<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-60560 and 811-07618
<PAGE>
<PAGE>
Alliance Municipal
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Income Portfolios
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P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
Prospectus and Application
February 1, 1996
National Portfolio Michigan Portfolio
Insured National Portfolio Minnesota Portfolio
Arizona Portfolio New Jersey Portfolio
California Portfolio New York Portfolio
Insured California Portfolio Ohio Portfolio
Florida Portfolio Pennsylvania Portfolio
Massachusetts Portfolio Virginia Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents Page
<S> <C>
The Portfolios At A Glance................................................ 2
Expense Information....................................................... 3
Financial Highlights...................................................... 5
Description of the Portfolios............................................. 12
Investment Objective.................................................. 12
How the Portfolios Pursue Their Objective............................. 12
Additional Investment Practices....................................... 14
Certain Fundamental Investment Policies............................... 19
Risk Considerations................................................... 19
Purchase and Sale of Shares............................................... 20
Management of the Funds................................................... 23
Dividends, Distributions and Taxes........................................ 24
General Information....................................................... 26
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</TABLE>
Adviser
Alliance Capital Management L.P.
1345 Avenue Of The Americas
New York, New York 10105
The fourteen Alliance Municipal Income Portfolios, by investing principally in
high-yielding, predominantly medium-quality municipal securities, seek to
provide their shareholders with the highest level of income exempt from Federal
and state tax that is available without assuming undue risk. These securities
generally offer current yields above those of higher quality municipal
obligations.
Each Portfolio is a series of Alliance Municipal Income Fund, Inc. or Alliance
Municipal Income Fund II (each a "Fund"), which are open-end management
investment companies. This Prospectus sets forth concisely the information which
a prospective investor should know about each Fund before investing. A
"Statement of Additional Information" for each Fund which provides further
information regarding certain matters discussed in this Prospectus and other
matters which may be of interest to some investors has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. For
a free copy, call or write Alliance Fund Services, Inc. at the indicated address
or "Literature" telephone number.
Each Portfolio offers three classes of shares which may be purchased at the
investor's choice at a price equal to their net asset value (i) plus an initial
sales charge imposed at the time of purchase (the "Class A shares"), (ii) with a
contingent deferred sales charge imposed on most redemptions made within three
years of purchase (the "Class B shares"), or (iii) without any initial or
contingent deferred sales charge (the "Class C shares"). See "Purchase and Sale
of Shares."
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[LOGO OF ALLIANCE APPEARS HERE]
/(R)//SM These are registered marks used under licenses from the owner,
Alliance Capital Management L.P.
<PAGE>
The Portfolios At A Glance
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
- --------------------------------------------------------------------------------
ALLIANCE MUNICIPAL
INCOME PORTFOLIOS
- --------------------------------------------------------------------------------
National Portfolio
- --------------------------------------------------------------------------------
Insured National Portfolio
- --------------------------------------------------------------------------------
Arizona Portfolio
- --------------------------------------------------------------------------------
California Portfolio
- --------------------------------------------------------------------------------
Insured California Portfolio
- --------------------------------------------------------------------------------
Florida Portfolio
- --------------------------------------------------------------------------------
Massachusetts Portfolio
- --------------------------------------------------------------------------------
Michigan Portfolio
- --------------------------------------------------------------------------------
Minnesota Portfolio
- --------------------------------------------------------------------------------
New Jersey Portfolio
- --------------------------------------------------------------------------------
New York Portfolio
- --------------------------------------------------------------------------------
Ohio Portfolio
- --------------------------------------------------------------------------------
Pennsylvania Portfolio
- --------------------------------------------------------------------------------
Virginia Portfolio
- --------------------------------------------------------------------------------
The Portfolios Seek...
High current tax-free income.
The National Portfolios Invest Principally in...
Diversified portfolios of medium-quality and investment grade municipal
securities.
The State Portfolios Invest Principally in...
Non-diversified portfolios of medium-quality and investment grade municipal
securities.
The Funds' Investment Manager is...
Alliance Capital Management L.P. ("Alliance"), a global investment manager
providing diversified services to institutions and individuals through a broad
line of investments including 107 mutual funds. Since 1971, Alliance has earned
a reputation as a leader in the investment world with over $146 billion in
assets under management as of December 31, 1995. Alliance provides investment
management services to 29 of the FORTUNE 100 companies.
The Type Of Investor Who May Want To Invest In These Portfolios Is...
An investor who wants tax-free income or is interested in the advantage of tax-
free investing. An investment in one of the Portfolios may soften the "tax bite"
because the income an investor earns is tax-free. Of course, bond prices and
yields will fluctuate with market conditions, so that your shares, when
redeemed, may be worth more or less than their original cost.
A Word About Risk...
The prices of the shares of the Alliance Municipal Income Portfolios will
fluctuate as the daily prices of the individual bonds in which they invest
fluctuate, so that your shares, when redeemed, may be worth more or less than
their original cost. Price fluctuations may be caused by changes in the general
level of interest rates or changes in bond credit quality ratings. Changes in
interest rates have a greater effect on bonds with longer maturities than those
with shorter maturities. While the Portfolios invest principally in bonds and
other fixed-income securities, in order to achieve their investment objectives,
the Portfolios may at times use certain types of derivative instruments, such as
options, futures, forwards and swaps. These involve risks different from, and,
in certain cases, greater than, the risks presented by more traditional
investments. These risks are fully discussed in this Prospectus. See
"Description of the Portfolios--Additional Investment Practices" and "--Risk
Considerations."
Getting Started...
Shares of the Portfolios are available through your financial representative and
most banks, insurance companies and brokerage firms nationwide. Shares can be
purchased for a minimum initial investment of $250, and subsequent investments
can be made for as little as $50. For detailed information about purchasing and
selling shares, see "Purchase and Sale of Shares." In addition, the Portfolios
offer several time and money saving services to investors. Be sure to ask your
financial representative about:
- --------------------------------------------------------------------------------
AUTOMATIC REINVESTMENT
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
- --------------------------------------------------------------------------------
DIVIDEND DIRECTION PLANS
- --------------------------------------------------------------------------------
AUTO EXCHANGE
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
- --------------------------------------------------------------------------------
CHECKWRITING
- --------------------------------------------------------------------------------
A CHOICE OF PURCHASE PLANS
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
24 HOUR INFORMATION
- --------------------------------------------------------------------------------
[LOGO OF ALLIANCE APPEARS HERE]
/(R)//SM These are registered marks used under licenses from the owner,
Alliance Capital Management L.P.
<PAGE>
- --------------------------------------------------------------------------------
Expense Information
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses are one of several factors to consider when you
invest in a Portfolio. The following table summarizes your maximum transaction
costs from investing in a Portfolio and annual expenses for each class of shares
of each Portfolio. For each Portfolio, the "Examples" to the right of the table
below show the cumulative expenses attributable to a hypothetical $1,000
investment in each class for the periods specified.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge imposed on purchases (as a percentage of offering
price)...................................................................... 4.25% (a) None None
Sales charge imposed on dividend reinvestments.............................. None None None
Deferred sales charge (as a percentage of original purchase price or redemp-
tion proceeds, whichever is lower).......................................... None 3.0% during the first year, None
decreasing 1.0% annually
to 0% after the third year(b)
Exchange fee................................................................ None None None
</TABLE>
- --------------------------------------------------------------------------------
(a) Reduced for larger purchases. Purchases of $1,000,000 or more are not
subject to an initial sales charge but may be subject to a 1% deferred sales
charge on redemptions within one year of purchase. See "Purchase and Sale of
Shares--How to Buy Shares" - page 20.
(b) Class B shares of each Portfolio automatically convert to Class A shares
after six years. See "Purchase and Sale of Shares--How to Buy Shares" -
page 20.
<TABLE>
<CAPTION>
Operating Expenses Examples
- ------------------------------------------------------------------- ---------------------------------------------------------
National Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .24% .24% .24% After 1 year $ 49 $ 44 $ 14 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 64 $ 55 $ 45 $ 45
Other expenses (a) .17% .18% .17% After 5 years $ 80 $ 78 $ 78 $ 77
---- ---- ---- After 10 years $127 $133(c) $133(c) $169
Total Portfolio
Operating expenses (b) .71% 1.42% 1.41%
==== ==== ====
<CAPTION>
Insured National Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .49% .49% .49% After 1 year $ 52 $ 47 $ 17 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 73 $ 64 $ 54 $ 54
Other expenses (a) .22% .23% .22% After 5 years $ 96 $ 93 $ 93 $ 93
---- ---- ---- After 10 years $161 $167(c) $167(c) $202
Total Portfolio
Operating expenses (b) 1.01% 1.72% 1.71%
==== ==== ====
<CAPTION>
Arizona Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 50 $ 45 $ 15 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 66 $ 57 $ 47 $ 47
Other expenses (after After 5 years $ 84 $ 81 $ 81 $ 81
reimbursement) (a) .48% .48% .48% After 10 years $135 $140(c) $140(c) $177
---- ---- ----
Total Portfolio
Operating expenses (b) .78% 1.48% 1.48%
==== ==== ====
<CAPTION>
California Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .32% .32% .32% After 1 year $ 50 $ 45 $ 15 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 56 $ 46 $ 46
Other expenses (a) .12% .13% .12% After 5 years $ 82 $ 79 $ 79 $ 79
---- ---- ---- After 10 years $130 $137(c) $137(c) $172
Total Portfolio
Operating expenses (b) .74% 1.45% 1.44%
==== ==== ====
<CAPTION>
Insured California Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .50% .50% .50% After 1 year $ 53 $ 48 $ 18 $ 18
12b-1 fees .30% 1.00% 1.00% After 3 years $ 74 $ 65 $ 55 $ 55
Other expenses (a) .24% .24% .24% After 5 years $ 97 $ 94 $ 94 $ 94
---- ---- ---- After 10 years $164 $170(c) $170(c) $205
Total Portfolio
Operating expenses (b) 1.04% 1.74% 1.74%
==== ==== ====
<CAPTION>
Florida Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .15% .15% .15% After 1 year $ 50 $ 44 $ 14 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 55 $ 45 $ 45
Other expenses (a) .28% .27% .27% After 5 years $ 81 $ 78 $ 78 $ 78
---- ---- ---- After 10 years $129 $134(c) $134(c) $170
Total Portfolio
Operating expenses (b) .73% 1.42% 1.42%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on page 4 and the discussion following these
tables on page 5.
3
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses Examples
- ------------------------------------------------------------------- ---------------------------------------------------------
Massachusetts Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 48 $ 43 $ 13 $ 13
12b-1 fees .30% 1.00% 1.00% After 3 years $ 61 $ 51 $ 41 $ 41
Other expenses (after After 5 years $ 75 $ 71 $ 71 $ 71
reimbursement) (a) .30% .30% .30% After 10 years $114 $120(c) $120(c) $157
---- ---- ----
Total Portfolio
Operating expenses (b) .60% 1.30% 1.30%
==== ==== ====
<CAPTION>
Michigan Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 56 $ 51 $ 21 $ 21
12b-1 fees .30% 1.00% 1.00% After 3 years $ 84 $ 75 $ 65 $ 65
Other expenses (after After 5 years $114 $111 $111 $111
reimbursement) (a) 1.06% 1.06% 1.06% After 10 years $199 $205(c) $205(c) $239
---- ---- ----
Total Portfolio
Operating expenses (b) 1.36% 2.06% 2.06%
==== ==== ====
<CAPTION>
Minnesota Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 49 $ 44 $ 14 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 64 $ 55 $ 45 $ 45
Other expenses (after After 5 years $ 80 $ 78 $ 78 $ 77
reimbursement) (a) .41% .42% .41% After 10 years $127 $133(c) $133(c) $169
---- ---- ----
Total Portfolio
Operating expenses (b) .71% 1.42% 1.41%
==== ==== ====
<CAPTION>
New Jersey Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .22% .22% .22% After 1 year $ 51 $ 46 $ 16 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 68 $ 58 $ 48 $ 48
Other expenses (a) .30% .31% .30% After 5 years $ 86 $ 83 $ 83 $ 83
---- ---- ---- After 10 years $140 $146(c) $146(c) $181
Total Portfolio
Operating expenses (b) .82% 1.53% 1.52%
==== ==== ====
<CAPTION>
New York Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .25% .25% .25% After 1 year $ 50 $ 45 $ 15 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 56 $ 46 $ 46
Other expenses (a) .20% .20% .19% After 5 years $ 82 $ 79 $ 79 $ 79
---- ---- ---- After 10 years $132 $137(c) $137(c) $172
Total Portfolio
Operating expenses (b) .75% 1.45% 1.44%
==== ==== ====
<CAPTION>
Ohio Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .05% .05% .05% After 1 year $ 50 $ 45 $ 15 $ 15
12b-1 fees .30% 1.00% 1.00% After 3 years $ 65 $ 56 $ 46 $ 46
Other expenses (a) .40% .41% .40% After 5 years $ 82 $ 80 $ 80 $ 79
---- ---- ---- After 10 years $132 $138(c) $138(c) $174
Total Portfolio
Operating expenses (b) .75% 1.46% 1.45%
==== ==== ====
<CAPTION>
Pennsylvania Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .33% .33% .33% After 1 year $ 52 $ 47 $ 17 $ 17
12b-1 fees .30% 1.00% 1.00% After 3 years $ 73 $ 64 $ 54 $ 54
Other expenses (a) .37% .38% .37% After 5 years $ 95 $ 93 $ 93 $ 92
---- ---- ---- After 10 years $160 $166(c) $166(c) $201
Total Portfolio
Operating expenses (b) 1.00% 1.71% 1.70%
==== ==== ====
<CAPTION>
Virginia Portfolio Class A Class B Class C Class A Class B+ Class B++ Class C
------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees (after waiver) .00% .00% .00% After 1 year $ 49 $ 44 $ 14 $ 14
12b-1 fees .30% 1.00% 1.00% After 3 years $ 63 $ 53 $ 43 $ 43
Other expenses (after After 5 years $ 78 $ 75 $ 75 $ 75
reimbursement) (a) .37% .37% .37% After 10 years $122 $128(c) $128(c) $165
---- ---- ----
Total Portfolio
Operating expenses (b) .67% 1.37% 1.37%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
+ Assumes redemption at end of period.
++ Assumes no redemption at end of period.
(a) These expenses include a transfer agency fee payable to Alliance Fund
Services, Inc., an affiliate of Alliance, based on a fixed dollar amount
charged to the Portfolio for each shareholder's account.
(b) Net of any voluntary fee waiver and expense reimbursement.
(c) Assumes Class B shares converted to Class A shares after six years.
4
<PAGE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in a Portfolio will bear
directly or indirectly. Long-term shareholders of a Portfolio may pay aggregate
sales charges totaling more than the economic equivalent of the maximum initial
sales charges permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. See "Management of the Funds--
Distribution Services Agreements." The Rule 12b-1 fee for each class comprises a
service fee not exceeding .25% of the aggregate average daily net assets of the
portfolio attributable to the class and an asset-based sales charge equal to the
remaining portion of the Rule 12b-1 fee. The management fees listed in the above
tables are net of voluntary fee waivers and total expenses are, for certain
funds, net of expense reimbursements. Absent such waivers and reimbursements,
(i) the management fees for the National, Insured National, California, Insured
California and New York Portfolios would have been .625%, .604%, .625%, .55% and
-----
.625% of daily average net assets, respectively, and total portfolio operating
expenses would have been 1.09%, 1.12%, 1.04%, 1.09% and 1.12% of daily average
net assets, respectively, of the Class A shares; 1.80%, 1.83%, 1.75%, 1.80% and
1.83% of daily average net assets, respectively, of the Class B shares; and
1.78%, 1.82%, 1.74%, 1.79% and 1.82% of daily net average net assets,
respectively, of the Class C shares; and (ii) the management fees for the
Arizona, Florida, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios would have been .625% of daily average net
assets for each Portfolio, and total portfolio operating expenses would have
been 4.88%, 1.33%, 6.44%, 3.43%, 2.30%, 1.35%, 1.51%, 1.47% and 8.96% of daily
average net assets, respectively, of the Class A shares, 5.58%, 2.03%, 7.14%,
4.12%, 3.02%, 2.06%, 2.21%, 2.17% and 9.66% of daily average net assets,
respectively, of Class B shares, and 5.58%, 2.03%, 7.14%, 4.13%, 3.00%, 2.06%,
2.20%, 2.17% and 9.66% of daily average net assets for each Portfolio's Class C
shares. "Other Expenses" for all classes of shares of the Portfolios are based
on estimated amounts for each Portfolio's current fiscal year. The examples set
forth above assume reinvestment of all dividends and distributions and utilize a
5% annual rate of return as mandated by Commission regulations. The examples
should not be considered representative of past or future expenses; actual
expenses may be greater or less than those shown.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The tables on the following pages present, for each Portfolio, per share income
and capital changes for a share outstanding throughout each period indicated.
The information in the tables has been audited by Ernst & Young LLP, the Funds'
independent auditors, whose report thereon (referring to financial highlights)
appears in the Statement of Additional Information for each Fund. The following
information for each Fund should be read in conjunction with financial
statements and related notes which are included in each Fund's Statement of
Additional Information.
Further information about the Portfolios' performance is contained in each
Fund's annual report to shareholders, which may be obtained without charge by
contacting Alliance Fund Services, Inc. at the address or the "Literature"
telephone number shown on the cover of this Prospectus.
5
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
- --------------------- ------------ -------------- -------------- --------------- -------------- --------------
National Portfolio
Class A
<S> <C> <C> <C> <C> <C> <C>
Year ended 10/31/95........... $ 9.41 $0.58 $ 1.04 $ 1.62 $(0.58) $ 0.00
Year ended 10/31/94........... 11.05 0.57 (1.37) (0.80) (0.57) (0.24)
Year ended 10/31/93........... 10.19 0.61 0.88 1.49 (0.62) (0.01)
Year ended 10/31/92........... 9.96 0.65 0.28 0.93 (0.65) (0.05)
Year ended 10/31/91........... 9.47 0.66 0.49 1.15 (0.66) 0.00
Year ended 10/31/90........... 9.56 0.68 (0.07) 0.61 (0.68) (0.02)
Year ended 10/31/89........... 9.48 0.69 0.09 0.78 (0.70) 0.00
Year ended 10/31/88........... 8.61 0.71 0.86 1.57 (0.70) 0.00
12/29/86+ to 10/31/87......... 9.60 0.61 (0.99) (0.38) (0.61) 0.00
Class B
Year ended 10/31/95........... 9.41 0.51 1.04 1.55 (0.51) 0.00
Year ended 10/31/94........... 11.05 0.50 (1.38) (0.88) (0.50) (0.24)
1/4/93+ to 10/31/93........... 10.43 0.44 0.63 1.07 (0.45) 0.00
Class C
Year ended 10/31/95........... 9.41 0.51 1.04 1.55 (0.51) 0.00
Year ended 10/31/94........... 11.05 0.50 (1.38) (0.88) (0.50) (0.24)
5/3/93+ to 10/31/93........... 10.70 0.26 0.36 0.62 (0.27) 0.00
Insured National Portfolio
Class A
Year ended 10/31/95........... $ 8.96 $0.51 $ 1.13 $ 1.64 $(0.51) $ 0.00
Year ended 10/31/94........... 10.76 0.53 (1.40) (0.87) (0.53) (0.39)
Year ended 10/31/93........... 9.87 0.56 0.96 1.52 (0.57) (0.06)
Year ended 10/31/92........... 9.88 0.60 0.15 0.75 (0.60) (0.16)
Year ended 10/31/91........... 9.39 0.61 0.49 1.10 (0.61) 0.00
Year ended 10/31/90........... 9.49 0.62 (0.03) 0.59 (0.62) (0.07)
Year ended 10/31/89........... 9.38 0.62 0.11 0.73 (0.62) 0.00
Year ended 10/31/88........... 8.62 0.62 0.76 1.38 (0.62) 0.00
12/29/86+ to 10/31/87......... 9.60 0.57 (0.98) (0.41) (0.57) 0.00
Class B
Year ended 10/31/95........... 8.96 0.45 1.12 1.57 (0.45) 0.00
Year ended 10/31/94........... 10.76 0.46 (1.40) (0.94) (0.46) (0.39)
1/4/93+ to 10/31/93........... 10.10 0.40 0.66 1.06 (0.40) 0.00
Class C
Year ended 10/31/95........... 8.96 0.45 1.12 1.57 (0.45) 0.00
Year ended 10/31/94........... 10.76 0.46 (1.40) (0.94) (0.46) (0.39)
5/3/93+ to 10/31/93........... 10.41 0.24 0.35 0.59 (0.24) 0.00
Arizona Portfolio
Class A
Year ended 9/30/95............ $ 9.77 $0.56 $ 0.53 $ 1.09 $(0.56) $ 0.00
6/1/94+ to 9/30/94............ 10.00 0.20 (0.23) (0.03) (0.20) 0.00
Class B
Year ended 9/30/95............ 9.77 0.49 0.53 1.02 (0.49) 0.00
6/1/94+ to 9/30/94............ 10.00 0.18 (0.24) (0.06) (0.17) 0.00
Class C
Year ended 9/30/95............ 9.77 0.49 0.54 1.03 (0.49) 0.00
6/1/94+ to 9/30/94............ 10.00 0.17 (0.23) (0.06) (0.17) 0.00
California Portfolio
Class A
Year ended 10/31/95........... $ 9.43 $0.59 $ 1.02 $ 1.61 $(0.59) $ 0.00
Year ended 10/31/94........... 10.90 0.59 (1.41) (0.82) (0.59) (0.06)
Year ended 10/31/93........... 10.06 0.61 0.85 1.46 (0.61) (0.01)
Year ended 10/31/92........... 9.97 0.65 0.13 0.78 (0.65) (0.04)
Year ended 10/31/91........... 9.58 0.67 0.39 1.06 (0.67) 0.00
Year ended 10/31/90........... 9.65 0.68 (0.03) 0.65 (0.68) (0.04)
Year ended 10/31/89........... 9.49 0.68 0.17 0.85 (0.69) 0.00
Year ended 10/31/88........... 8.73 0.70 0.75 1.45 (0.69) 0.00
12/29/86+ to 10/31/87......... 9.60 0.58 (0.87) (0.29) (0.58) 0.00
Class B
Year ended 10/31/95........... 9.43 0.51 1.02 1.53 (0.51) 0.00
Year ended 10/31/94........... 10.90 0.52 (1.41) (0.89) (0.52) (0.06)
1/4/93+ to 10/31/93........... 10.27 0.44 0.63 1.07 (0.44) 0.00
Class C
Year ended 10/31/95........... 9.43 0.51 1.02 1.53 (0.51) 0.00
Year ended 10/31/94........... 10.90 0.52 (1.41) (0.89) (0.52) (0.06)
5/3/93+ to 10/31/93........... 10.54 0.26 0.36 0.62 (0.26) 0.00
Insured California Portfolio
Class A
Year ended 10/31/95........... $11.79 $0.68 $ 1.54 $ 2.22 $(0.68) $ 0.00
Year ended 10/31/94........... 14.25 0.69 (1.99) (1.30) (0.69) (0.47)
Year ended 10/31/93........... 12.99 0.70 1.30 2.00 (0.71) (0.03)
Year ended 10/31/92........... 12.80 0.76 0.18 0.94 (0.75) 0.00
Year ended 10/31/91........... 12.19 0.77 0.61 1.38 (0.77) 0.00
Year ended 10/31/90........... 12.23 0.78 (0.04) 0.74 (0.78) 0.00
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on pages 10 and 11.
