $ 13.39 $ 13.32 $ 11.79
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income ................................ .54(b) .54(b) .59(b) .60 .58(a)
Net realized and unrealized gain (loss) on investment
transactions ...................................... (1.15) .39 .50 .05 1.54
------- ------- ------- ------- -------
Net increase (decrease) in net asset value from
operations ........................................ (.61) .93 1.09 .65 2.12
------- ------- ------- ------- -------
Less: Dividends and Distributions
Dividends from net investment income ................. (.53) (.54) (.59) (.58) (.58)
Distributions in excess of net investment income ..... -0- (.03) -0- -0- (.01)
------- ------- ------- ------- -------
Total dividends and distributions .................... (.53) (.57) (.59) (.58) (.59)
------- ------- ------- ------- -------
Net asset value, end of year ......................... $ 13.11 $ 14.25 $ 13.89 $ 13.39 $ 13.32
======= ======= ======= ======= =======
Total Return
Total investment return based on net asset value (c) . (4.44)% 6.84% 8.37% 4.99% 18.35%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) .............. $16,391 $16,013 $13,436 $12,826 $14,323
Ratios to average net assets of:
Expenses, net of fee waivers ...................... 1.75% 1.75% 1.81% 1.78% 1.74%
Expenses, before fee waivers ...................... 1.75% 1.75% 1.81% 1.78% 1.79%
Net investment income, net of fee waivers ......... 3.89% 3.82% 4.39% 4.49% 4.64%
Portfolio turnover rate .............................. 100% 0% 35% 118% 103%
</TABLE>
- --------------------------------------------------------------------------------
(a) Net of fees waived by the Adviser.
(b) Based on average shares outstanding.
(c) 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 charges or
contingent deferred sales charges are not reflected in the calculation of
total investment return. Deferred sales charge is not reflected in the
calculation of total investment return.
56
<PAGE>
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, 1999, 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 and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1999, 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, 1999, 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.
/s/ Ernst & Young LLP
New York, New York
December 8, 1999
FEDERAL TAX INFORMATION (unaudited)
================================================================================
In accordance with Federal tax law, the following table represents each
portfolio's designation of "exempt-interest dividends" and long-term capital
gain distributions paid during the fiscal year ended October 31, 1999. As
required by Federal tax law, shareholders will receive notification of their
portion of each portfolio's taxable ordinary dividends (if any) and long term
capital gain distributions (if any) paid for the 1999 calendar year on Form
1099-DIV which will be mailed by January 31, 2000.
Exempt-Interest Long-Term Capital
Portfolio Dividends Gain Distributions
- ----------- --------------- ------------------
California ............................ $45,897,630 $ -0-
Insured California .................... 6,495,227 -0-
Insured National ...................... 9,467,855 4,633,941
National .............................. 30,517,437 5,958,459
New York .............................. 18,466,575 -0-
57
<PAGE>
124
<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;
A-1
<PAGE>
Baa - considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured and have speculative
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,
A-2
<PAGE>
current liquidity provides ample coverage of near-term
liabilities and unused alternative financing arrangements are
generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term
obligations. Commercial paper issuers rated "A" by 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
A-3
<PAGE>
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
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.
A-4
<PAGE>
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.
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.
A-5
<PAGE>
________________________________________________________________
APPENDIX B: FUTURES CONTRACTS AND RELATED OPTIONS
________________________________________________________________
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
B-1
<PAGE>
contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
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
B-2
<PAGE>
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
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
B-3
<PAGE>
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.
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.
B-4
<PAGE>
________________________________________________________________
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
C-1
<PAGE>
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing
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
C-2
<PAGE>
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.
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
C-3
<PAGE>
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.
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.
C-4
00250011.AX3