6
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
------------- ------------- --------- ------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.58) $10.45 17.73% $338,311 0.71%(a) 5.84% 118%
(0.03) (0.84) 9.41 (7.65) 338,814 0.62 (a) 5.61 110
(0.00) (0.63) 11.05 14.94 386,484 0.65 (a) 5.69 233
(0.00) (0.70) 10.19 9.60 261,895 0.83 (a) 6.35 86
(0.00) (0.66) 9.96 12.55 207,167 0.75 (a) 6.81 64
(0.00) (0.70) 9.47 6.52 185,832 0.60 (a) 7.06 105
(0.00) (0.70) 9.56 8.55 127,149 0.38 (a) 7.25 216
(0.00) (0.70) 9.48 18.87 59,357 0.40 (a) 7.71 261
(0.00) (0.61) 8.61 (4.14) 20,704 0.50 (a)* 7.71* 181
0.00 (0.51) 10.45 16.91 252,357 1.42 (a) 5.13 118
(0.02) (0.76) 9.41 (8.34) 250,391 1.32 (a) 4.91 110
0.00 (0.45) 11.05 10.43 216,489 1.36 (a)* 4.59* 233
0.00 (0.51) 10.45 16.93 108,068 1.41 (a) 5.16 118
(0.02) (0.76) 9.41 (8.33) 133,249 1.31 (a) 4.89 110
0.00 (0.27) 11.05 5.84 150,953 1.36 (a)* 4.17* 233
$(0.02) $(0.53) $10.07 18.72% $165,548 1.01%(b) 5.37% 171%
(0.01) (0.93) 8.96 (8.69) 153,656 0.66 (b) 5.40 149
0.00 (0.63) 10.76 15.82 185,876 0.73 (b) 5.40 165
0.00 (0.76) 9.87 7.88 149,632 0.81 (b) 6.04 105
0.00 (0.61) 9.88 12.08 130,723 0.92 (b) 6.34 96
0.00 (0.69) 9.39 6.44 118,240 0.92 (b) 6.56 69
0.00 (0.62) 9.49 8.07 107,740 1.05 (b) 6.61 91
0.00 (0.62) 9.38 16.56 103,864 1.32 (b) 6.93 173
0.00 (0.57) 8.62 (4.48) 103,426 1.20 (b)* 6.87* 105
(0.01) (0.46) 10.07 17.91 58,990 1.72 (b) 4.65 171
(0.01) (0.86) 8.96 (9.38) 51,439 1.37 (b) 4.71 149
0.00 (0.40) 10.76 10.68 42,954 1.43 (b)* 4.31* 165
(0.01) (0.46) 10.07 17.91 22,265 1.71 (b) 4.69 171
(0.01) (0.86) 8.96 (9.38) 24,112 1.36 (b) 4.68 149
0.00 (0.24) 10.76 5.75 28,862 1.43 (b)* 3.98* 165
$(0.01) $(0.57) $10.29 11.56% $ 2,379 .78%(c) 5.56% 85%
0.00 (0.20) 9.77 (0.35) 930 .78 (c)* 5.82* 81
(0.01) (0.50) 10.29 10.78 3,166 1.48 (c) 4.89 85
0.00 (0.17) 9.77 (0.58) 1,677 1.48 (c)* 5.13* 81
(0.01) (0.50) 10.30 10.89 481 1.48 (c) 4.90 85
0.00 (0.17) 9.77 (0.58) 485 1.48 (c)* 4.70* 81
$ 0.00 $(0.59) $10.45 17.55% $478,535 0.74%(d) 5.90% 39%
0.00 (0.65) 9.43 (7.73) 470,308 0.64 (d) 5.78 45
0.00 (0.62) 10.90 14.90 531,293 0.74 (d) 5.74 83
0.00 (0.69) 10.06 8.05 361,661 0.59 (d) 6.38 77
0.00 (0.67) 9.97 11.42 228,755 0.39 (d) 6.80 106
0.00 (0.72) 9.58 7.03 143,557 0.39 (d) 7.04 88
0.00 (0.69) 9.65 9.25 92,000 0.53 (d) 7.03 193
0.00 (0.69) 9.49 17.14 34,112 0.40 (d) 7.45 196
0.00 (0.57) 8.73 (3.14) 7,200 0.50 (d)* 7.28* 197
0.00 (0.51) 10.45 16.64 166,759 1.45 (d) 5.19 39
0.00 (0.58) 9.43 (8.43) 160,879 1.35 (d) 5.07 45
0.00 (0.44) 10.90 10.60 126,688 1.44 (d)* 4.66* 83
0.00 (0.51) 10.45 16.64 87,793 1.44 (d) 5.22 39
0.00 (0.58) 9.43 (8.43) 103,622 1.34 (d) 5.06 45
0.00 (0.26) 10.90 5.98 117,379 1.44 (d)* 4.42* 83
$(0.01) $(0.69) $13.32 19.29% $103,940 1.04%(e) 5.34% 103%
0.00 (1.16) 11.79 (9.73) 94,857 0.82 (e) 5.29 100
0.00 (0.74) 14.25 15.64 120,734 0.94 (e) 5.06 186
0.00 (0.75) 12.99 7.52 90,477 0.78 (e) 5.77 60
0.00 (0.77) 12.80 11.62 69,757 0.79 (e) 6.13 59
0.00 (0.78) 12.19 6.29 56,933 0.86 (e) 6.42 104
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
- --------------------- ------------ -------------- -------------- --------------- -------------- --------------
Insured California Portfolio (cont'd)
Class A
<S> <C> <C> <C> <C> <C> <C>
Year ended 10/31/89........... $12.18 $0.79 $ 0.06 $ 0.85 $(0.80) $ 0.00
Year ended 10/31/88........... 11.25 0.85 0.92 1.77 (0.84) 0.00
Ten months ended 10/31/87..... 13.06 0.73 (1.69) (0.96) (0.73) (0.12)
Year ended 12/31/86........... 12.11 0.95 0.95 1.90 (0.95) 0.00
11/21/85+ to 12/31/85......... 11.97 0.09 0.14 0.23 (0.09) 0.00
Class B
Year ended 10/31/95........... 11.79 0.58 1.54 2.12 (0.58) 0.00
Year ended 10/31/94........... 14.25 0.60 (2.00) (1.40) (0.59) (0.47)
1/4/93+ to 10/31/93........... 13.37 0.49 0.89 1.38 (0.50) 0.00
Class C
Year ended 10/31/95........... 11.79 0.58 1.54 2.12 (0.58) 0.00
Year ended 10/31/94........... 14.25 0.60 (2.00) (1.40) (0.59) (0.47)
5/3/93+ to 10/31/93........... 13.78 0.29 0.48 0.77 (0.30) 0.00
Florida Portfolio
Class A
Year ended 9/30/95............ $ 8.89 $0.55 $ 0.69 $ 1.24 $(0.55) $ 0.00
Year ended 9/30/94............ 10.25 0.55 (1.35) (0.80) (0.55) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.16 0.25 0.41 (0.16) 0.00
Class B
Year ended 9/30/95............ 8.89 0.47 0.70 1.17 (0.47) 0.00
Year ended 9/30/94............ 10.25 0.48 (1.35) (0.87) (0.48) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.14 0.25 0.39 (0.14) 0.00
Class C
Year ended 9/30/95............ 8.89 0.47 0.70 1.17 (0.47) 0.00
Year ended 9/30/94............ 10.25 0.48 (1.35) (0.87) (0.48) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.14 0.25 0.39 (0.14) 0.00
Massachusetts Portfolio
Class A
Year ended 9/30/95............ $10.12 $0.58 $ 0.41 $ 0.99 $(0.58) $ 0.00
3/29/94+ to 9/30/94........... 10.00 0.31 0.11 0.42 (0.30) 0.00
Class B
Year ended 9/30/95............ 10.12 0.52 0.39 0.91 (0.52) 0.00
3/3/94+ to 9/30/94............ 10.00 0.27 0.11 0.38 (0.26) 0.00
Class C
Year ended 9/30/95............ 10.12 0.52 0.39 0.91 (0.52) 0.00
3/29/94+ to 9/30/94........... 10.00 0.25 0.13 0.38 (0.26) 0.00
Michigan Portfolio
Class A
Year ended 10/31/95........... $ 9.35 $0.52 $ 0.78 $ 1.30 $(0.52) $ 0.00
2/25/94+ to 10/31/94.......... 10.00 0.33 (0.65) (0.32) (0.33) 0.00
Class B
Year ended 10/31/95........... 9.35 0.45 0.78 1.23 (0.45) 0.00
2/25/94+ to 10/31/94.......... 10.00 0.29 (0.65) (0.36) (0.29) 0.00
Class C
Year ended 10/31/95........... 9.35 0.45 0.78 1.23 (0.45) 0.00
2/25/94+ to 10/31/94.......... 10.00 0.29 (0.65) (0.36) (0.29) 0.00
Minnesota Portfolio
Class A
Year ended 9/30/95............ $ 9.19 $0.53 $ 0.32 $ 0.85 $(0.53) $0.00
Year ended 9/30/94............ 10.28 0.55 (1.09) (0.54) (0.55) 0.00
6/25/93+ to 9/30/93........... 10.00 0.15 0.28 0.43 (0.15) 0.00
Class B
Year ended 9/30/95............ 9.18 0.46 0.33 0.79 (0.46) 0.00
Year ended 9/30/94............ 10.28 0.48 (1.10) (0.62) (0.48) 0.00
6/25/93+ to 9/30/93........... 10.00 0.13 0.28 0.41 (0.13) 0.00
Class C
Year ended 9/30/95............ 9.19 0.46 0.33 0.79 (0.46) 0.00
Year ended 9/30/94............ 10.27 0.48 (1.08) (0.60) (0.48) 0.00
6/25/93+ to 9/30/93........... 10.00 0.13 0.27 0.40 (0.13) 0.00
New Jersey Portfolio
Class A
Year ended 9/30/95............ $ 9.07 $0.54 $0.59 $ 1.13 $(0.54) $0.00
Year ended 9/30/94............ 10.29 0.55 (1.22) (0.67) (0.55) 0.00
6/25/93+ to 9/30/93........... 10.00 0.15 0.29 0.44 (0.15) 0.00
Class B
Year ended 9/30/95............ 9.07 0.47 0.60 1.07 (0.47) 0.00
Year ended 9/30/94............ 10.28 0.48 (1.21) (0.73) (0.48) 0.00
6/25/93+ to 9/30/93........... 10.00 0.13 0.28 0.41 (0.13) 0.00
</TABLE>
- --------------------------------------------------------------------------------
Please refer to the footnotes on pages 10 and 11.
8
<PAGE>
<TABLE>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
-------------- ------------- -------- ------------ ---------- ---------- ----------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.80) $12.23 7.24% $53,302 0.90%(e) 6.43% 100%
0.00 (0.84) 12.18 16.27 46,017 0.32 (e) 7.27 112
0.00 (0.85) 11.25 16.18 25,254 0.10 (e)* 7.56* 116
0.00 (0.95) 13.06 16.18 23,502 0.00 7.05 52
0.00 (0.09) 12.11 1.94 2,894 0.00 7.77* 0
(0.01) (0.59) 13.32 18.35 27,816 1.74 (e) 4.61 103
0.00 (1.06) 11.79 (10.43) 24,591 1.53 (e) 4.60 100
0.00 (0.50) 14.25 10.43 21,234 1.65 (e)* 3.85* 186
(0.01) (0.59) 13.32 18.35 14,323 1.74 (e) 4.64 103
0.00 (1.06) 11.79 (10.43) 12,472 1.52 (e) 4.59 100
0.00 (0.30) 14.25 5.63 15,971 1.65 (e)* 3.74* 186
$ 0.00 $(0.55) $ 9.58 14.44% $11,956 0.73%(f) 5.91% 146%
0.00 (0.56) 8.89 (8.03) 8,227 0.38 (f) 5.70 185
0.00 (0.16) 10.25 4.10 4,145 0.00 (f)* 5.44* 82
(0.01) (0.48) 9.58 13.56 20,660 1.42 (f) 5.22 146
0.00 (0.49) 8.89 (8.72) 18,048 1.08 (f) 4.99 185
0.00 (0.14) 10.25 3.91 9,588 0.61 (f)* 4.74* 82
(0.01) (0.48) 9.58 13.56 30,787 1.42 (f) 5.27 146
0.00 (0.49) 8.89 (8.72) 42,405 1.08 (f) 4.97 185
0.00 (0.14) 10.25 3.91 28,249 0.61 (f)* 4.74* 82
$(0.03) $(0.61) $10.50 10.19% $ 1,337 0.60%(g) 5.67% 155%
0.00 (0.30) 10.12 4.14 565 0.60 (g)* 5.98* 146
(0.02) (0.54) 10.49 9.32 1,754 1.30 (g) 4.90 155
0.00 (0.26) 10.12 3.78 725 1.30 (g)* 5.13* 146
(0.02) (0.54) 10.49 9.32 2,556 1.30 (g) 4.85 155
0.00 (0.26) 10.12 3.78 774 1.30 (g)* 4.00* 146
$(0.03) $(0.55) $10.10 14.40% $ 5,158 1.36%(h) 5.27% 151%
0.00 (0.33) 9.35 (3.24) 2,473 0.93 (h)* 5.83* 222
(0.03) (0.48) 10.10 13.58 2,424 2.06 (h) 4.57 151
0.00 (0.29) 9.35 (3.65) 1,722 1.63 (h)* 4.93* 222
(0.03) (0.48) 10.10 13.58 2,886 2.06 (h) 4.69 151
0.00 (0.29) 9.35 (3.65) 2,778 1.63 (h)* 4.92* 222
$(0.02) $(0.55) $ 9.49 9.63% $ 2,414 0.71%(i) 5.71% 117%
0.00 (0.55) 9.19 (5.35) 2,125 0.09 (i) 5.71 143
0.00 (0.15) 10.28 4.34 994 0.00 (i)* 5.20* 61
(0.02) (0.48) 9.49 8.90 7,299 1.42 (i) 4.97 117
0.00 (0.48) 9.18 (6.15) 6,150 0.80 (i) 5.00 143
0.00 (0.13) 10.28 4.16 2,665 0.43 (i)* 4.50* 61
(0.02) (0.48) 9.50 8.89 7,305 1.41 (i) 5.05 117
0.00 (0.48) 9.19 (5.95) 9,489 0.79 (i) 4.90 143
0.00 (0.13) 10.27 4.06 6,697 0.43 (i)* 4.50 61
$(0.01) $(0.55) $ 9.65 12.91% $11,612 0.82%(j) 5.73% 86%
0.00 (0.55) 9.07 (6.67) 9,257 0.20 (j) 5.65 171
0.00 (0.15) 10.29 4.44 6,679 0.00 (j)* 5.37* 47
(0.01) (0.48) 9.66 12.15 34,695 1.53 (j) 5.03 86
0.00 (0.48) 9.07 (7.28) 30,459 0.91 (j) 4.96 171
0.00 (0.13) 10.28 4.16 15,637 0.63 (j)* 4.67* 47
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Net Net Net
Asset Realized and Increase
Value Unrealized (Decrease) In Dividends From Distributions
Beginning Of Net Investment Gain (Loss) On Net Asset Value Net Investment From Net
Fiscal Year or Period Period Income++ Investments From Operations Income Realized Gains
- --------------------- ------------ -------------- -------------- --------------- -------------- --------------
New Jersey Portfolio (cont'd)
Class C
<S> <C> <C> <C> <C> <C> <C>
Year ended 9/30/95............ $ 9.07 $0.47 $ 0.60 $ 1.07 $(0.47) $ 0.00
Year ended 9/30/94............ 10.28 0.48 (1.21) (0.73) (0.48) 0.00
6/25/93+ to 9/30/93........... 10.00 0.13 0.28 0.41 (0.13) 0.00
New York Portfolio
Class A
Year ended 10/31/95........... $ 8.72 $0.55 $ 0.90 $ 1.45 $(0.55) $ 0.00
Year ended 10/31/94........... 10.17 0.55 (1.40) (0.85) (0.55) (0.04)
Year ended 10/31/93........... 9.53 0.57 0.79 1.36 (0.58) (0.14)
Year ended 10/31/92........... 9.30 0.60 0.24 0.84 (0.60) (0.01)
Year ended 10/31/91........... 8.78 0.62 0.52 1.14 (0.62) 0.00
Year ended 10/31/90........... 8.92 0.64 (0.14) 0.50 (0.64) 0.00
Year ended 10/31/89........... 8.88 0.65 0.04 0.69 (0.65) 0.00
Year ended 10/31/88........... 8.11 0.65 0.77 1.42 (0.65) 0.00
12/29/86+ to 10/31/87......... 9.60 0.58 (1.49) (0.91) (0.58) 0.00
Class B
Year ended 10/31/95........... 8.72 0.48 0.90 1.38 (0.48) 0.00
Year ended 10/31/94........... 10.17 0.48 (1.41) (0.93) (0.47) (0.04)
1/4/93+ to 10/31/93........... 9.61 0.41 0.56 0.97 (0.41) 0.00
Class C
Year ended 10/31/95........... 8.72 0.48 0.90 1.38 (0.48) 0.00
Year ended 10/31/94........... 10.17 0.48 (1.41) (0.93) (0.47) (0.04)
5/3/93+ to 10/31/93........... 9.89 0.24 0.29 0.53 (0.25) 0.00
Ohio Portfolio
Class A
Year ended 9/30/95............ $ 9.06 $0.54 $ 0.48 $ 1.02 $(0.54) $ 0.00
Year ended 9/30/94............ 10.26 0.55 (1.19) (0.64) (0.55) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.15 0.26 0.41 (0.15) 0.00
Class B
Year ended 9/30/95............ 9.06 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94............ 10.26 0.48 (1.19) (0.71) (0.48) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.13 0.26 0.39 (0.13) 0.00
Class C
Year ended 9/30/95............ 9.06 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94............ 10.26 0.48 (1.19) (0.71) (0.48) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.13 0.26 0.39 (0.13) 0.00
Pennsylvania Portfolio
Class A
Year ended 9/30/95............ $ 9.18 $0.54 $ 0.48 $ 1.02 $(0.54) $ 0.00
Year ended 9/30/94............ 10.25 0.56 (1.06) (0.50) (0.56) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.16 0.25 0.41 (0.16) 0.00
Class B
Year ended 9/30/95............ 9.18 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94............ 10.25 0.49 (1.06) (0.57) (0.49) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.14 0.25 0.39 (0.14) 0.00
Class C
Year ended 9/30/95............ 9.18 0.47 0.49 0.96 (0.47) 0.00
Year ended 9/30/94............ 10.24 0.49 (1.05) (0.56) (0.49) (0.01)
6/25/93+ to 9/30/93........... 10.00 0.14 0.24 0.38 (0.14) 0.00
Virginia Portfolio
Class A
Year ended 9/30/95............ $ 9.69 $0.56 $ 0.61 $ 1.17 $(0.56) $ 0.00
4/29/94+ to 9/30/94........... 10.00 0.24 (0.31) (0.07) (0.24) 0.00
Class B
Year ended 9/30/95............ 9.69 0.49 0.61 1.10 (0.49) 0.00
4/29/94+ to 9/30/94........... 10.00 0.22 (0.32) (0.10) (0.21) 0.00
Class C
Year ended 9/30/95............ 9.70 0.49 0.60 1.09 (0.49) 0.00
4/29/94+ to 9/30/94........... 10.00 0.21 (0.30) (0.09) (0.21) 0.00
</TABLE>
- --------------------------------------------------------------------------------
+ Commencement of operations and/or distribution.
++ Net of expenses assumed and/or waived by Alliance, except in the case of the
Insured National Portfolio for the fiscal year ended October 31, 1988.
* Annualized.
(a) If the National Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.09%, 1.09%, 1.08%, 1.11%, 1.14%, 1.15%, 1.31%, 1.62% and 2.25% for
Class A shares, 1.80%, 1.80% and 1.78% for Class B shares and 1.78%, 1.79%
and 1.78% for Class C shares.
(b) If the Insured National Portfolio had borne all expenses, the respective
expense ratios (beginning with those of the most recent fiscal period) would
have been 1.12%, 1.11%, 1.11%, 1.12%, 1.17%, 1.20%, 1.29%, 2.25% and 1.54%
for Class A shares, 1.83%, 1.82% and 1.83% for Class B shares and 1.82%,
1.81% and 1.83% for Class C shares.
(c) If the Arizona Portfolio had borne all expenses, the respective expense
ratios would have been 4.88% and 7.71% for Class A shares, 5.58% and 8.41%
for Class B shares and 5.58% and 8.41% for Class C shares.
(d) If the California Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.04%, 1.05%, 1.06%, 1.07%, 1.11%, 1.13%, 1.39%, 1.89% and 2.30% for
Class A shares, 1.75%, 1.75% and 1.78% for Class B shares and 1.74%, 1.75%
and 1.78% for Class C shares.
(e) If the Insured California Portfolio had borne all expenses, the respective
expense ratios (beginning with those of the most recent fiscal period) would
have been 1.09%, 1.08%, 1.08%, 1.09%, 1.20%, 1.23%, 1.37%, 1.45% and 1.36%
for Class A shares, 1.80%, 1.78% and 1.79% for Class B shares and 1.79%,
1.77% and 1.79% for Class C shares.
10
<PAGE>
<TABLE>
<CAPTION>
Total Net Assets Ratio Of Net
Distributions Total Net Asset Investment At End Of Ratio Of Investment
In Excess of Dividends Value Return Based Period Expenses Income
Net Investment And End Of on Net Asset (000's To Average To Average Portfolio
Income Distributions Period Value omitted) Net Assets Net Assets Turnover Rate
-------------- ------------- ---------- ------------ ---------- ---------- ----------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
$(0.01) $(0.48) $ 9.66 12.14% $ 21,255 1.52%(j) 5.09% 86%
0.00 (0.48) 9.07 (7.28) 26,472 0.90 (j) 4.93 171
0.00 (0.13) 10.28 4.16 21,193 0.63 (j)* 4.67* 47
$ 0.00 $(0.55) $ 9.62 17.10% $183,987 0.75%(k) 5.93% 69%
(0.01) (0.60) 8.72 (8.76) 182,170 0.66 (k) 5.75 69
0.00 (0.72) 10.17 14.71 214,259 0.68 (k) 5.76 63
0.00 (0.61) 9.53 9.39 162,549 0.70 (k) 6.37 69
0.00 (0.62) 9.30 13.36 136,484 0.65 (k) 6.81 48
0.00 (0.64) 8.78 5.71 118,875 0.44 (k) 7.08 101
0.00 (0.65) 8.92 8.03 70,766 0.37 (k) 7.14 119
0.00 (0.65) 8.88 18.08 27,731 0.43 (k) 7.43 146
0.00 (0.58) 8.11 (9.77) 9,985 0.20 (k)* 7.68* 210
0.00 (0.48) 9.62 16.19 94,400 1.45 (k) 5.21 69
(0.01) (0.52) 8.72 (9.44) 81,941 1.36 (k) 5.05 69
0.00 (0.41) 10.17 10.29 58,504 1.39 (k)* 4.70* 63
0.00 (0.48) 9.62 16.19 32,259 1.44 (k) 5.24 69
(0.01) (0.52) 8.72 (9.44) 34,646 1.36 (k) 5.03 69
0.00 (0.25) 10.17 5.37 38,245 1.38 (k)* 4.42* 63
$(0.01) $(0.55) $ 9.53 11.63% $ 4,170 0.75%(l) 5.74% 108%
0.00 (0.56) 9.06 (6.44) 2,810 0.04 (l) 5.67 161
0.00 (0.15) 10.26 4.15 1,050 0.00 (l)* 5.30* 55
(0.01) (0.48) 9.54 10.88 21,821 1.46 (l) 5.08 108
0.00 (0.49) 9.06 (7.13) 20,267 0.74 (l) 4.95 161
0.00 (0.13) 10.26 3.97 8,952 0.17 (l)* 4.60* 55
(0.01) (0.48) 9.54 10.88 18,874 1.45 (l) 5.14 108
0.00 (0.49) 9.06 (7.13) 26,294 0.74 (l) 4.89 161
0.00 (0.13) 10.26 3.97 19,894 0.17 (l)* 4.60* 55
$(0.02) $(0.56) $ 9.64 11.53% $ 8,721 1.00%(m) 5.78% 114%
0.00 (0.57) 9.18 (5.02) 7,149 0.45 (m) 5.73 156
0.00 (0.16) 10.25 4.12 4,170 0.00 (m)* 5.67* 75
(0.02) (0.49) 9.65 10.78 28,559 1.71 (m) 5.09 114
0.00 (0.50) 9.18 (5.72) 25,637 1.16 (m) 5.01 156
0.00 (0.14) 10.25 3.94 12,173 0.40 (m)* 4.97* 75
(0.02) (0.49) 9.65 10.78 15,052 1.70 (m) 5.09 114
0.00 (0.50) 9.18 (5.63) 18,198 1.15 (m) 4.99 156
0.00 (0.14) 10.24 3.84 13,541 0.40 (m)* 4.97* 75
$(0.01) $(0.57) $10.29 12.46% $ 1,855 0.67%(n) 5.59% 128%
0.00 (0.24) 9.69 (0.71) 1,249 0.57 (n)* 5.62* 65
(0.01) (0.50) 10.29 11.67 1,193 1.37 (n) 4.80 128
0.00 (0.21) 9.69 (1.01) 224 1.27 (n)* 4.97* 65
(0.01) (0.50) 10.29 11.56 122 1.37 (n) 4.81 128
0.00 (0.21) 9.70 (0.91) 43 1.27 (n)* 4.67* 65
</TABLE>
- --------------------------------------------------------------------------------
(f) If the Florida Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the more recent fiscal period) would have
been 1.33%, 1.27% and 1.30% for Class A shares, 2.03%, 1.98% and 2.00% for
Class B shares and 2.03%, 1.97% and 2.00% for Class C shares.
(g) If the Massachusetts Portfolio had borne all expenses, the respective
expense ratios would have been 6.44% and 13.2% for Class A shares, 7.14% and
13.9% for Class B shares and 7.14% and 13.9% for Class C shares.
(h) If the Michigan Portfolio had borne all expenses, the respective expense
ratios would have been 3.43% and 3.97% for Class A shares, 4.12% and 4.67%
for Class B shares and 4.13% and 4.67% for Class C shares.
(i) If the Minnesota Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the more recent fiscal period) would have
been 2.30%, 2.12% and 1.89% for Class A shares, 3.02%, 2.83% and 2.59% for
Class B shares and 3.00%, 2.82% and 2.59% for Class C shares.
(j) If the New Jersey Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the more recent fiscal period) would have
been 1.35%, 1.33% and 1.29% for Class A shares, 2.06%, 2.03% and 1.99% for
Class B shares and 2.06%, 2.02% and 1.99% for Class C shares.
(k) If the New York Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the most recent fiscal period) would have
been 1.12%, 1.11%, 1.13%, 1.13%, 1.20%, 1.23%, 1.48%, 1.98% and 2.30% for
Class A shares, 1.83%, 1.82% and 1.84% for Class B shares and 1.82%, 1.81%
and 1.84% for Class C shares.
(l) If the Ohio Portfolio had borne all expenses, the respective expense ratios
(beginning with those of the more recent fiscal period) would have been
1.51%, 1.42% and 1.32% for Class A shares, 2.21%, 2.13% and 2.02% for Class
B shares and 2.20%, 2.12% and 2.02% for Class C shares.
(m) If the Pennsylvania Portfolio had borne all expenses, the respective expense
ratios (beginning with those of the more recent fiscal period) would have
been 1.47%, 1.46% and 1.31% for Class A shares, 2.17%, 2.16% and 2.01% for
Class B shares and 2.17%, 2.15% and 2.01% for Class C shares.
(n) If the Virginia Portfolio had borne all expenses, the respective expense
ratios would have been 8.96% and 12.29% for Class A shares, 9.66% and 12.99%
for Class B shares and 9.66% and 12.99% for Class C shares.
11
<PAGE>
- --------------------------------------------------------------------------------
Description Of The Portfolios
- --------------------------------------------------------------------------------
Each Portfolio is a separate pool of assets constituting, in effect, a separate
fund. Except as otherwise indicated, the Portfolios' investment policies are not
"fundamental policies" and may, therefore, be changed without a shareholder
vote. However, no Portfolio will change its investment policies without
contemporaneous written notice to its shareholders. There is no guarantee that
any Portfolio will achieve its investment objective.
INVESTMENT OBJECTIVE
The investment objective of each Portfolio (other than the Insured California
Portfolio, as discussed below) is to earn the highest level of current income,
exempt from Federal and state taxation to the extent described, that is
available without assuming what Alliance considers to be undue risk by investing
principally in high-yielding, predominantly medium-quality, intermediate and
long-term debt obligations issued by: (i) in the case of the National and
Insured National Portfolios, states, territories and possessions of the United
States and the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations and, (ii) in the case of each of the
State Portfolios, the named state, and its political subdivisions, agencies and
instrumentalities. These securities are generally known as "municipal
securities." The average weighted maturity of the securities in each Portfolio
normally will range between 10 and 25 years.
Current Federal tax law distinguishes between municipal securities issued to
finance certain "private activities" and other municipal securities. Such
private activity bonds include bonds issued to finance such projects as
airports, housing projects, resource recovery programs, solid waste disposal
facilities, student loan programs, and water and sewage projects. Interest from
such "private activity bonds" ("AMT-Subject Bonds") becomes an item of "tax
preference" which is subject to the alternative minimum tax ("AMT") when
received by a person in a tax year during which the person is subject to that
tax. Because interest on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal securities
generally will provide somewhat higher yields than other municipal securities
("AMT-Exempt Bonds") of comparable quality and maturity.
HOW THE PORTFOLIOS PURSUE THEIR OBJECTIVE
The National Portfolio invests principally in a diversified portfolio of
municipal securities, the interest from which is wholly exempt from Federal
income taxes except when received by a shareholder who will be subject to the
AMT. The National Portfolio may invest without limit in AMT-Subject Bonds. As of
October 31, 1995, 82% of the National Portfolio's total net assets was invested
in AMT-Subject Bonds.
The Insured National Portfolio invests principally in AMT-Exempt Bonds that are
insured as to the payment of principal and interest ("insured securities"). The
investment policies of the Insured National Portfolio differ from those of the
National Portfolio in two respects: (i) whereas the National Portfolio invests
principally in AMT-Subject Bonds, the Insured National Portfolio invests
principally in a diversified portfolio of AMT-Exempt Bonds; and (ii) as a matter
of fundamental policy, the Insured National Portfolio, under normal market
conditions, invests at least 65% of its total assets in insured securities. (See
page 14 for a further discussion of the insurance feature.) The Insured National
Portfolio may be suitable for an investor who will be subject to the AMT to the
extent that the after-tax yield of the National Portfolio to such an investor is
less than the yield of the Insured National Portfolio. From time to time, the
National and Insured National Portfolios may invest 25% or more of their
respective total assets in municipal securities whose issuers are located in the
same state.
Each of the twelve State Portfolios invests in a non-diversified portfolio of
municipal securities the interest from which, in the opinion of bond counsel to
the issuer, is exempt from Federal income tax and from personal income tax in
the named state, or in the case of the Florida Portfolio, from the Florida
intangible tax (Florida currently imposes no income taxes on individuals.)
Normally, substantially all of the total assets of each State Portfolio will be
invested in municipal securities of the indicated state. Each Portfolio other
than the Insured National and Insured California Portfolios may invest without
limit in AMT-Subject Bonds.
The Insured California Portfolio seeks to provide as high a level of current
income exempt from Federal income tax and California personal income tax as is
consistent with the preservation of capital. As a matter of fundamental policy,
the Insured California Portfolio normally invests at least 80% of its total
assets in municipal bonds, at least 80% of its total assets in AMT-Exempt Bonds
and at least 65% of its total assets in insured securities. The Insured
California Portfolio's current policy is to invest at least 65% of its total
assets in municipal bonds issued by California or its political subdivisions
("California Bonds"), at least 80% of its total assets in insured bonds, and not
to invest in AMT-Subject Bonds. The remainder of the Insured California
Portfolio's total assets may be invested in uninsured California Bonds.
The California Portfolio invests in AMT-Subject Bonds issued by California and
its political subdivisions. As a matter of fundamental policy, at least 80% of
the California Portfolio's total assets normally will be invested in municipal
securities and at least 65% of its total assets normally will be invested in
AMT-Subject Bonds. The California Portfolio normally will invest at least 65% of
its total assets in California Bonds. As of October 31, 1995, 69% of the
California Portfolio's total net assets was invested in AMT-Subject Bonds.
12
<PAGE>
The New York Portfolio invests in AMT-Subject Bonds issued by New York State and
its political subdivisions. As a matter of fundamental policy, at least 65% of
the New York Portfolio's total assets normally will be so invested. In addition,
the Portfolio will invest in at least 80% of its net assets in municipal
securities the interest on which is exempt from Federal income tax. As of
October 31, 1995, 81% of the Portfolio's total net assets was invested in AMT-
Subject Bonds.
As of September 30, 1995, 36% of the Arizona Portfolio's total net assets, 63%
of the Florida Portfolio's total net assets, 34% of the Massachusetts
Portfolio's total net assets, 25% of the Michigan Portfolio's total assets, 29%
of the Minnesota Portfolio's total net assets, 55% of the New Jersey Portfolio`s
total net assets, 40% of the Ohio Portfolio's total net assets, 52% of the
Pennsylvania Portfolio`s total net assets and 38% of the Virginia Portfolio's
total net assets were invested in AMT-Subject Bonds.
As a matter of fundamental policy, each of the Arizona, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia Portfolios will
normally invest (i) at least 65% of its total assets in municipal securities of
the named state, and (ii) at least 80% of its net assets in municipal securities
the interest on which is exempt from Federal income tax. In addition, the New
Jersey Portfolio will invest at least 80% of its net assets in securities the
interest on which is exempt from New Jersey personal income tax (i.e., New
Jersey municipal securities and obligations of the U.S. government, its agencies
and instrumentalities ("U.S. Government Securities")). Where consistent with
applicable state law, each State Portfolio may also invest in municipal
securities issued by governmental entities (for example, U.S. territories)
outside the named state if such municipal securities generate interest exempt
from Federal income tax and personal income tax (or the Florida intangible tax)
in the named state. When Alliance believes that municipal securities of the
named state that meet the Portfolio's quality standards are not available, any
State Portfolio may invest in securities whose interest payments are only
federally tax-exempt.
Municipal Securities--Further Information. The two principal classifications of
municipal securities are bonds and notes. Municipal bonds, which are intended to
meet longer-term capital needs, are typically classified as either "general
obligation" or "revenue" (or "special tax") bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. Each Portfolio may invest more than 25% of its assets
in tax-exempt private activity bonds, which in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of the
principal and interest on such private activity bonds is dependent solely on the
ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. Each Portfolio may invest more than 25%
of its total assets in securities or obligations which are related in such a way
that business or political developments or changes affecting one such security
could also affect the others (for example, securities the interest on which is
paid from projects of a similar type.)
Municipal notes, which may be either "general obligation" or "revenue"
securities, are intended to fulfill short-term capital needs and generally have
original maturities not exceeding one year. They include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
tax-exempt commercial paper.
The yields of municipal securities depend on, among other things, conditions in
the municipal bond market and fixed income markets generally, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. Normally, lower-rated municipal securities provide yields superior to
those of more highly rated securities, but involve greater risks. When the
spread between the yields of lower-rated obligations and those of more highly
rated issues is relatively narrow, a Portfolio may invest in the latter since
they will provide optimal yields with somewhat less risk.
The high tax-free yields sought by the Portfolios are generally obtainable from
medium-quality municipal securities rated A or Baa by Moody's Investors Service,
Inc. ("Moody's"), or A or BBB by Standard & Poor's Ratings Services (S&P), Duff
& Phelps Credit Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc.
("Fitch"). Each Portfolio may maintain up to 25% of its net assets, in municipal
securities rated below Baa by Moody's and below BBB by S&P, Duff & Phelps and
Fitch or, if non-rated, determined by Alliance to be of comparable quality. At
least 75% of the total assets of each Portfolio will be invested in municipal
securities rated at the time of purchase Baa or higher by Moody's or BBB or
higher by S&P, Duff & Phelps or Fitch. It is expected that no Portfolio will
retain a municipal security downgraded below Caa by Moody's and CCC by S&P, Duff
& Phelps and Fitch, or if unrated, determined by Alliance to have undergone
similar credit quality deterioration.
Non-rated municipal securities may be purchased by a Portfolio when Alliance
believes that the financial condition of the issuers of such obligations and the
protection afforded by their terms limit risk to a level comparable to that of
rated securities that are consistent with the Portfolio's investment policies.
During the fiscal year ended October 31, 1995, the Insured National and Insured
California Portfolios invested all of their assets in securities rated A and
above by S&P, or if unrated by S&P, considered by Alliance to be of equivalent
quality to securities rated A or above. During the following Portfolios'
13
<PAGE>
fiscal years ended in 1995, on a weighted average basis, the percentages of the
assets invested in securities rated in particular rating categories by S&P or,
if not rated by S&P, considered by Alliance to be of equivalent quality to such
ratings, were as follows:
<TABLE>
<CAPTION>
Portfolio A and above BBB BB B
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National 84% 16% -- --
Arizona 95 5 -- --
California 81 11 7 1%
Florida 75 25 -- --
Massachusetts 91 9 -- --
Michigan 81 19 -- --
Minnesota 79 21 -- --
New Jersey 81 19 -- --
New York 92 8 -- --
Ohio 79 15 6 --
Pennsylvania 78 22 -- --
Virginia 95 5 -- --
</TABLE>
Each Portfolio may invest up to 35% of its total assets in zero coupon municipal
securities. Each Portfolio also may invest in municipal securities that have
fixed, variable, floating or inverse floating rates of interest. See "Additional
Investment Practices--Zero Coupon Securities" and "--Variable, Floating and
Inverse Floating Rate Investments." Each Portfolio normally will invest at least
65% of its total assets in income-producing securities (including zero coupon
securities).
Insurance Feature of the Insured National and Insured California Portfolios. The
Insured National and Insured California Portfolios normally will invest at least
65% and 80%, respectively, of their total assets in insured securities. At the
time of purchase by a Portfolio, insured securities are either (i) insured under
an insurance policy that relates to the specific municipal security in question
(a "Specific Issue Insurance Policy") or (ii) insured under a Mutual Fund
Insurance Policy issued to the Portfolio's Fund by an appropriate insurer. If a
municipal security is already covered by a Specific Issue Insurance Policy when
acquired by the Portfolio, then coverage will not be duplicated by a Mutual Fund
Insurance Policy. Based upon the expected composition of each of the Insured
National and Insured California Portfolios, Alliance estimates that the annual
premiums for a Mutual Fund Insurance Policy and/or Special Issue Insurance
Policy will range from .12 of 1% to .75 of 1% of the average net assets of each
Portfolio. Although the insurance feature reduces certain financial risks, the
premiums for a Mutual Fund Insurance Policy, and for many Specific Issue
Insurance Policies, which are paid from each of the Insured National and Insured
California Portfolio's assets, will reduce each Portfolio's current yield.
Insurance is not a substitute for the basic credit of an issuer, but supplements
the existing credit and provides additional security therefor. While insurance
coverage for municipal securities held by the Insured National and Insured
California Portfolios reduces credit risk by insuring that the Portfolios will
receive payment of principal and interest, it does not protect against market
fluctuations caused by changes in interest rates or other factors.
The Insured National and Insured California Portfolios may obtain insurance on
their municipal bonds or purchase insured municipal bonds covered by policies
issued by any insurer having a claims-paying ability rated AA by S&P or Aaa by
Moody's. Alliance is familiar with five such insurers, Municipal Bond Investors
Assurance Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"),
AMBAC Indemnity Corporation ("AMBAC"), Financial Security Assurance Inc. ("FSA")
and Capital Guaranty Insurance Company ("CGIC"). S&P has rated AAA the claims-
paying ability of MBIA, FGIC, AMBAC, FSA and CGIC, and the municipal bonds
insured by these organizations. Further information with respect to MBIA, FGIC,
AMBAC, FSA and CGIC is provided in the Statement of Additional Information of
Alliance Municipal Income Fund, Inc.
ADDITIONAL INVESTMENT PRACTICES
Some or all of the Portfolios may engage in the following investment practices
to the extent described in this Prospectus. See the Statement of Additional
Information of each Fund for a further discussion of the uses, risks and costs
of engaging in these practices.
Derivatives. The Portfolios may use derivatives in furtherance of their
investment objectives. Derivatives are financial contracts whose value depends
on, or is derived from, the value of an underlying asset, reference rate or
index. These assets, rates, and indices may include bonds, stocks, mortgages,
commodities, interest rates, bond indices and stock indices. Derivatives can be
used to earn income or protect against risk, or both. For example, one party
with unwanted risk may agree to pass that risk to another party who is willing
to accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Portfolios to earn income and
enhance returns, to hedge or adjust the risk profile of an investment portfolio,
and in place of more traditional direct investments. Each of the Portfolios is
permitted to use derivatives for one or more of these purposes, although most of
the Portfolios generally use derivatives primarily as direct investments in
order to enhance yields and broaden portfolio diversification. Each of these
uses entails greater risk than if derivatives were used solely for hedging
purposes. Derivatives are a valuable tool which, when used properly, can provide
significant benefit to Portfolio shareholders. A Portfolio may take a
significant position in those derivatives that are within its investment
policies if, in Alliance's judgement, this represents the most effective
response to current or anticipated market conditions.
Derivatives may be (i) standardized, exchange-traded contracts or (ii)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
14
<PAGE>
There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created.
. Options--An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy or sell the underlying asset (or settle for cash an amount
based on an underlying asset, rate or index) at a specified price (the
exercise price) during a period of time or on a specified date. A call option
entitles the holder to purchase, while a put option entitles the holder to
sell, the underlying asset (or settle for cash an amount based on an
underlying asset, rate or index). Likewise, when an option is exercised the
writer of the option would be obligated to sell (in the case of a call option)
or to purchase (in the case of a put option) the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index).
. Futures--A futures contract is an agreement that obligates the buyer to buy
and the seller to sell a specified quantity of an underlying asset (or settle
for cash the value of a contract based on an underlying asset, rate or index)
at a specific price on the contract maturity date. Futures contracts are
standardized, exchange-traded instruments and are fungible (i.e., considered
to be perfect substitutes for each other). This fungibility allows futures
contracts to be readily offset or cancelled through the acquisition of equal
but opposite positions, which is the primary method in which futures contracts
are liquidated. A cash-settled futures contract does not require physical
delivery of the underlying asset but instead is settled for cash equal to the
difference between the values of the contract on the date it is entered into
and its maturity date.
. Forwards--A forward contract is an obligation by one party to buy, and the
other party to sell, a specific quantity of an underlying commodity or other
tangible asset for an agreed upon price at a future date. Forward contracts
are customized, privately negotiated agreements designed to satisfy the
objectives of each party. A forward contract usually results in the delivery
of the underlying asset upon maturity of the contract in return for the agreed
upon payment.
. Swaps--A swap is a customized, privately negotiated agreement that obligates
two parties to exchange a series of cash flows at specified intervals (payment
dates) based upon or calculated by reference to changes in specified prices or
rates (e.g., interest rates in the case of interest rate swaps) for a
specified amount of an underlying asset (the "notional" principal amount). The
payment flows are netted against each other, with the difference being paid by
one party to the other. The notional principal amount is used solely to
calculate the payment streams but is not exchanged.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities."
Examples of this type of structured security include certain securities
described below under "Variable, Floating and Inverse Floating Rate
Instruments."
While the judicious use of derivatives by highly experienced investment managers
such as Alliance can be quite beneficial, derivatives also involve risks
different from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Portfolio.
. Market Risk--This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to the
Portfolio's interest.
. Management Risk--Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative
under all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative
adds to a Portfolio's portfolio and the ability to forecast price and interest
rate movements correctly.
. Credit Risk--This is the risk that a loss may be sustained by a Portfolio as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Portfolios consider the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
. Liquidity Risk--Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
. Leverage Risk--Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss
15
<PAGE>
generally is related to a notional principal amount, even if the parties have
not made any initial investment. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment.
. Other Risks--Other risks in using derivatives include the risk of mispricing
or improper valuation of derivatives and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many
derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a Portfolio.
Derivatives do not always perfectly or even highly correlate or track the
value of the assets, rates or indices they are designed to closely track.
Consequently, a Portfolio's use of derivatives may not always be an effective
means of, and sometimes could be counterproductive to, furthering the
Portfolio's investment objective.
Derivatives Used by the Portfolios. Following is a description of specific
derivatives currently used by one or more of the Portfolios.
Options on Municipal and U.S. Government Securities. In an effort to increase
current income and to reduce fluctuations in net asset value, the Portfolios
intend to write covered put and call options and purchase put and call options
on municipal securities and U.S. Government securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and purchasing of
options by the Portfolios. In purchasing an option on securities, a Portfolio
would be in a position to realize a gain if, during the option period, the price
of the underlying securities increased (in the case of a call) or decreased (in
the case of a put) by an amount in excess of the premium paid; otherwise the
Portfolio would experience a loss not greater than the premium paid for the
option. Thus, a Portfolio would realize a loss if the price of the underlying
security declined or remained the same (in the case of a call) or increased or
remained the same (in the case of a put) or otherwise did not increase (in the
case of a put) or decrease (in the case of a call) by more than the amount of
the premium. If a put or call option purchased by a Portfolio were permitted to
expire without being sold or exercised, its premium would represent a loss to
the Portfolio.
A Portfolio may write a put or call option in return for a premium, which is
retained by the Portfolio whether or not the option is exercised. Except with
respect to uncovered call options written for cross-hedging purposes, none of
the Portfolios will write uncovered call or put options. A call option written
by a Portfolio is "covered" if the Portfolio owns the underlying security, has
an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than that of the call option it
has written. A put option written by a Portfolio is covered if the Portfolio
holds a put option on the underlying securities with an exercise price equal to
or greater than that of the put option it has written.
The risk involved in writing an uncovered put option is that there could be a
decrease in the market value of the underlying securities. If this occurred, a
Portfolio could be obligated to purchase the underlying security at a higher
price than its current market value. Conversely, the risk involved in writing an
uncovered call option is that there could be an increase in the market value of
the underlying security, and a Portfolio could be obligated to acquire the
underlying security at its current price and sell it at a lower price. The risk
of loss from writing an uncovered put option is limited to the exercise price of
the option, whereas the risk of loss from writing an uncovered call option is
potentially unlimited.
A Portfolio may write a call option on a security that it does not own in order
to hedge against a decline in the value of a security that it owns or has the
right to acquire, a technique referred to as "cross-hedging." A Portfolio would
write a call option for cross-hedging purposes, instead of writing a covered
call option, when the premium to be received from the cross-hedge transaction
exceeds that to be received from writing a covered call option, while at the
same time achieving the desired hedge. The correlation risk involved in cross-
hedging may be greater than the correlation risk involved from other hedging
strategies.
The Portfolios may purchase or write privately negotiated options on securities.
A Portfolio that purchases or writes privately negotiated options on securities
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by Alliance, and Alliance has adopted procedures for monitoring the
creditworthiness of such counterparties. Privately negotiated options purchased
or written by a Portfolio may be illiquid, and it may not be possible for the
Portfolio to effect a closing transaction at an advantageous time. See "Illiquid
Securities" below.
Futures Contracts and Options on Futures Contracts. Futures contracts that a
Portfolio may buy and sell may include futures contracts on municipal securities
or U.S. Government Securities and contracts based on any index of municipal
securities or U.S. Government securities.
Options on futures contracts are options that call for the delivery upon
exercise of futures contracts. Options on futures contracts written or purchased
by a Portfolio will be traded on U.S. exchanges and will be used only for
hedging purposes.
A Portfolio will not enter into a futures contract or option on a futures
contract if immediately thereafter the market values of the outstanding futures
contracts of the Portfolio and the futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of its total assets.
Forward Commitments. Each Portfolio may purchase or sell municipal securities on
a forward commitment basis. Forward commitments are forward contracts for the
purchase or sale of securities, including purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. In some
16
<PAGE>
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring or approval of a proposed financing by
appropriate authorities (i.e., a "when, as and if issued" trade).
When forward commitments with respect to fixed-income securities are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation,
and no interest or dividends accrue to the purchaser prior to the settlement
date. At the time a Portfolio enters into a forward commitment, it records the
transaction and thereafter reflects the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation would be
canceled if the required conditions did not occur and the trade were canceled.
The use of forward commitments helps a Portfolio to protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, a Portfolio might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, a Portfolio
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
a Portfolio if, as a result, the Portfolio's aggregate forward commitments under
such transactions would be more than 20% of its total assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date. The Portfolios enter into forward
commitments, however, only with the intention of actually receiving securities
or delivering them, as the case may be. If a Portfolio, however, chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
may incur a gain or loss.
Interest Rate Transactions (Swaps, Caps and Floors). Each Portfolio may enter
into interest rate swap, cap or floor transactions primarily for hedging
purposes, which may include preserving a return or spread on a particular
investment or portion of its portfolio or protecting against an increase in the
price of securities the Portfolio anticipates purchasing at a later date. The
Portfolios do not intend to use these transactions in a speculative manner.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments) computed based on a
contractually-based principal (or "notional") amount. Interest rate swaps are
entered into on a net basis (i.e., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments). Interest rate caps and floors are similar to options in that
the purchase of an interest rate cap or floor entitles the purchaser, to the
extent that a specified index exceeds (in the case of a cap) or falls below (in
the case of a floor) a predetermined interest rate, to receive payments of
interest on a notional amount from the party selling the interest rate cap or
floor. A Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or liabilities.
There is no limit on the amount of interest rate transactions that may be
entered into by a Portfolio that is permitted to enter into such transactions. A
Portfolio will not enter into an interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is then rated in the highest rating category of at least one nationally
recognized rating organization.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become well established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, unless there is a
counterparty default, the risk of loss to a Portfolio from interest rate
transactions is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make.
Zero Coupon Securities. Zero coupon securities are debt securities that have
been issued without interest coupons or stripped of their unmatured interest
coupons, and include receipts or certificates representing interests in such
stripped debt obligations and coupons. Such a security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value.
Such securities usually trade at a deep discount from their face or par value
and are subject to greater fluctuations in market value in response to changing
interest rates than debt obligations of comparable maturities and credit quality
that make current distributions of interest. On the other hand, because there
are no periodic interest payments to be reinvested prior to maturity, these
securities eliminate reinvestment risk and "lock in" a rate of return to
maturity.
Current federal tax law requires that a holder (such as a Portfolio) of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the security during the year. As a result, in order to make
the distributions necessary for a Portfolio not to be subject to federal income
or excise taxes, the Portfolio might be required to pay out as an income
distribution each year an amount, obtained by liquidation of portfolio
securities or borrowings if necessary, greater than the total amount of cash
that the Portfolio has actually received as interest during the year. Each
Portfolio believes, however, that it is highly unlikely
17
<PAGE>
that it would be necessary to liquidate portfolio securities or borrow money in
order to make such required distributions or to meet its investment objective.
For a discussion of the tax treatment of zero coupon Treasury securities, see
"Dividends, Distributions and Taxes--Zero Coupon Treasury Securities" in the
Statement of Additional Information of each Fund.
Variable, Floating and Inverse Floating Rate Instruments. Municipal securities
may have fixed, variable or floating rates of interest. Variable and floating
rate securities pay interest at rates that are adjusted periodically, according
to a specified formula. A "variable" interest rate adjusts at predetermined
intervals (e.g., daily, weekly or monthly), while a "floating" interest rate
adjusts whenever a specified benchmark rate (such as the bank prime lending
rate) changes.
A Portfolio may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap." The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
Leveraged inverse floating rate securities are sometimes known as inverse
floaters. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverge inherent in inverse
floaters is associated with greater volatility in market value, such that,
during periods of rising interest rates, the market values of inverse floaters
will tend to decrease more rapidly than those of fixed rate municipal
securities. 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, while the second of the components (the "residual
component") pays a current residual interest rate based on the difference
between the total interest paid by the issuer on the municipal securities and
the auction rate paid on the auction component. A Portfolio may purchase both
auction and residual components.
Repurchase Agreements. A Portfolio may seek additional income by investing in
repurchase agreements pertaining only to U.S. Government securities. A
repurchase agreement arises when a buyer purchases a security and simultaneously
agrees to resell it to the vendor at an agreed-upon future date, normally a day
or a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon interest rate for the period the buyer's money is
invested in the security. Such agreements permit a Portfolio to keep all of its
assets at work while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. A Portfolio requires continual maintenance of
collateral in an amount equal to, or in excess of, the resale price. If a vendor
defaults on its repurchase obligation, a Portfolio would suffer a loss to the
extent that the proceeds from the sale of the collateral were less than the
repurchase price. If a vendor goes bankrupt, a Portfolio might be delayed in, or
prevented from, selling the collateral for its benefit. There is no percentage
restriction on any Portfolio's ability to enter into repurchase agreements. The
Portfolios may enter into repurchase agreements with member banks of the Federal
Reserve System or "primary dealers" (as designated by the Federal Reserve Bank
of New York).
Illiquid Securities. Subject to any applicable fundamental investment policy,
each Portfolio may not maintain more than 15% of its net assets in illiquid
securities. These securities include, among others, securities for which there
is no readily available market, options purchased by a Portfolio over-the-
counter, the cover for such options and repurchase agreements not terminable
within seven days.
Because of the absence of a trading market for illiquid securities, a Portfolio
may not be able to realize their full value upon sale. With respect to each
Portfolio that may invest in such securities, Alliance will monitor their
illiquidity under the supervision of the Directors or Trustees of the Fund. To
the extent permitted by applicable law, Rule 144A securities will not be treated
as "illiquid" for purposes of the foregoing restriction so long as such
securities meet liquidity guidelines established by a Fund's Directors or
Trustees.
Defensive Position. Under normal circumstances, substantially all of the total
assets of each Portfolio will be invested in the types of municipal securities
described in "How The Portfolios Pursue Their Objective" above. However, when
business or financial conditions warrant, each Portfolio may assume a temporary
defensive position and invest without limit in other municipal securities that
are in all other respects consistent with the Portfolio's investment policies.
For temporary defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P, MIG-2 (or VMIG-2)
or higher by Moody's, D-1 or higher by Duff & Phelps or FIN-2 or higher by
Fitch, or in taxable cash equivalents (limited, in the case of the Florida
Portfolio, to short-term U.S. Government Securities or repurchase agreements).
Portfolio Turnover. From time to time, the Portfolios may engage in active
short-term trading to benefit from yield disparities among different issues of
municipal securities, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. Such trading will increase a Portfolio's
rate of turnover and the incidence of short-term capital gain taxable as
ordinary income. Management anticipates that the annual turnover in each
Portfolio will not exceed 250%. An annual turnover rate of 200% occurs, for
example, when all of the securities in a Portfolio are replaced twice in a
period of one year. A high rate of portfolio turnover involves correspondingly
greater expenses than a lower rate, which expenses must be borne by a Portfolio
and its shareholders. However, the execution costs for municipal securities are
substantially less than those for equivalent dollar values of equity securities.
See "Dividends, Distributions and Taxes."
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<PAGE>
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
Each Portfolio has adopted certain fundamental investment policies listed below,
which may not be changed without the approval of its shareholders. Additional
investment restrictions with respect to a Portfolio are set forth in the
Statements of Additional Information.
No Portfolio other than the Insured California Portfolio may: (i) invest more
than 5% of its total assets in the securities of any one issuer except the U.S.
Government, although with respect to 25% of the total assets of the National and
Insured National Portfolios and 50% of the total assets of the State Portfolios
(other than the Insured California Portfolio) each such Portfolio may invest in
any number of issuers; (ii) invest 25% or more of its total assets in the
securities of issuers conducting their principal business activities in any one
industry, provided that for purposes of this policy (a) there is no limitation
with respect to investments in municipal securities issued by governmental users
(including private activity bonds issued by governmental users), U.S. Government
Securities and (b) consumer finance companies, industrial finance companies and
gas, electric, water and telephone utility companies are each considered to be
separate industries (for purposes of this restriction, the Portfolio will regard
the entity with the primary responsibility for the payment of interest and
principal as the issuer); (iii) purchase more than 10% of any class of the
voting securities of any one issuer; (iv) have more than 5% of its assets
invested in repurchase agreements with the same dealer; (v) borrow money except
from banks for temporary or emergency purposes and then in amounts not exceeding
20% of its total assets; or (vi) in the case of the National, Insured National,
New York and California Portfolios, invest more than 10% of its total assets in
repurchase agreements not terminable within seven days (whether or not illiquid)
or other illiquid investments.
The Insured California Portfolio may not: (i) except when investing for
temporary defensive purposes, invest more than 35% of its total assets in
securities not covered by insurance which provides for the payment of principal
of and interest on such securities or invest more than 20% of its total assets
in securities the interest from which is subject to Federal income tax and
California personal income tax (there is no limit on the amount of securities
that may be insured by a single insurance company); (ii) invest more than 5% of
its total assets in the securities of any one issuer or invest in more than 10%
of the voting securities of any one issuer except that up to 50% of the Insured
California Portfolio's total assets may be invested without regard to this
limitation and except that this does not limit the amount of the Insured
California Portfolio's assets that may be invested in U.S. Government
Securities; (iii) invest more than 25% of its total assets in a single industry,
except that there is no limit on the amount of its assets which may be invested
in municipal securities issued by governments or political subdivisions thereof,
in a particular segment of the municipal securities market or (subject to (ii)
above) in U.S. Government Securities; (iv) invest more than 10% of its total
assets in repurchase agreements not terminable within seven days (whether or not
illiquid) or other illiquid investments; or (v) borrow money, except from banks
for temporary purposes and then in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
not in excess of 15% of its total assets at the time of such borrowing.
RISK CONSIDERATIONS
Municipal Securities. The value of each Portfolio's shares will fluctuate with
the value of its investments. The value of each Portfolio's investments will
change as the general level of interest rates fluctuates. During periods of
falling interest rates, the values of a Portfolio's securities generally rise.
Conversely, during periods of rising interest rates, the values of a Portfolio's
securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and
realization of capital losses on securities in a Portfolio's portfolio will be
unavoidable. Moreover, medium- and lower-rated securities and non-rated
securities of comparable quality may be subject to wider fluctuations in yield
and market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps and
Fitch are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may be varying
degrees of difference in credit risk of securities within each rating category.
Securities rated Aaa by Moody's and AAA by S&P, Duff & Phelps and Fitch are
considered to be of the highest quality; capacity to pay interest and repay
principal is extremely strong. Securities rated Aa by Moody's and AA by S&P,
Duff & Phelps and Fitch are considered to be high quality; capacity to repay
principal is considered very strong, although elements may exist that make risks
appear somewhat larger than exist with securities rated Aaa or AAA. Securities
rated A are considered by Moody's to possess adequate factors giving security to
principal and interest. S&P, Duff & Phelps and Fitch consider such securities to
have a strong capacity to pay interest and repay principal. Such securities are
more susceptible to adverse changes in economic conditions and circumstances
than higher-rated securities.
Securities rated Baa by Moody's and BBB by S&P, Duff & Phelps and Fitch are
considered to have an adequate capacity to pay interest and repay principal.
Such securities are
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considered to have speculative characteristics and share some of the same
characteristics as lower-rated securities. Sustained periods of deteriorating
economic conditions or of rising interest rates are more likely to lead to a
weakening in the issuer's capacity to pay interest and repay principal than in
the case of higher-rated securities. Securities rated Ba by Moody's and BB by
S&P, Duff & Phelps and Fitch are considered to have speculative characteristics
with respect to capacity to pay interest and repay principal over time; their
future cannot be considered as well-assured. Securities rated B by Moody's, S&P,
Duff & Phelps and Fitch are considered to have highly speculative
characteristics with respect to capacity to pay interest and repay principal.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Securities rated Caa by Moody's and CCC by S&P, Duff & Phelps and Fitch are of
poor standing and there is a present danger with respect to payment of principal
or interest. See the Statements of Additional Information for a description of
the ratings used by Moody's, S&P, Duff & Phelps and Fitch.
Investments in Lower-Rated Securities. Lower-rated securities, i.e., those rated
Ba and lower by Moody's or BB and lower by S&P, Duff & Phelps and Fitch
(commonly known as "junk bonds"), are subject to greater risk of loss of
principal and interest than higher rated securities. They are also generally
considered to be subject to greater market risk than higher-rated securities,
and the capacity of issuers of lower-rated securities to pay interest and repay
principal is more likely to weaken than is that of issuers of higher-rated
securities in times of deteriorating economic conditions or rising interest
rates. In addition, lower-rated securities may be more susceptible to real or
perceived adverse economic conditions than investment grade securities, although
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established
secondary market for lower-rated securities, a Portfolio may experience
difficulty in valuing such securities and, in turn, the Portfolio's assets.
Alliance will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political conditions.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research and credit
analysis are a correspondingly more important aspect of its program for managing
a Portfolio's securities than would be the case if a Portfolio did not invest in
lower-rated securities.
Non-rated Securities. Non-rated securities will also be considered for
investment by a Portfolio when Alliance believes that the financial condition of
the issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objective
and policies.
Non-diversified Status. Each of the State Portfolios is a "non-diversified"
investment company, which means the Portfolio is not limited in the proportion
of its assets that may be invested in the securities of a single issuer. Because
each State Portfolio will normally invest solely or substantially in municipal
securities of a particular state, it is more susceptible than a geographically
diversified municipal securities portfolio to local risk factors. Such risks
arise from the financial condition of the state involved and its municipalities.
To the extent such state or local governmental entities are unable to meet their
financial obligations, the income derived by the State Portfolios, their ability
to preserve or realize appreciation of their portfolio assets and their
liquidity could be impaired. The Statements of Additional Information of the
Funds provide certain information about the particular states.
Each Portfolio, however, intends to conduct its operations so as to qualify to
be taxed as a "regulated investment company" for purposes of the Internal
Revenue Code, which will relieve the Portfolio of any liability for federal
income tax to the extent its earnings are distributed to shareholders. See
"Dividends, Distributions and Taxes" in the Statements of Additional
Information. To so qualify, among other requirements, each Portfolio will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the Portfolio's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of its total assets,
not more than 5% of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of any such single issuer. A Portfolio's investments in U.S.
Government securities are not subject to these limitations.
- --------------------------------------------------------------------------------
Purchase And Sale Of Shares
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You can purchase shares of any of the Portfolios through broker-dealers, banks
or other financial intermediaries, or directly through Alliance Fund
Distributors, Inc. ("AFD"), each Fund's principal underwriter. The minimum
initial investment in each Portfolio is $250. The minimum for subsequent
investments in each Portfolio is $50. Investments of $25 or more are allowed
under the automatic investment program in each Portfolio. Share certificates are
issued only upon request. Under certain conditions, the Funds may suspend
purchases of shares. See the Subscription Application and Statements of
Additional Information for more information. In the case of the State
Portfolios, each Portfolio is available only to residents of the indicated
state.
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Existing shareholders may make subsequent purchases by electronic funds transfer
if they have completed the Telephone Transactions section of the Subscription
Application or the Shareholder Options form obtained from Alliance Fund
Services, Inc. ("AFS"), each Fund's registrar transfer agent and dividend
disbursing agent. Telephone purchase orders can be made by calling (800) 221-
5672, may not exceed $500,000, must be received by the Fund by 3:00 p.m. Eastern
time on a Fund business day and will be made at the next day's net asset value
(less any applicable sales charge).
Each Portfolio offers three classes of shares, Class A, Class B and Class C.
Class A Shares -- Initial Sales Charge Alternative
You can purchase Class A shares at net asset value plus an initial sales charge,
as follows:
<TABLE>
<CAPTION>
Initial Sales Charge
as % of Commission to
Net Amount as % of Dealer/Agent as %
Amount Purchased Invested Offering Price of Offering Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.44% 4.25% 4.00%
- --------------------------------------------------------------------------------
$100,000 to
less than $250,000 3.36 3.25 3.00
- --------------------------------------------------------------------------------
$250,000 to
less than $500,000 2.30 2.25 2.00
- --------------------------------------------------------------------------------
$500,000 to
less than $1,000,000 1.78 1.75 1.50
- --------------------------------------------------------------------------------
</TABLE>
On purchases of $1,000,000 or more, you pay no initial sales charge but may pay
a contingent deferred sales charge ("CDSC") equal to 1% of the lesser of net
asset value at the time of redemption or original cost if you redeem within one
year; Alliance may pay the dealer or agent a fee of up to 1% of the dollar
amount purchased. Certain purchases of Class A shares may qualify for reduced or
eliminated sales charges in accordance with a Fund's Combined Purchase
Privilege, Cumulative Quantity Discount, Statement of Intention, Privilege for
Certain Retirement Plans, Reinstatement Privilege and Sales at Net Asset Value
programs. Consult the Subscription Application and the Statements of Additional
Information.
Class B Shares -- Deferred Sales Charge Alternative
You can purchase Class B shares at net asset value without an initial sales
charge. However, you may pay a CDSC if you redeem shares within three years
after purchase. The amount of the CDSC (expressed as a percentage of the lesser
of the current net asset value or original cost) will vary according to the
number of years from the purchase of the Class B shares until the redemption of
those shares, as follows:
<TABLE>
<CAPTION>
Year Since Purchase CDSC
- --------------------------------------------------------------------------------
<S> <C>
First 3%
Second 2%
Third 1%
Fourth None
</TABLE>
Class B shares are subject to higher distribution fees than Class A shares for a
period of six years (at which time they convert to Class A shares). The higher
fees mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower net asset value than Class A shares.
Class C Shares -- Asset-Based Sales Charge Alternative
You can purchase Class C shares without any initial sales charge or CDSC. The
Portfolio will thus receive the full amount of your purchase, and you will
receive the entire net asset value of your shares upon redemption. Class C
shares incur higher distribution fees than Class A shares and do not convert to
any other class of shares of the Portfolio. The higher fees mean a higher
expense ratio, so Class C shares pay correspondingly lower dividends and may
have a lower net asset value than Class A shares.
Application of the CDSC
Shares obtained from dividend or distribution reinvestment are not subject to
the CDSC on Class A and Class B shares. The CDSC is deducted from the amount of
the redemption and is paid to AFD. The CDSC will be waived on redemptions of
shares following the death or disability of a shareholder, to meet the
requirements of certain qualified retirement plans or pursuant to a monthly,
bimonthly or quarterly systematic withdrawal plan. See the Statements of
Additional Information.
How The Portfolios Value Their Shares
The net asset value of each Class of shares in a Portfolio is calculated by
dividing the value of the Portfolio's net assets allocable to that Class by the
outstanding shares of that Class. Shares are valued each day the New York Stock
Exchange (the "Exchange") is open as of the close of regular trading (currently
4:00 p.m. Eastern time). The securities in a Portfolio are valued at their
current market value determined on the basis of market quotations or, if such
quotations are not readily available, such other methods as the Fund's Directors
or Trustees believe would accurately reflect fair market value.
General
The decision as to which Class is more beneficial to you depends on the amount
and intended length of your investment. If you are making a large investment,
thus qualifying for a reduced sales charge, you might consider Class A shares.
If you are making a smaller investment, you might consider Class B shares
because 100% of your purchase is invested immediately. If you are unsure of the
length of your investment, you might consider Class C shares because there is no
initial or contingent deferred sales charge. Consult your financial agent.
Dealers and agents may receive differing compensation for selling Class A, Class
B or Class C shares. There is no size limit on purchases of Class A shares. The
maximum purchase of Class B shares is $250,000. The maximum purchase of Class C
shares is $5,000,000. A Fund may refuse any order to purchase shares.
In addition to the discount or commission paid to dealers or agents, AFD from
time to time pays additional cash or other incentives to dealers or agents,
including Equico Securities, Inc., an affiliate of AFD, in connection with the
sale of shares of the Portfolios. Such additional amounts may be utilized, in
whole or in part, in some cases together with other revenues of such dealers or
agents, to provide additional compensation to registered representatives who
sell shares of the Portfolios. On some
21
<PAGE>
occasions, such cash or other incentives will be conditioned upon the sale of a
specified minimum dollar amount of the shares of a Portfolio and/or other
Alliance Mutual Funds during a specific period of time. Such incentives may take
the form of payment for attendance at seminars, meals, sporting events or
theater performances, or payment for travel, lodging and entertainment incurred
in connection with travel by persons associated with a dealer or agent and their
immediate family members to urban or resort locations within or outside the
United States. Such dealer or agent may elect to receive cash incentives of
equivalent amount in lieu of such payments.
HOW TO SELL SHARES
You may "redeem", i.e., sell your shares in a Portfolio to a Fund on any day the
Exchange is open, either directly or through your financial intermediary. The
price you will receive is the net asset value (less any applicable CDSC for
Class A and Class B shares) next calculated after the Fund receives your request
in proper form. Proceeds generally will be sent to you within seven days.
However, for shares recently purchased by check or electronic funds transfer, a
Fund will not send proceeds until it is reasonably satisfied that the check or
electronic funds transfer has been collected (which may take up to 15 days).
Selling Shares Through Your Broker
Your broker must receive your request before 4:00 p.m. Eastern time, and your
broker must transmit your request to the Fund by 5:00 p.m. Eastern time, for you
to receive that day's net asset value (less any applicable CDSC for Class A and
Class B shares). Your broker is responsible for furnishing all necessary
documentation to the Funds, and may charge you for this service.
Selling Shares Directly To A Fund
Send a signed letter of instruction or stock power form to AFS along with your
certificates, if any, that represent the shares you want to sell. For your
protection, signatures must be guaranteed by a bank, a member firm of a national
stock exchange or other eligible guarantor institution. Stock power forms are
available from your financial intermediary, AFS, and many commercial banks.
Additional documentation is required for the sale of shares by corporations,
intermediaries, fiduciaries and surviving joint owners. For details contact:
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
1-800-221-5672
Alternatively, a request for redemption of shares for which no stock
certificates have been issued can also be made by telephone to 800-221-5672.
Telephone redemption requests must be made by 4 p.m. Eastern time on a Fund
business day in order to receive that day's net asset value and may be made only
once in any 30-day period. A shareholder who has completed the Telephone
Transactions section of the Subscription Application, or the Shareholder Options
form obtained from AFS, can elect to have the proceeds of their redemption sent
to their bank via an electronic funds transfer. Proceeds of telephone
redemptions also may be sent by check to a shareholder's address of record.
Redemption requests by electronic funds transfer may not exceed $100,000 and
redemption requests by check may not exceed $50,000. Telephone redemption is not
available for shares held in nominee or "street name" accounts or retirement
plan accounts or shares held by a shareholder who has changed his or her address
of record within the previous 30 calendar days.
General
The sale of shares is a taxable transaction for federal tax purposes. Under
unusual circumstances, a Fund may suspend redemptions or postpone payment for up
to seven days or longer, as permitted by federal securities law. The Funds
reserve the right to close an account that through redemption has remained below
$200 for 90 days. Shareholders will receive 60 days' written notice to increase
the account value before the account is closed.
During drastic economic or market developments, you might have difficulty in
reaching AFS by telephone, in which event you should issue written instructions
to AFS. AFS is not responsible for the authenticity of telephonic requests to
purchase, sell or exchange shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine, and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephonic requests. The telephone
service may be suspended or terminated at any time without notice.
SHAREHOLDER SERVICES
AFS offers a variety of shareholder services. For more information about these
services or your account, call AFS's toll-free number, 800-221-5672. Some
services are described in the attached Application. A shareholder's manual
explaining all available services will be provided upon request. To request a
shareholder manual, call 800-227-4618.
HOW TO EXCHANGE SHARES
You may exchange your shares of any Portfolio for shares of the same class of
other Alliance Mutual Funds (which include AFD Exchange Reserves, a money market
fund managed by Alliance). Exchanges of shares are made at the net asset values
next determined, without sales or service charges. Exchanges may be made by
telephone or written request. Telephone exchange request must be received by AFS
by 4:00 p.m. Eastern time on a Fund business day in order to receive that day's
net asset value.
Class A and Class B shares will continue to age without regard to exchanges for
purposes of determining the CDSC, if any, upon redemption and, in the case of
Class B shares, for the purposes of conversion to Class A shares. After an
exchange, your Class B shares will automatically convert to Class A shares in
accordance with the conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original shares"). When
redemption occurs, the CDSC applicable to the original shares is applied.
22
<PAGE>
Please read carefully the Prospectus of the mutual fund into which you are
exchanging before submitting the request. Call AFS at 800-221-5672 to exchange
uncertificated shares. An exchange is a taxable capital transaction for federal
tax purposes. The exchange service may be changed, suspended, or terminated on
60 days' written notice.
- --------------------------------------------------------------------------------
Management Of The Funds
- --------------------------------------------------------------------------------
ADVISER
Alliance, which is a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an
advisory agreement (the "Advisory Agreement"), to provide investment advice and,
in general, to conduct the management and investment program of each Portfolio
of each Fund, subject to the general supervision and control of the Board of
Directors or Trustees of that Fund.
The employees of Alliance principally responsible for each Portfolio's
investment program are Mrs. Susan P. Keenan, Mr. David M. Dowden and Mr.
Terrance T. Hults. Mrs. Keenan has served in this capacity for each Portfolio
since it commenced operations. Messrs. Dowden and Hults have served in this
capacity for each Portfolio since 1994 and 1995, respectively. Mrs. Keenan is a
Senior Vice President of Alliance Capital Management Corporation ("ACMC"), with
which she has been associated since prior to 1990. Mr. Dowden is an Assistant
Vice President of ACMC with which he has been associated since 1994. Previously
he was an analyst in the Municipal Strategy Group at Merrill Lynch Capital
Markets. Mr. Hults has been an Assistant Vice President of ACMC since 1995.
Previously he was an associate and trader in the Municipal Derivative Products
department at Merrill Lynch Capital Markets.
Alliance is a leading international investment manager supervising client
accounts with assets as of December 31, 1995 totaling more than $146 billion
(of which approximately $48 billion represented the assets of investment
companies). Alliance's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations and
endowment funds. The 51 registered investment companies managed by Alliance
comprising 107 separate investment portfolios currently have over two million
shareholders. As of December 31, 1995, Alliance was retained as an investment
manager for 29 of the Fortune 100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, Alliance, is an indirect wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States, which is a wholly-owned
subsidiary of The Equitable Companies Incorporated, a holding company controlled
by AXA, a French insurance holding company. Certain information concerning the
ownership and control of Equitable by AXA is set forth in the Statements of
Additional Information under "Management of the Fund."
DISTRIBUTION SERVICES AGREEMENTS
Rule 12b-1 adopted by the Securities and Exchange Commission (the "Commission")
under the 1940 Act permits an investment company to pay expenses associated with
the distribution of its shares in accordance with a duly adopted plan. Each Fund
has adopted a Rule 12b-1 plan (the "Plan") and has entered into a Distribution
Services Agreement (the "Agreement") with AFD. Pursuant to the Plan, each
Portfolio pays to AFD a Rule 12b-1 distribution services fee, which may not
exceed an annual rate of .30% of the Portfolio's aggregate average daily net
assets attributable to the Class A shares, 1.00% of the Portfolio's aggregate
average daily net assets attributable to the Class B shares and 1.00% of the
Portfolio's aggregate average daily net assets attributable to the Class C
shares, for distribution expenses. The Plans provide that a portion of the
distribution services fee in an amount not to exceed .25% of the aggregate
average daily net assets of each Portfolio attributable to each class of shares
constitutes a service fee used for personal service and/or the maintenance of
shareholder accounts.
The Plans provide that AFD will use the distribution services fee received from
a Portfolio in its entirety for payments (i) to compensate broker-dealers or
other persons for providing distribution assistance, (ii) to otherwise promote
the sale of shares of the Portfolio, and (iii) to compensate broker-dealers,
depository institutions and other financial intermediaries for providing
administrative, accounting and other services with respect to the Portfolio's
shareholders. In this regard, some payments under the Plans are used to
compensate financial intermediaries with trail or maintenance commissions in an
amount equal to .25%, annualized, with respect to Class A shares and Class B
shares, and 1.00%, annualized, with respect to Class C shares, of the assets
maintained in a Portfolio by their customers. Distribution services fees
received from the Portfolios with respect to Class A shares will not be used to
pay any interest expenses, carrying charges or other financing costs or
allocation of overhead of AFD. Distribution services fees received from the
Portfolios, with respect to Class B and Class C shares, may be used for these
purposes. The Plans also provide that Alliance may use its own resources to
finance the distribution of each Portfolio's shares.
The Portfolios are not obligated under the Plans to pay any distribution
services fee in excess of the amounts set forth above. With respect to Class A
shares of each Portfolio, distribution expenses accrued by AFD in one fiscal
year may not be paid from distribution services fees received from the Portfolio
in subsequent fiscal years.
AFD's compensation with respect to Class B and Class C shares under the Plans is
directly tied to its expenses incurred. Actual distribution expenses for Class B
and Class C shares for any given year, however, will probably exceed the
distribution services fees payable under the applicable Plan with respect to the
class involved and, in the case of Class B shares, payments received
23
<PAGE>
from CDSCs. The excess will be carried forward by AFD and reimbursed from
distribution services fees payable under the Plan with respect to the class
involved and, in the case of Class B shares, payments subsequently received
through CDSCs, so long as the Plan and the Agreement are in effect.
Unreimbursed distribution expenses incurred as of the end of each Portfolio's
most recently completed fiscal period, and carried over for reimbursement in
future years in respect of the Class B and Class C shares for all Portfolios
were, as of that time, as follows:
<TABLE>
<CAPTION>
Amount of Distribution Expenses Carried Over
(as % of Class's Net Assets)
---------------------------------------------------------------
Class B Class C
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National..................... $4,580,693 (1.82%) $1,735,266 (1.61%)
Insured National............. $1,879,251 (3.19%) $ 582,379 (2.62%)
Arizona...................... $ 333,848 (10.54%) $ 82,644 (17.19%)
California................... $4,648,912 (2.79%) $1,398,507 (1.59%)
Insured California........... $1,235,161 (4.44%) $ 379,783 (2.65%)
Florida...................... $ 756,410 (3.66%) $ 689,466 (2.24%)
Massachusetts................ $ 293,674 (16.75%) $ 250,539 (9.80%)
Michigan..................... $ 272,393 (11.24%) $ 326,746 (11.32%)
Minnesota.................... $ 582,028 (7.97%) $ 437,224 (5.99%)
New Jersey................... $1,390,839 (4.01%) $ 426,141 (2.00%)
New York..................... $2,854,710 (3.02%) $ 614,470 (1.90%)
Ohio......................... $ 939,849 (4.31%) $ 518,440 (2.75%)
Pennsylvania................. $1,088,987 (3.81%) $ 430,536 (2.86%)
Virginia..................... $ 276,543 (23.18%) $ 35,816 (29.30%)
- ------------------------------------------------------------------------------------------------
</TABLE>
The Plans are in compliance with rules of the National Association of Securities
Dealers, Inc. which effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to that class. The
rules also limit the aggregate of all front-end, deferred and asset-based sales
charges imposed with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of shares of that
class, plus interest at the prime rate plus 1% per annum.
The Glass-Steagall Act and other applicable laws may limit the ability of a bank
or other depository institution to become an underwriter or distributor of
securities. However, in the opinion of the Funds' management, based on the
advice of counsel, these laws do not prohibit such depository institutions from
providing services for investment companies such as the administrative,
accounting and other services referred to in the Agreements. In the event that a
change in these laws prevented a bank from providing such services, it is
expected that other service arrangements would be made and that shareholders
would not be adversely affected. The State of Texas requires that shares of the
National and Insured National Portfolio may be sold in that state only by
dealers or other financial institutions that are registered there as broker-
dealers.
- --------------------------------------------------------------------------------
Dividends, Distributions
- --------------------------------------------------------------------------------
And Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Portfolio will be declared on each Fund business day
from the Portfolio's net investment income. Dividends on shares for Saturdays,
Sundays and holidays will be declared on the previous business day. The Funds
pay dividends on shares of each Portfolio after the close of business on the
twentieth day of each month or, if such day is not a business day, the first
business day thereafter. At your election (which you may change at least 30 days
prior to the record date for a particular dividend or distribution), dividends
and distributions are paid in cash or reinvested without charge in additional
shares of the same class having an aggregate net asset value as of the payment
date of the dividend or distribution equal to the cash amount thereof.
If you receive an income dividend or capital gains distribution in cash, you
may, within 120 days following the date of its payment, reinvest the dividend or
distribution in additional shares of that Portfolio without charge by returning
to Alliance, with appropriate instructions, the check representing such dividend
or distribution. Thereafter, unless you otherwise specify, you will be deemed to
have elected to reinvest all subsequent dividends and distributions in shares of
that Portfolio.
There is no fixed dividend rate and there can be no assurance that a Portfolio
will pay any dividends. The amount of any dividend or distribution paid on
shares of a Portfolio must necessarily depend upon the realization of income and
capital gains from the Portfolio's investments.
TAXES
Generally. Each Portfolio intends to qualify for each taxable year to be taxed
as a regulated investment company under the Internal Revenue Code (the "Code")
and, as such, will not be liable for federal income and excise taxes on the
investment company taxable income and net capital gains distributed to its
shareholders.
Distributions to shareholders out of tax-exempt interest income earned by a
Portfolio are not subject to Federal income tax. However, under current tax law,
some individuals and corporations may be subject for Federal income tax purposes
to the AMT on distributions to shareholders out of income from the AMT-Subject
Bonds in which all Portfolios (other than the Insured National and Insured
California Portfolios) principally invest. Further, under current tax law,
certain corporate taxpayers may be subject to the AMT based on their "adjusted
current earnings." Distributions from a Portfolio that are excluded from gross
income and from AMT taxable income will be included in such corporation's
"adjusted current earnings" for purposes of computation of the AMT.
Distributions out of taxable interest, other investment income, and net realized
short-term capital gains are taxable to shareholders as ordinary income, and
distributions to shareholders of net realized long-term capital gains are
taxable to shareholders as long-term capital gains irrespective of the length of
time a shareholder has held his or her Portfolio shares. Since a Portfolio's
investment income is derived from interest rather than dividends, no portion of
such distributions is eligible for the dividends-received deduction available to
corporations.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
a Portfolio is not deductible for Federal income tax purposes. Further, persons
who are "substantial users" (or related persons) of facilities financed by AMT-
24
<PAGE>
Subject Bonds should consult their tax advisers before purchasing shares of a
Portfolio.
If a shareholder holds shares for six months or less and during that time
receives a distribution taxable to such shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term capital loss to the extent of such distribution. If a shareholder
holds shares for six months or less and during that time receives a distribution
of tax-exempt interest income, any loss realized on the sale of such shares
would be disallowed to the extent of such distribution.
Substantially all of the dividends paid by a Portfolio are anticipated to be
exempt from regular federal income taxes. Shareholders may be subject to state
and local taxes on distributions from a Portfolio, including distributions which
are exempt from federal income taxes. The Funds will report annually to
shareholders the percentage and source of interest earned by a Portfolio which
is exempt from federal income tax and, except in the case of the National and
Insured National Portfolios, relevant state and local personal income taxes,
and, in the case of the Florida Portfolio, the portion of the net asset value of
such Portfolio which is exempt from Florida intangible tax.
Each investor should consult his or her own tax adviser to determine the tax
status, with regard to his or her tax situation, of distributions from the
Portfolios.
Arizona Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from the Arizona income tax imposed on
individuals, corporations, estates and trusts. Such dividends will be exempt
from Arizona income tax to the extent they are derived from Arizona municipal
securities and U.S. Government Securities. Arizona law does not permit a
deduction for interest paid or accrued on indebtedness incurred or continued to
purchase or carry obligations the interest of which is exempt from Arizona state
income taxes.
California and Insured California Portfolios. Distributions of interest income
by the California Portfolio and by the Insured California Portfolio, to the
extent derived from California tax-exempt obligations, will be exempt from
California personal income tax.
Florida Portfolio. Dividends paid by the Portfolio to individual Florida
shareholders will not be subject to Florida income tax, which is imposed only on
corporations. However, Florida currently imposes an intangible personal property
tax at the rate of $2.00 per $1,000 taxable value of certain securities, such as
shares of the Portfolio, and other intangible assets owned by Florida residents.
U.S. Government Securities and Florida municipal securities are exempt from this
intangible tax. It is anticipated that the Portfolio's shares will qualify for
exemption from the Florida intangible tax. In order to so qualify, the Portfolio
must, among other things, have its entire portfolio invested in U.S. Government
Securities and Florida municipal securities on December 31 of any year. Exempt-
interest dividends paid by the Portfolio to corporate shareholders will be
subject to Florida corporate income tax.
Massachusetts Portfolio. It is anticipated that substantially all of the
dividends paid by the Portfolio will be exempt from the Massachusetts personal
income tax. Such dividends will be exempt from Massachusetts personal income tax
to the extent attributable to interest from Massachusetts municipal securities
exempt from the Massachusetts personal income tax or U.S. Government Securities
and are so designated. Dividends designated as attributable to capital gains
will be subject to the Massachusetts personal income tax at capital gains tax
rates except to the extent designated as attributable to gains on certain
Massachusetts municipal securities. Dividends paid by the Portfolio to a
corporate shareholder will be subject to Massachusetts corporate excise tax.
Michigan Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Michigan income, intangibles and
single business taxes. Such dividends will be exempt from Michigan personal
income tax, the Michigan intangible personal property tax and the Michigan
single business tax to the extent that such distributions are derived from
Michigan municipal securities and U.S. Government Securities, and provided that
at least 50% of the total assets of the Portfolio consist of Michigan municipal
securities at the close of each quarter of the Fund's taxable year. To the
extent the distributions are not subject to Michigan income tax, they are not
subject to the uniform city income tax imposed by certain Michigan cities. For
Michigan income, intangibles and single business tax purposes, distributions
representing income derived by the Portfolio from sources other than Michigan
municipal securities and U.S. Government Securities will be included in Michigan
taxable income and will be included in the taxable bases of the Michigan single
business and intangibles taxes, except that distributions from capital gains
which are reinvested in Portfolio shares are exempt from intangibles taxes.
Minnesota Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from Minnesota personal
income tax. However, at least 95% of the exempt-interest dividends paid by the
Portfolio during a Fund fiscal year must be derived from Minnesota municipal
securities in order for any portion of the exempt-interest dividends paid by the
Portfolio to be exempt from the Minnesota personal income tax. Under current
Minnesota tax law, some individuals may be subject to the Minnesota AMT on
distributions to shareholders out of the income from AMT-Subject Bonds in which
the Portfolio invests. Exempt-interest dividends paid by the Portfolio to
shareholders that are corporations are subject to Minnesota franchise tax.
New Jersey Portfolio. It is anticipated that substantially all of the dividends
paid by the Portfolio to individuals will be exempt from New Jersey personal
income tax. In order to pass through tax-exempt interest for New Jersey personal
income tax purposes, the Portfolio must, among other things, invest only in
interest bearing obligations, obligations issued at a discount, and cash and
cash items including receivables and financial options, futures, forward
contracts and other similar financial instruments related to such obligations or
to bond indices. In addition, it must have not less than 80% of the aggregate
principal amount of its investments, excluding certain financial options and
similar
25
<PAGE>
financial instruments described above and cash and cash items, invested in New
Jersey municipal securities or U.S. Government Securities at the close of each
quarter of the tax year. Distributions attributable to gains from New Jersey
municipal securities also will be exempt from New Jersey personal income tax,
provided the Portfolio satisfies the above requirements. Exempt-interest
dividends paid by the Portfolio to a corporate shareholder will be subject to
New Jersey corporation business (franchise) tax and the New Jersey corporation
income tax.
New York Portfolio. Distributions of interest income by the Portfolio, to the
extent derived from New York State municipal securities, or from obligations
issued by the government of Puerto Rico or by its authority, will be exempt from
New York State and New York City personal income taxes.
Ohio Portfolio. Distributions of interest income and gain by the Portfolio, to
the extent such distributions are derived from Ohio municipal securities, will
be exempt from the Ohio personal income tax, Ohio school district income taxes
and Ohio municipal income taxes, and will not be includable in the net income
base of the Ohio corporate franchise tax; provided that at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio municipal
securities or similar obligations of other states or their subdivisions. Shares
of the Portfolio will be included in a corporation's tax base for purposes of
computing the Ohio corporate franchise tax on a net worth basis.
Pennsylvania Portfolio. Dividends paid by the Portfolio will not be subject to
the Pennsylvania personal income tax or the Philadelphia School District
investment net income tax to the extent that the dividends are attributable to
interest received by the Portfolio from its investments in Pennsylvania
municipal securities or U.S. Government Securities. Exempt-interest dividends
paid by the Portfolio and dividends attributable to interest on U.S. Government
securities also are not subject to the Pennsylvania Corporate Net Income Tax.
Portfolio shares are not considered exempt assets for the purposes of
determining a corporation's capital stock value subject to the Pennsylvania
Capital Stock/Franchise Tax. Shares of the Portfolio also are exempt from
Pennsylvania county personal property taxes to the extent that the Portfolio
consists of Pennsylvania municipal securities or U.S. Government Securities.
Virginia Portfolio. Shareholders may be subject to state and local taxes on
distributions from the Portfolio, including distributions which are exempt from
Federal income taxes. It is anticipated that substantially all of the dividends
paid by the Portfolio will be exempt from Virginia income taxes. So long as the
Portfolio qualifies as a regulated investment company under the Code and at
least 50% of the value of the total assets of the Portfolio at the end of each
quarter of its taxable year consists of obligations whose interest is exempt
from Federal income taxes, dividends paid by the Portfolio will be exempt from
Virginia individual, estate, trust, and corporate income taxes to the extent
such distributions are either (i) exempt from regular Federal income tax and
attributable to interest on Virginia municipal securities or obligations issued
by Puerto Rico, the United States Virgin Islands, or Guam or (ii) attributable
to interest on obligations of the United States or any authority, commission or
instrumentality of the United States. As a general rule, distributions
attributable to gains of the Portfolio and gains recognized on the sale or other
disposition of shares of the Portfolio (including the redemption or exchange of
shares) will be subject to Virginia income taxes. Interest on indebtedness
incurred (directly or indirectly) by shareholders to purchase or carry shares of
the Portfolio generally will not be deductible for Virginia income tax purposes.
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, a
Fund may consider sales of its shares of a Portfolio as a factor in the
selection of dealers to enter into portfolio transactions with the Funds.
ORGANIZATION
Alliance Municipal Income Fund, Inc. is a Maryland corporation organized on
July 30, 1986. Alliance Municipal Income Fund II is a Massachusetts business
trust organized on April 2, 1993. It is anticipated that annual shareholder
meetings will not be held; shareholder meetings will be held only when required
by Federal or, in the case of Alliance Municipal Income Fund, Inc., state law.
Shareholders have available certain procedures for the removal of Directors or
Trustees.
A shareholder in a Portfolio will be entitled to his pro rata share of all
dividends and distributions arising from that Portfolio's assets and, upon
redeeming shares, will receive the then current net asset value of that
Portfolio represented by the redeemed shares less any applicable CDSC. The Funds
are empowered to establish, without shareholder approval, additional portfolios
which may have different investment objectives and additional classes of shares.
If an additional portfolio or class were established in a Fund, each share of
the portfolio or class would normally be entitled to one vote for all purposes.
Generally, shares of each Fund vote together as a single class on matters, such
as the election of Directors or Trustees, that affect each Portfolio in
substantially the same manner. Class A, Class B and Class C shares of a
Portfolio have identical voting, dividend, liquidation and other rights, except
that each class bears its own distribution and transfer agency expenses. Each
class of shares votes separately with respect to a Fund's Rule 12b-1 plan and
other matters for which separate class voting is appropriate under applicable
law. Shares are freely transferable, are entitled to dividends as determined by
the Board of Directors or Trustees and, in liquidation of a Portfolio, are
entitled to receive the net assets of that Portfolio. Since this Prospectus sets
forth information about both Funds, it is theoretically possible that one Fund
might be liable for any materially inaccurate or incomplete disclosure in this
Prospectus
26
<PAGE>
concerning the other Fund. Based on the advice of counsel, however, the Funds
believe that the potential liability of each Fund with respect to the disclosure
in this Prospectus extends only to the disclosure relating to that Fund. Certain
additional matters relating to the organization of a Fund are discussed in its
Statement of Additional Information.
REGISTRAR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
AFS, an indirect wholly-owned subsidiary of Alliance, located at 500 Plaza
Drive, Secaucus, New Jersey 07094, acts as the Funds' registrar, transfer agent
and dividend-disbursing agent for a fee based upon the number of shareholder
accounts maintained for the Funds. The transfer agency fee with respect to the
Class B shares will be higher than the transfer agency fee with respect to the
Class A shares or Class C shares.
PRINCIPAL UNDERWRITER
AFD, an indirect wholly-owned subsidiary of Alliance, located at 1345 Avenue of
the Americas, New York, New York 10105, is the Principal Underwriter of shares
of the Funds.
PERFORMANCE INFORMATION
From time to time, the Portfolios advertise their "yield" and "total return",
which are computed separately for Class A, Class B and Class C shares. A
Portfolio's yield for any 30-day (or one-month) period is computed by dividing
the net investment income per share earned during such period by the maximum
public offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a formula
prescribed by the Commission which provides for compounding on a semi-annual
basis. The Portfolios may also state a "taxable equivalent yield" that is
calculated by assuming that net investment income per share is increased by an
amount sufficient to offset the benefit of tax exemptions at the stated income
tax rate. The Portfolios may also state in sales literature an "actual
distribution rate" for each class which is computed in the same manner as yield
except that actual income dividends declared per share during the period in
question are substituted for net investment income per share.
The actual distribution rate is computed separately for Class A, Class B and
Class C shares. Advertisements of a Portfolio's total return disclose the
Portfolio's average annual compounded total return for the periods prescribed by
the Commission. A Portfolio's total return for each such period is computed by
finding, through the use of a formula prescribed by the Commission, the average
annual compounded rate of return over the period that would equate an assumed
initial amount invested to the value of the investment at the end of the period.
For purposes of computing total return, income dividends and capital gains
distributions paid on shares of a Portfolio are assumed to have been reinvested
when paid and the maximum sales charges applicable to purchases and redemptions
of the Portfolio's shares are assumed to have been paid. Performance data for
each class of shares will be included in any advertisement or sales literature
using performance data. These advertisements may quote performance rankings or
ratings of the Portfolios by financial publications or independent organizations
such as Lipper Analytical Services, Inc. and Morningstar, Inc. or compare a
Portfolio's performance to various indices.
ADDITIONAL INFORMATION
This Prospectus and the Statements of Additional Information, which have been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by each Fund with the Commission under the
Securities Act. Copies of the Registration Statements may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
offices of the Commission in Washington, D.C.
This prospectus does not constitute an offering in any state in which such
offering may not lawfully be made.
This prospectus is intended to constitute an offer by each Fund only of the
securities of which it is the issuer and is not intended to constitute an offer
by a Fund of the securities of the other Fund whose securities are also offered
by this prospectus. Neither Fund intends to make any representation as to the
accuracy or completeness of the disclosure in this prospectus relating to the
other Fund. See "General Information--Organization."
27
<PAGE>
ALLIANCE SUBSCRIPTION APPLICATION
- --------------------------------------------------------------------------------
ALLIANCE MUNICIPAL INCOME PORTFOLIOS
NATIONAL PORTFOLIO FLORIDA PORTFOLIO NEW JERSEY PORTFOLIO
INSURED NATIONAL PORTFOLIO MASSACHUSETTS PORTFOLIO NEW YORK PORTFOLIO
ARIZONA PORTFOLIO MICHIGAN PORTFOLIO OHIO PORTFOLIO
CALIFORNIA PORTFOLIO MINNESOTA PORTFOLIO PENNSYLVANIA PORTFOLIO
INSURED CALIFORNIA PORTFOLIO VIRGINIA PORTFOLIO
- --------------------------------------------------------------------------------
INFORMATION AND INSTRUCTIONS
- --------------------------------------------------------------------------------
To Open Your New Alliance Account...
Please complete the application and mail it to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, New Jersey 07096-1520
For certified or overnight deliveries, send to:
Alliance Fund Services, Inc.
500 Plaza Drive
Secaucus, New Jersey 07094
- ---------
Section 1 Your Account Registration (Required)
- ---------
Complete one of the available choices. To ensure proper tax reporting to the
IRS:
. Individuals, Joint Tenants and Gift/Transfer to a Minor:
. Indicate your name(s) exactly as it appears on your social
security card.
. Trust/Other:
. Indicate the name of the entity exactly as it appeared on the
notice you received from the IRS when your Employer
Identification number was assigned.
- ---------
Section 2 Your Address (Required)
- ---------
Complete in full.
- ---------
Section 3 Your Initial Investment (Required)
- ---------
For each fund in which you are investing: 1) Write the dollar amount of your
initial purchase in the column corresponding to the class of shares you have
chosen (If you are eligible for a reduced sales charge, you must also complete
Section 4F) 2) Circle a distribution option for your dividends 3) Circle a
distribution option for your capital gains. All distributions (dividends and
capital gains) will be reinvested into your fund account unless you direct
otherwise. If you want distributions sent directly to your bank account, then
you must complete Section 4D and attach a voided check for that account. If you
want your distributions sent to a third party you must complete Section 4E.
- ---------
Section 4 Your Shareholder Options (Complete only those options you want)
- ---------
A. Automatic Investment Plans (AIP) - You can make periodic investments into any
of your Alliance Funds in one of three ways. First, by a periodic withdrawal
($25 minimum) directly from your bank account and invested into an Alliance
Fund. Second, you can direct your distributions (dividends and capital gains)
from one Alliance Fund into another Fund. Or third, you can automatically
exchange monthly ($25 minimum) shares of one Alliance Fund for shares of
another Fund. To elect one of these options, complete the appropriate portion
of Section 4A.
B. Systematic Withdrawal Plans (SWP) - Complete this option if you wish to
periodically redeem dollars from one of your fund accounts. Payments can be
made via Electronic Funds Transfer (EFT) to your bank account (currently
Classes A and C only) or by check.
C. Telephone Transactions via EFT - Complete this option if you would like to be
able to transact via telephone between your fund account and your bank
account.
D. Bank Information - If you have elected any options that involve transactions
between your bank account and your fund account or have elected cash
distribution options and would like the payments sent to your bank account,
please tape a voided check of the account you wish to use to this section of
the application.
E. Third Party Payment Details - If you have chosen cash distributions and/or a
Systematic Withdrawal Plan and would like the payments sent to a person
and/or address other than those provided in section 1 or 2, complete this
option.
F. Reduced Charges (Class A only) - Complete if you would like to link fund
accounts that have combined balances that might exceed $100,000 so that
future purchases will receive discounts. Complete if you intend to purchase
over $100,000 within 13 months.
- ---------
Section 5 Shareholder Authorization (Required)
- ---------
All owners must sign. If it is a custodial, corporate, or trust account, the
custodian, and authorized officer, or the trustee respectively must sign.
If We Can Assist You In Any Way, Please Do Not Hesitate To Call Us At:
(800) 221-5672.
<PAGE>
SUBSCRIPTION APPLICATION
- --------------------------------------------------------------------------------
THE ALLIANCE MUNICIPAL INCOME PORTFOLIOS
(see instructions at the front of the application)
- --------------------------------------------------------------------------------
1. YOUR ACCOUNT REGISTRATION (Please Print)
- --------------------------------------------------------------------------------
[_] INDIVIDUAL OR JOINT ACCOUNT
----------------------------------------------------------------------------
Owner's Name (First Name) (MI) (Last Name)
- -
---------------------------------------------
Social Security Number (Required to open account)
----------------------------------------------------------------------------
Joint Owner's Name* (First Name) (MI) (Last Name)
*Joint Tenants with right of survivorship unless Alliance Fund Services is
informed otherwise.
[_] GIFT/TRANSFER TO A MINOR
----------------------------------------------------------------------------
Custodian - One Name Only (First Name) (MI) (Last Name)
----------------------------------------------------------------------------
Minor (First Name) (MI) (Last Name)
- -
---------------------------------------------------------
Minor's Social Security Number (Required to open account)
Under the State of __________ (Minor's Residence) Uniform Gifts/Transfer
to Minor's Act
[_] TRUST ACCOUNT
----------------------------------------------------------------------------
Name of Trustee
----------------------------------------------------------------------------
Name of Trust
----------------------------------------------------------------------------
Name of Trust (cont'd)
------------------------------------ ------------------------------------
Trust Dated Tax ID or Social Security Number
(Required to open account)
[_] OTHER
----------------------------------------------------------------------------
Name of Corporation, Partnership or other Entity
----------------------------
Tax ID Number
- --------------------------------------------------------------------------------
2. YOUR ADDRESS
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------
Street
----------------------------------------------------------------------------
City State Zip Code
----------------------------------------------------------------------------
If Non-U.S., Specify Country
- - - -
--------------------------- ---------------------------
Daytime Phone Evening Phone
I am a: [ ] U.S. Citizen [ ] Non-Resident Alien
[ ] Resident Alien [ ] Other
+ +
For Alliance Use Only
+ +
<PAGE>
- --------------------------------------------------------------------------------
3. YOUR INITIAL INVESTMENT
- --------------------------------------------------------------------------------
The minimum investment is $250 per fund. The maximum investment in Class B is
$250,000; Class C is $5,000,000.
I hereby subscribe for shares of the following Alliance Municipal Income Fund
Portfolio(s) and elect distribution options as indicated.
Dividend and Capital Gain R Reinvest distributions into fund account.
Distribution Options: - ----------------------
- ---------------------- C Send my distributions in cash to the address I
BROKER/DEALER USE ONLY - -----------------------------
WIRE CONFIRM # have provided in Section 2. (Complete Section 4D
- ---------------------- for direct deposit to your bank account. Complete
Section 4E for payment to a third party)
- ---------------------- D Direct my distributions to another Alliance fund.
- ------------------------------------------------
Complete the appropriate portion of Section 4A to
direct your distributions (dividends and capital
gains) to another Alliance Fund (the $250 minimum
investment requirement applies to Funds into
which distributions are directed).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS OF SHARES
Make all checks payable to: ----------------------------------------------------------------- DISTRIBUTIONS OPTIONS
Alliance Fund Services CONTINGENT "CIRCLE"
INITIAL SALES DEFERRED ASSET-BASED ----------------------------
- ------------------------------------- CHARGE SALES CHARGE SALES CHARGE CAPITAL
ALLIANCE FUND NAME A B C DIVIDENDS GAINS
- ------------------------------------- -------------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
National Portfolio $ (84) $ (284) $ (384) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Insured National Portfolio (86) (286) (386) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Arizona Portfolio (114) (214) (314) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
California Portfolio (85) (285) (385) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Insured California Portfolio (91) (291) (391) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Florida Portfolio (65) (265) (365) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Massachusetts Portfolio (115) (215) (315) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan Portfolio (117) (217) (317) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Minnesota Portfolio (61) (261) (361) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
New Jersey Portfolio (69) (269) (369) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
New York Portfolio (83) (283) (383) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Ohio Portfolio (80) (280) (380) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Pennsylvania Portfolio (67) (267) (367) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Portfolio (121) (221) (321) R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
R C D R C D
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------
SIGNATURE CARD NAME OF FUND:
- -----------------------------------
CLASS A OR CLASS C ACCOUNT #
(if known)
- --------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
- -------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE(S) - for joint accounts, all owners, or their legal
representatives, must sign this card.
1._________________________________________________________________________
2._________________________________________________________________________
3._________________________________________________________________________
- --------------------------------------------------------------------------------
Check One Box [_] All the above signatures are required on checks written
against this account.
[_] Any one signature is acceptable on checks written against
this account.
[_] A combination of signatures is required (specify number.)
Subject to conditions printed on reverse side.
STATE STREET BANK AND TRUST COMPANY
For Class A and C only:
To apply for checkwriting privileges, please complete the signature card to the
left. The minimum amount any check can be written for is $500. The
checkwriting privilege is not transferable to any other fund account.
<PAGE>
-----------------------------
MY SOCIAL SECURITY (TAX IDENTIFICATION) NUMBER IS:
-----------------------------
- --------------------------------------------------------------------------------
4. YOUR SHAREHOLDER OPTIONS
- --------------------------------------------------------------------------------
- ------------------------------------
A. AUTOMATIC INVESTMENT PLANS (AIP)
- ------------------------------------
[_] WITHDRAW FROM MY BANK ACCOUNT
I authorize Alliance to draw on my bank account for investment in my fund
account(s) as indicated below (Complete Section 4D also for the bank account you
wish to use).
<TABLE>
<CAPTION>
Monthly Dollar Amount Day of Withdrawal*
Fund Name ($25 minimum) (1st thru 31st) Circle "all" or applicable months
<S> <C> <C> <C>
All J F M A M J J A S O N D
- ----------------------- ----------------------- ----------------------- ---------------------------------
All J F M A M J J A S O N D
- ----------------------- ----------------------- ----------------------- ---------------------------------
All J F M A M J J A S O N D
- ----------------------- ----------------------- ----------------------- ---------------------------------
All J F M A M J J A S O N D
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*If my bank is not a member of the National Automated Clearing House Association
(NACHA), I understand that the withdrawal(s) will occur on or about the 20th of
the month.
[_] DIRECT MY DISTRIBUTIONS
As indicated in Section 3, I would like my dividends and/or capital gains
directed to another Alliance fund.
<TABLE>
<CAPTION>
"From" Fund Account #
"From" Fund Name (if existing) "To" Fund Name "To" Fund Account # (if existing)
<S> <C> <C> <C>
[_] New
[_] Existing
- ----------------------- ----------------------- ----------------------- ---------------------------------
[_] New
[_] Existing
- ----------------------- ----------------------- ----------------------- ---------------------------------
[_] New
[_] Existing
- ----------------------- ----------------------- ----------------------- ---------------------------------
[_] New
[_] Existing
- ----------------------- ----------------------- ----------------------- ---------------------------------
</TABLE>
[_] EXCHANGE SHARES MONTHLY
I authorize Alliance to transact monthly exchanges between my fund accounts as
listed below.
<TABLE>
<CAPTION>
"From" Fund Account # Dollar Amount Day of Exchange** "To" Fund Name "To" Fund Account #
"From" Fund Name (if existing) ($25 minimum) (1st thru 31st) (if existing)
<S> <C> <C> <C>
[_] New
[_] Existing
- ------------------- ----------------------- ------------- ---------------- -------------- --------------------------
[_] New
[_] Existing
- ------------------- ----------------------- ------------- ---------------- -------------- --------------------------
[_] New
[_] Existing
- ------------------- ----------------------- ------------- ---------------- -------------- --------------------------
[_] New
[_] Existing
- ------------------- ----------------------- ------------- ---------------- -------------- --------------------------
</TABLE>
**Shares exchanged will be redeemed at the net asset value on the "Day of
Exchange" (If the "Day of Exchange" is not a fund business day, the exchange
transaction will be processed on the next fund business day). The exchange
privilege is not available if stock certificates have been issued.
- ------------------------------------
B. SYSTEMATIC WITHDRAWAL PLANS (SWP)
- ------------------------------------
In order to establish a SWP, you must reinvest all dividends and capital gains
and own or purchase shares of the Fund having a current net asset value of at
least:
. $10,000 for monthly payments,
. $5,000 for bi-monthly payments,
. $4,000 for quarterly or less frequent payments
SWPs on Class B shares of up to approximately 12% (annualized) of the current
market value of an account will be processed free of a contingent deferred sales
charge (CDSC). Under this plan, you may withdraw a maximum of 1% monthly, 2% bi-
monthly or 3% quarterly, of the value of your class B shares acquired after July
1, 1995, without the imposition of a CDSC. Withdrawals in excess of these
amounts will continue to be charged the applicable CDSC. Your bank must be a
member of the National Automated Clearing House Association (NACHA) in order for
you to receive SWP proceeds directly into your checking account.
[_] I authorize Alliance to transact periodic redemptions from my fund account
and send the proceeds to me as indicated below.
<TABLE>
<CAPTION>
Fund Name and Class of Shares Dollar Amount ($50 minimum) Circle "all" or applicable months
<S> <C> <C>
All J F M A M J J A S O N D
- --------------------------------------------------------------- ------------------------------ ---------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------------------- ------------------------------ ---------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------------------- ------------------------------ ---------------------------------
All J F M A M J J A S O N D
- --------------------------------------------------------------- ------------------------------ ---------------------------------
</TABLE>
PLEASE SEND MY PROCEEDS TO:
[_] MY CHECKING ACCOUNT (via EFT) - Currently Class A and C only
I would like to have these payments occur on or about the [____] (1st-
31st) of the months circled above. (Complete Section 4D for the bank
account you wish to use)
[_] MY ADDRESS OF RECORD (via CHECK)
[_] THE PAYEE AND ADDRESS SPECIFIED IN SECTION 4E (via CHECK)
<PAGE>
- ------------------------------------
C. PURCHASES AND REDEMPTIONS VIA EFT
- ------------------------------------
You can call our toll-free number 1-800-221-5672 and instruct Alliance Fund
Services, Inc. in a recorded conversation to purchase, redeem or exchange
shares for your account. Purchase and redemption requests will be processed
via electronic funds transfer (EFT) to and from your bank account.
Instructions: . Review the information in the Prospectus about telephone
transaction services.
. If you select the telephone purchase or redemption
privilege, you must write "VOID" across the face of a check
from the bank account you wish to use and attach it to
Section 4D of this application.
Purchases and Redemptions via EFT
[_] I hereby authorize Alliance Fund Services, Inc. to effect the purchase
and/or redemption of Fund shares for my account according to my telephone
instructions or telephone instructions from my Broker/Agent, and to
withdraw money or credit money for such shares via EFT from the bank
account I have selected.
- --------------------
D. Bank Information
- --------------------
This bank account information will be used for:
[_] Distributions (Section 3) [_] Automatic Investments (Section 4A)
[_] Systematic Withdrawals (Section 4B)[_] Telephone Transactions (Section 4C)
Please attach a voided check:
---------------------------------------------------------------------------
Tape Voided Check Here.
We Cannot Establish These Services Without it.
---------------------------------------------------------------------------
Your bank must be a member of the National Automated Clearing House
Association (NACHA) in order to have EFT transactions processed to your fund
account.
For EFT transactions, the fund requires signatures of bank account owners
exactly as they appear on bank records.
- -------------------------------
E. THIRD PARTY PAYMENT DETAILS
- -------------------------------
This third party payee information will be used for:
[_] Distribution (Section 3) [_] Systematic Withdrawals (Section 4B)
--------------------------------------------------------------------------
Name
--------------------------------------------------------------------------
Address-Line 1
--------------------------------------------------------------------------
Address-Line 2
--------------------------------------------------------------------------
Address-Line 3
- ----------------------------------
F. REDUCED CHARGES (CLASS A ONLY)
- ----------------------------------
If you, your spouse or minor children own shares in other Alliance funds, you
may be eligible for a reduced sales charge. Please complete the Right of
Accumulation section or the Statement of Intent section.
A. Right of Accumulation
[_] Please link the tax identification numbers or account numbers listed
below for Right of Accumulation privileges, so that this and future
purchases will receive any discount for which they are eligible.
B. Statement of Intent
[_] I want to reduce my sales charge by agreeing to invest the following
amount over a 13-month period:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
If the full amount indicated is not purchased within 13 months, I
understand that an additional sales charge must be paid from my account.
------------------------- ------------------------- -------------------------
Tax ID or Account # Tax ID or Account # Tax ID or Account #
<PAGE>
...................................Perf Line....................................
- --------------------------------------------------------------------------------
5. Shareholder Authorization This section MUST be completed
----
- --------------------------------------------------------------------------------
Telephone Exchanges and Redemptions by Check
Unless I have checked one or both boxes below, these privileges will
automatically apply, and by signing this application, I hereby authorize
Alliance Fund Services, Inc. to act on my telephone instructions, or on
telephone instructions from any person representing himself to be an authorized
employee of an investment dealer or agent requesting a redemption or exchange on
my behalf. (NOTE: Telephone exchanges may only be processed between accounts
that have identical registrations.) Telephone redemption checks will only be
mailed to the name and address of record; and the address must have no change
within the last 30 days. The maximum telephone redemption amount is $50,000.
This service can be enacted once every 30 days.
[ ] I do not elect the telephone exchange service.
---
[ ] I do not elect the telephone redemption by check service.
---
I certify under penalty of perjury that the number shown in Section 1 of this
form is my correct tax identification number or social security number and that
I have not been notified that this account is subject to backup withholding.
By selecting any of the above telephone privileges, I agree that neither the
Fund nor Alliance, Alliance Fund Distributors, Inc., Alliance Fund Services,
Inc. or other Fund Agent will be liable for any loss, injury, damage or expense
as a result of acting upon telephone instructions purporting to be on my behalf,
that the Fund reasonably believes to be genuine, and that neither the Fund nor
any such party will be responsible for the authenticity of such telephone
instructions. I understand that any or all of these privileges may be
discontinued by me or the Fund at any time. I understand and agree that the Fund
reserves the right to refuse any telephone instructions and that my investment
dealer or agent reserves the right to refuse to issue any telephone instructions
I may request.
For non-residents only: Under penalties of perjury, I certify that to the best
of my knowledge and belief, I qualify as a foreign person as indicated in
Section 2.
I am of legal age and capacity and have received and read the Prospectus and
agree to its terms.
- ----------------------------------------- ---------------
Signature Date
- ----------------------------------------- --------------- -----------------
Signature Date Acceptance Date:
- --------------------------------------------------------------------------------
Dealer/Agent Authorization For selected Dealers or Agents ONLY.
- --------------------------------------------------------------------------------
We hereby authorize Alliance Fund Services, Inc. to act as our agent in
connection with transactions under this authorization form; and we guarantee the
signature(s) set forth in Section 5, as well as the legal capacity of the
shareholder.
- ------------------------------------- -----------------------------------------
Dealer/Agent Firm Authorized Signature
- ------------------------------------- ------------- ---------------------------
Representative First Name MI Last Name
- --------------------------------------------------------------------------------
Representative Number
- --------------------------------------------------------------------------------
Branch Office Address
- --------------------------------------------------------------------------------
City State Zip Code
( )
- --------------------------------------------------------------------------------
Branch Number Branch Phone
................................................................................
The payment of funds is authorized by the signature(s) appearing on the reverse
side.
If this card is signed by more than one person, all checks will require all
signatures appearing on the reverse side unless a lesser number is indicated. If
no indication is given, all checks will require all signatures. Each signatory
guarantees the genuineness of the other signatures.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor[s]") and, as agent, is authorized and directed to present checks
drawn on this checking account to Alliance _______________ ("the Fund") or its
transfer agent as requests to redeem shares of "the Fund" registered in the name
of the Depositor(s) in the amounts of such checks and to deposit the proceeds of
such redemptions in this checking account. The Bank shall be liable only for its
own negligence.
The Depositor(s) agrees to be subject to the rules and regulations of the Bank
pertaining to this checking account as amended from time to time. The Bank and
"the Fund" reserve the right to change, modify or terminate this checking
account and authorization at any time.
Checks may not be for less than $500 or such other minimum amount as may from
time to time be established by "the Fund" upon prior written notice to its
shareholders. Shares purchases by check (including certified or cashier's check)
will not be redeemed within 15 calendar days of such purchase by checkwriting or
any other method of redemption.
No checkwriting available on Alliance World Income and Alliance Corporate Bond.
ENCLOSE THIS CARD WITH THE APPLICATION FORM
60000GEN-SF
<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-60560 and 811-07618.
<PAGE>
ALLIANCE MUNICIPAL INCOME FUND II
_________________________________________________________________
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, 1996
_________________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the current
Prospectus for the Fund. Copies of such Prospectus may be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "Literature" telephone number shown above.
TABLE OF CONTENTS
PAGE
Investment Policies and Restrictions 2
Management of the Fund 66
Expenses of the Fund 73
Purchase of Shares 77
Redemption and Repurchase of Shares 97
Shareholder Services 101
Net Asset Value 106
Dividends, Distributions and Taxes 107
Portfolio Transactions 111
General Information 112
Report of Independent Auditors and
Financial Statements 124
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
<PAGE>
(R): This registered service mark used under license from the
Owner, Alliance Capital Management L.P.
<PAGE>
_________________________________________________________________
INVESTMENT POLICIES AND RESTRICTIONS
_________________________________________________________________
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information regarding the investment objectives, policies and
restrictions of each Portfolio set forth in the Fund's
Prospectus. Except as otherwise noted, each Portfolio's
investment policies are not fundamental and may be changed by the
Trustees of the Fund with respect to a Portfolio without approval
of the shareholders of such Portfolio; however, such shareholders
will be notified prior to a material change in such policies.
Alternative Minimum Tax
Under current Federal income tax law, (1) interest on
tax-exempt municipal securities issued after August 7, 1986 which
are "specified private activity bonds," and the proportionate
share of any exempt-interest dividend paid by a regulated
investment company which receives interest from such specified
private activity bonds, will be treated as an item of tax
preference for purposes of the alternative minimum tax ("AMT")
imposed on individuals and corporations, though for regular
Federal income tax purposes such interest will remain fully
tax-exempt, and (2) interest on all tax-exempt obligations will
be included in "adjusted current earnings" of corporations for
AMT purposes. Such private activity bonds ("AMT-Subject Bonds"),
which include industrial development bonds and bonds issued to
finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage
projects, have provided, and may continue to provide, somewhat
higher yields than other comparable municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with taxing power
will be obligated with respect to AMT-Subject Bonds. AMT-Subject
Bonds are in most cases revenue bonds and do not generally have
the pledge of the credit or the taxing power, if any, of the
issuer of such bonds. AMT-Subject Bonds are generally limited
obligations of the issuer supported by payments from private
business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the
issuer of AMT-Subject Bonds is to make payments to bond holders
only out of and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject Bonds were
issued. Payment of the principal and interest on such revenue
bonds depends solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
2
<PAGE>
security for such payment. It is not possible to provide
specific detail on each of these obligations in which Fund assets
may be invested.
Risks 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
obligers 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,
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.
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The following brief summaries are included for the
purpose of providing certain information regarding the economic
climate and financial condition of the states of Arizona,
Florida, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia, and are based primarily on information
from state publications with respect to Arizona, and from
official statements made available in July 1995 with respect to
Michigan and Minnesota, September 1995 with respect to Ohio and
Virginia, November 1995 with respect to Massachusetts and
Pennsylvania and December 1995 with respect to Florida and New
Jersey 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 Portfolios invest or the private business entities
whose obligations support the payments on AMT-Subject Bonds in
which the Portfolios will invest. Therefore, the general risk
factors as to the credit of the state or its political
subdivisions discussed herein may not be relevant to the
Portfolios. 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 obligers 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.
Arizona Portfolio
The Arizona Portfolio seeks the highest level of current
income exempt from both federal income tax and State of Arizona
("Arizona" or the "State") personal income tax that is available
without assuming what the Fund's Adviser considers to be undue
risk to income or principal by investing in medium-quality,
intermediate and long-term debt obligations issued by the State,
its political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt from federal income tax and State of Arizona personal
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income tax. As a matter of fundamental policy, at least 65% of
the Portfolio's total assets will be so invested (except when the
Portfolio is in a temporary defensive position), although it is
anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Arizona
securities. As a matter of fundamental policy, the Arizona
Portfolio will invest at least 80% of its net assets in municipal
securities the interest on which is exempt from federal income
tax. Under normal market conditions, at least 65% of the Arizona
Portfolio's total assets will be invested in income-producing
securities (including zero coupon securities). Shares of the
Arizona Portfolio are available only to Arizona residents.
Economic Climate
Arizona has been, and is projected to continue to be,
one of the fastest growing states in the United States. Over the
last several decades, Arizona has outpaced most other regions of
the country in virtually every major category of growth. For
example, Arizona's 35% population growth during the 1980s was the
third fastest rate in the nation, next to Alaska and Nevada. The
unemployment rate in Arizona for 1994 was 6.3% and for 1993 was
6.4% compared to a national rate of 6.1% in 1994 and 6.4% in
1993.
Geographically, Arizona is the nation's sixth largest
state in terms of area (113,417 square miles) and the twenty-
fourth largest in population (3,958,875 residents). The State is
divided into fifteen counties. Two of these counties, Maricopa
County and Pima County, are more urban in nature and account for
approximately 77% of total population and 85% of total wage and
salary employment in Arizona.
Until recently, the growth of Arizona's two major
metropolitan statistical areas has historically compared
favorably with that of the average for the United States, as well
as other major metropolitan areas, during periods of both
economic contraction and expansion. In recent years, however,
Arizona's economy has continued to grow at a slower rate than in
earlier periods. However, beginning in late 1993 Arizona's
economy began a significant expansion resulting in substantial
job creation outside the State's historically dominant employment
sectors.
Over the past decade, Arizona's two major metropolitan
areas have diversified their employment base in an attempt to
buffer against the cyclical nature of various industries and
markets. While employment in the mining and agricultural
industries has diminished over the last 25 years, job growth has
occurred in the aerospace and high technology, construction,
finance, insurance, tourism and real estate industries. The
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service industry is Arizona's single largest employment sector.
A significant percentage of these jobs are directly related to
tourism. Arizona's economy, however, has been adversely affected
by problems in the real estate industry, including an excessive
supply of unoccupied commercial and retail buildings and severe
problems with Arizona-based savings and loan associations, many
of which have been liquidated by the Resolution Trust
Corporation. The winding-up of the RTC has led to a
substantially improved real estate market in 1995, and commercial
and industrial vacancy rates have sharply declined into 1996.
Current and proposed reductions in Federal military expenditures
are expected to negatively effect the State's economy. Defense-
related business plays an important role in Arizona's economy,
particularly in the manufacturing sector, and reductions in the
defense budget could adversely affect these businesses. In 1994,
the Arizona Legislature expanded existing defense restructuring
legislation intended to transition defense-related industries
into civilian manufacturing. This legislation has been initially
successful in preserving Arizona employment in this sector.
Arizona has experienced a degree of political instability in
recent years, including the impeachment of its Governor in 1988
and a bribery scandal at the Capitol, which resulted in
convictions of seven sitting legislators. Arizona's sitting
Governor, J. Fife Symington III, filed for bankruptcy in 1995.
However, Arizona voters improved the State's image with the
passage of the Martin Luther King state holiday in 1992.
A reform-minded legislature has taken steps to improve
Arizona's business climate by reducing taxes and eliminating
unnecessary government regulation. Arizona experienced nearly
annual budget crises during the late 1980's. However, between
1992 and 1995 the Legislature restrained the growth of State
expenditures while substantially reducing taxes. Individual
income tax rates have been reduced more than 20% and businesses
received corporate income tax and property tax reductions of a
substantial magnitude. Nevertheless, tax collections were up
more than 10% for fiscal year 1995, reflecting strong economic
growth in the State as well as a perceived improvement in the
State's business climate.
Per capita income levels in Arizona were $19,153 as
compared to the United States average of $21,699 in 1994 and
Arizona's average annual growth rate of per capita income has
been less than the United States average for several years.
Arizona's per capita increase in personal income was second in
the nation in 1994. The diversification of Arizona's economy,
and its current strength, led to the increase in per capita
income, although Arizona still lags behind the United States
average. Substantial Indian Reservations and retiree populations
are a drag on growth and per capita personal income, although
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these demographic factors do not suggest an adverse impact on
State and local budgets.
Problems associated with the phenomenal growth Arizona
experienced in the 1984-1986 boom, e.g., air quality,
transportation, and public infrastructure, are currently being
addressed by the Arizona legislature and other public bodies.
Another issue of interest with respect to Arizona municipalities
is the existence of adequate water supplies. This issue is a
complex one, and any analysis varies from municipality to
municipality. In general, the Arizona legislature has taken
steps to address the issue of protecting the long-term supplies
of water for the State. In 1980, Arizona enacted the Groundwater
Management Act, which is a comprehensive statute regulating the
withdrawal and use of groundwater in those-areas of the State
where groundwater has been heavily relied upon. Those areas of
significant groundwater use include the Phoenix and Tucson
metropolitan areas. The Act requires that groundwater overdrafts
cease in the Phoenix and Tucson metropolitan areas by the year
2025. The Arizona Legislature also adopted air quality
legislation in the 1994 special session, complying with a
December 31, 1994 deadline imposed by the Environmental
Protection Agency.
Notwithstanding the strain which had accompanied the
recent recession, Arizona is likely to continue growing during
the 1990's. The current expansion rate of 2% is forecast to
continue for the remainder of the decade to be driven by
affordable housing, a warm climate and entrepreneurial flight
from more heavily regulated states such as California. It is
likely that affordable land and a pervasive pro- development
culture will continue to attract employers and job seekers.
Arizona's housing industry enjoyed its best year ever in 1995,
and has had a robust 20% expansion since 1993. It is unlikely
that this degree of growth in residential housing will continue
in 1996.
Financial Condition
The Finance Division of the Arizona Department of
Administration is responsible for preparing and updating
financial statements and reports. The State's financial
statements are prepared in accordance with generally accepted
governmental accounting principles.
While general obligation bonds are often issued by local
governments, the State of Arizona is constitutionally prohibited
from issuing general obligation debt. The State relies on pay-
as-you-go capital outlays, revenue bonds and certificates of
participation to finance capital projects. Each such project is
individually rated based on its specific creditworthiness.
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Certificates of Participation rely upon annual appropriations for
debt service payments. Failure of the obligated party to
appropriate funds would have a negative impact upon the price of
the bond and could lead to a default.
Arizona's State constitution limits the amount of debt
payable from general tax revenues that may be contracted by the
state to $350,000. This, as a practical matter, precludes the
use of general revenue bonds for state projects. Additionally,
certain other issuers have the statutory power to issue
obligations payable from other sources of revenue which affect
the whole or large portions of the state. The debts are not
considered debts of the State because they are secured solely by
separate revenue sources. For example, the Arizona Department of
Transportation may issue debt for highways that is paid from
revenues generated from, among other sources, state gasoline
taxes. The three Arizona universities may issue debt for
university building projects payable from tuition and other fees.
Salt River Project Agricultural & Improvement District, an
agricultural improvement district that operates the Salt River
Project (a Federal reclamation project and an electric system
which generates, purchases, and distributes electric power to
residential, commercial, industrial, and agricultural power users
in a 2,900 square-mile service area around Phoenix), may issue
debt payable from a number of sources.
Arizona's Constitution also restricts the debt of
certain of the state's political subdivisions. No county, city,
town, school district, or other municipal corporation of the
state may for any purpose become indebted in any manner in an
amount exceeding six percent of the taxable property in such
county, city, town, school district, or other municipal
corporation without the assent of a majority of the qualified
electors thereof voting at an election provided by law to be held
for that purpose; provided, however, that (a) under no
circumstances may any county or school district of the state
become indebted in an amount exceeding 15% (or 30% in the case of
a unified school district) of such taxable property and (b) any
incorporated city or town of the State with such assent may be
allowed to become indebted up to a 20% additional amount for
(i) supplying such city or town with water, artificial light, or
sewers, when the works for supplying such water, light, or sewers
are or shall be owned and controlled by the municipality,
(ii) the acquisition and development by the incorporated city or
town of land or interests therein for open space preserves,
parks, playgrounds and recreational facilities, and (iii) the
construction, reconstruction, improvement or acquisition of
streets, highways or bridges or interests in land for rights-of-
way for streets, highways or bridges. Irrigation, power,
electrical, agricultural improvement, drainage, flood control and
tax levying public improvement districts are, however, exempt
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from the restrictions on debt set forth in Arizona's constitution
and may issue obligations for limited purposes, payable from a
variety of revenue sources.
Arizona's local governmental entities are subject to
certain other limitations on their ability to assess taxes and
levies which could affect their ability to meet their financial
obligations. Subject to certain exceptions, the maximum amount
of property taxes levied by any Arizona county, city, town or
community college district for their operations and maintenance
expenditures cannot exceed the amount levied in a preceding year
by more than 2%. Certain taxes are specifically exempt from this
limit, including taxes levied for debt service payments.
Arizona is required by law to maintain a balanced
budget. To achieve this objective, the State has, in the past,
utilized a combination of spending reductions and tax increases.
For the 1990-91 budget, the Arizona Legislature increased taxes
by over $250 million, which led to a citizen's referendum
designed to stop the tax increase until the voters could consider
it at the general election. After an unsuccessful court
challenge, the tax increase went into effect. In 1992, Arizona
voters adopted Proposition 108, an initiative and amendment to
the state's constitution which requires a two-thirds vote by the
Legislature and signature by the Governor for any net increase in
state revenues, including the imposition of a new tax, an
increase in a tax rate or rates and a reduction or elimination of
a tax deduction. If the Governor vetoes the measure, then the
legislation will not become effective unless it is approved by an
affirmative vote of three-fourths of the members of each house of
the Legislature. This makes any future tax increase more
difficult to achieve. The issue of tax increases has become
problematic given the conservative nature of Arizona's
Legislature. From 1992 through 1995, the State adopted
substantial tax relief, including the 20% individual income tax
roll-back described above. In special session Senate Bill 1009,
the Legislature in 1995 committed to $200 million in net property
tax reductions, to be implemented by the Legislature during its
1996 session.
Arizona's budget outlook has improved significantly in
recent years. The State budget grew by only 1.8% to $4.5 billion
in 1996. State revenues have exceeded fiscal year 1996
projections. The proposed fiscal year 1997 budget calls for a
4.4% increase in overall State spending, including $17.2 million
for additional prison space and $95.3 million for student
enrollment growth in the public schools. The improving Arizona
economy resulted in reduced social welfare expenditures,
including the State medicaid program, and resulted in a $54
million reversion into the State's general fund for fiscal year
1995.
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Arizona law requires municipalities to maintain balanced
budgets, a requirement that has become more difficult in light of
the slower economy. For example, the proposed 1992-93 annual
budget for the City of Phoenix, for the first time in the city's
history, was less than the current year's budget. Moreover, the
state tax cuts in 1992 and 1993 will have the effect of worsening
the budget picture in future years because municipalities in
Arizona rely heavily on state-shared revenues. It is likely that
municipalities in Arizona will need to either increase taxes or
reduce spending to compensate for this lost state-shared revenue.
Municipalities also rely on a variety of revenue
sources. While municipalities cannot collect an income tax, they
do impose sales and property taxes. Municipalities also rely on
state shared revenues. School districts are funded by a
combination of local property taxes and state assistance.
Maricopa County had a $4.5 million general fund deficit for
fiscal year 1993 and no reserves. The Maricopa County Board of
Supervisors, however, passed a deficit reduction plan which
purports to cut the deficit to zero and create a $10 million
reserve for contingency liabilities, such as lawsuits. The
Maricopa County health care budget currently is running a $32
million deficit. However, the Maricopa County Board of
Supervisors has a three year deficit reduction plan purported to
eliminate that deficit through reductions in force, cutbacks and
other cost cutting measures.
Litigation
Arizona's school financing system has historically
relied heavily upon local property taxes. In 1991, a lawsuit was
filed by a group of school districts challenging the school
financing system. On July 21, 1994, the Arizona Supreme Court
found unconstitutional the State's method of funding public
education. It is unclear, at this time what effect school finance
will have on State finances or school district budgets. It is
expected that the Legislature will debate alternative financing
systems of public school financing in the 1996 session.
A lawsuit decided by the U.S. Supreme Court invalidated
Arizona's tax treatment of Federal Retirement Benefits for years
prior to 1989. In June 1993 the Court, in Harper v. Virginia,
directed states, including Arizona, to give meaningful relief
under their own laws to federal retirees who the Court said were
improperly taxed. As a result, the Arizona Department of Revenue
has begun to send refunds and credit vouchers to federal retirees
who paid income taxes on their pensions in the 1984-88 tax years.
The refunds and credit vouchers will cost the State approximately
$200 million over the next four years. As of October, 1995, the
"federal retiree" claims have fallen 20% below projections, and
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it appears the State's liability will expire in 1998 without
significant impact upon the State budget.
Florida Portfolio
The Florida Portfolio seeks the highest level of current
income exempt from both federal income tax and State of Florida
("Florida" or the "State") intangible tax that is available
without assuming what the Fund's Adviser considers to be undue
without assuming what the Fund's Adviser considers to be undue
risk to income to principal by investing in medium-quality,
intermediate and long-term debt obligations issued by the State,
its political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt form federal income tax and State of Florida intangible
tax. As a matter of fundamental policy at least 65% of the
Portfolio's total assets will be so invested (except when the
Portfolio is in a temporary defensive position), although it is
anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Florida
Securities. As a matter of fundamental policy, the Florida
Portfolio will invest as least 80% of its net assets in municipal
securities the interest which is exempt from federal income tax.
Under normal market conditions, at least 65% of the Florida
Portfolio's total assets will be invested in income-producing
securities (including zero coupon securities). Shares of the
Florida Portfolio are available only to Florida residents.
The following is based on information obtained from an
Official Statement, dated December 6, 1995, relating to
$237,750,000 State of Florida Full Faith and Credit State Board
of Education Public Education Capital Outlay Refunding Bonds,
1995 Series D.
Economic Climate
As of April 1, 1994 Florida was the fourth most populous
state in the nation with an estimated population of 13.9 million.
The State's average annual population growth rate for the period
1984 to 1994 was approximately 2.3% while the nation's average
annual growth rate for the same period was approximately 1.0%.
During this same period, Florida maintained an average growth of
approximately 287,300 people per year.
From 1985 through 1994 Florida's per capita income rose
an average of 5.2% per year, while the national per capita income
increased an average of 5.1%. The structure of Florida's income
differs from that of the nation, in that Florida has a
proportionally greater retiree population, property income
(dividends, interest and rent) and transfer payments (social
security and pension benefits, among other sources of income) are
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a relatively more important source of income. Florida's
employment income in 1994 represented 61.5% of total personal
income, while the U.S. share of total personal income in the form
of wages and salaries and other labor benefits was 72.6%. One
positive aspect of this greater diversity is that transfer
payments are typically less sensitive to the business cycle than
employment income, and, therefore, act as stabilizing forces in
weak economic periods. From 1985 through 1994, Florida's total
personal income increased by 107% and per capita income by
approximately 64.6%. For the U.S., total and per capita personal
income increased by approximately 80.7% and 63.7%, respectively.
From 1980 through 1994, Florida's total employment
increased with each succeeding year, with a small decrease in
employment occurring in 1991 and 1992. In 1992, Florida non-
agricultural job creation began to recover, and increased by 4%
in 1994 from 1993. The State is now less dependent on employment
from construction and construction-related manufacturing and
resource based manufacturing, which have declined as a proportion
of total state employment. Trade and services, the two largest
sectors, account for more than half the total non-farm employment
in Florida. Employment in the service sector increased by 6.3%
in 1994 from 1993. Tourism is also one of Florida's most
important industries. Approximately 39.9 million people visited
the State in 1994.
Florida's unemployment rate throughout the 1980's
tracked below that of the nation's. In recent years, however, as
Florida's economic growth has slowed from previous highs, the
unemployment rate has tracked above the national average. The
average rate of unemployment for Florida since 1985 is 6.3%,
while the national average is 6.4%. During 1994, Florida's
unemployment rate was 6.6% compared to the national average of
6.1%. The estimated unemployment rate for Florida for 1995 was
5.3% as compared to the U.S. average of 5.6% for the same year.
Financial Condition
In December 1992 the State legislature enacted a law
whereby the projected revenue windfall will be transferred from
the General Revenue Fund to a Trust Fund to defray the costs of
matching funds and a wide array of expenditures related to
Hurricane Andrew. The amount of the transfer will change based
on revisions made by the State's Revenue Estimating Conference.
The State's Revenue Estimating Conference estimated that
additional non-recurring general revenues of $159 million during
fiscal year 1994-95 were generated as a result of increased
economic activity due to Hurricane Andrew.
Florida prepares an annual budget which is formulated
each year and presented to the Governor and Legislature. Under
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current law, the State budget as a whole, and each separate fund
within the State budget, must be kept in balance from currently
available revenues each State Fiscal Year (July 1-June 30).
In fiscal year 1994-1995, Florida derived approximately
66% of its total direct revenues from State taxes and fees.
Federal funds and other special revenues accounted for the
remaining revenues. Florida does not currently impose an
individual income tax. The greatest single source of tax
receipts in Florida is the sales and use tax, accounting for 68%
of general revenue funds available. For the fiscal year which
ended June 30, 1995, total receipts from this source were $10.7
billion, an increase of 6% from fiscal year 1993-94.
For fiscal year 1994-95 general revenue funds were
$13.647 billion. Based on effective general revenue fund
appropriations of $13.462.1 billion, unencumbered reserves at the
end of fiscal year 1993-94 were $184.9 million.
In fiscal year 1995-96, the available general revenue
working capital and budget stabilization funds are estimated to
be $15.149.1 billion, a 2.2% increase from fiscal year 1994-95.
The $14.456.7 billion in estimated revenues represent a 5.9%
increase from the analogous figure in 1994-95. With combined
general revenue, working capital and budget stabilization fund
appropriations at $14.824 billion, unencumbered reserves at the
end of 1995-96 are estimated at $325.1 million.
For fiscal year 1995-96 the estimated general revenue
plus working capital funds available total $15.149 billion, a
2.2% increase from fiscal year 1994-95. The $14.456 billion in
estimated revenues represents a 5.9% increase from the analogous
figure in 1994-95.
The Florida Constitution places limitations on the ad
valorem taxation of real estate and tangible personal property
for all county, municipal or school purposes, and for water
management districts. Counties, school districts and
municipalities are authorized by law, and special districts may
be authorized by law, to levy ad valorem taxes. The State does
not levy ad valorem taxes on real property or tangible personal
property. These limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two
years when authorized by a vote of the electors. The Florida
Constitution and the Florida Statutes provide for the exemption
of homesteads from all taxation, except for assessments for
special benefits, up to the assessed valuation of $5,000. For
every person who is entitled to the foregoing exemption, the
exemption is increased to a total of $25,000 of assessed
valuation for taxes levied by governing bodies.
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Litigation
Kuhnlein v. Department of Revenue involved a
constitutional challenge to the Florida impact fee imposed by
section 319.231 F.S. The Supreme Court affirmed the trial
court's decision which held the statute in question
unconstitutional. The Supreme Court remanded the case to the
trial court. The trial court denied Plaintiffs' requests for pre
and post judgment interest. The Supreme Court issued its Order
on June 9, 1995, affirming the trial court for a hearing on
attorney fees. The trial court issued its decision on July 13,
1995 and awarded the Plaintiffs' attorney 10% of the fund and
found that any residue goes to the claim class members. The
Supreme Court reduced the amount of the award of attorney fees
from $18.8 million (the requested amount) to $6.5 million. The
Florida Department of Highway Safety and Motor Vehicles is
setting up the procedure for taxpayer refunds, which total
approximately $189,000,000. It is not known if this will
adversely effect the financial condition of the State.
Massachusetts Portfolio
The Massachusetts Portfolio seeks the highest level of
current income exempt from both federal income tax and
Commonwealth of Massachusetts ("Massachusetts" or the
"Commonwealth") personal income tax that is available without
assuming what the Fund's Adviser considers to be undue risk to
income or principal by investing in medium-quality, intermediate
and long-term debt obligations issued by the Commonwealth, its
political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt from federal income tax and Commonwealth of
Massachusetts personal income tax. As a matter of fundamental
policy at least 65% of the Portfolio's total assets will be so
invested (except when the Portfolio is in a temporary defensive
position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be
invested in such Massachusetts securities. As a matter of
fundamental policy, the Massachusetts Portfolio will invest at
least 80% of its net assets in municipal securities the interest
on which is exempt from federal income tax. Under normal market
conditions, at least 65% of the Massachusetts Portfolio's total
assets will be invested in income-producing securities (including
zero coupon securities). Shares of the Massachusetts Portfolio
are available only to Massachusetts residents.
The following was obtained from an Official Statement,
dated November 1, 1995, relating to $250,000,000 General
Obligation Bonds, Consolidated Loan of 1995, Series D.
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Economic Climate
The Commonwealth of Massachusetts is a densely populated
urban state. According to the 1990 census, Massachusetts had a
population density of 768 persons per square mile, as compared to
70.3 for the United States as a whole. It thus had the third
greatest population density following Rhode Island and New
Jersey. Massachusetts experienced a modest increase in
population between 1980 and 1990. The 1994 U.S. census count for
Massachusetts was 6,041,123.
Per capita personal income for Massachusetts residents,
unadjusted for differentials in the cost of living, was $25,616
in 1994, as compared to the national average of $21,809. While
per capita personal income is, on a relative scale, higher in
Massachusetts than in the United States as a whole, this is
offset to some extent by the higher cost of living in
Massachusetts.
Massachusetts has a diversified economic base which
includes traditional manufacturing, high technology and service
industries. A substantial portion of products produced by these
and other sectors is exported. Like most other industrial
states, Massachusetts has seen a shift in employment from labor-
intensive manufacturing industries (e.g., textiles, apparel,
shoes, paper products, etc.) to technology and service-based
industries like computers, biomedical technology, consulting,
health care and business services.
The Massachusetts service sector, which constituted
34.2% of the total work force in August 1995, is the largest
sector in the Massachusetts economy. Government employment
represents 12.6% of the Massachusetts work force. While total
employment in construction, manufacturing, trade, government,
services, and finance, insurance and real estate declined between
1988 and 1992, total employment in all those sectors, excluding
manufacturing, increased in 1993 and 1994.
Between 1982 and 1988, the economies of Massachusetts
and New England were among the strongest performers in the
nation. Since 1989, however, both Massachusetts and New England
have experienced growth rates significantly below the national
average. An economic recession in 1990 and 1991 caused negative
growth rates in Massachusetts and New England. In 1992, the
Gross State Product for Massachusetts grew at a rate of 1.5
percent while the total Gross Domestic Product for the United
States grew at a rate of 2.5 percent. During 1980-1988
employment growth measured 20%, well above the national rate. By
1990, however, unemployment reached 6.0%. Massachusetts'
unemployment rate averaged 8.5% in 1992, 6.9% in 1993 and 6.0% in
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1994. During the first eight months of 1995, the unemployment
rate fluctuated between 4.6% and 6.0%.
Financial Condition
Under its constitution, the Commonwealth may borrow
money (a) for defense or in anticipation of receipts from taxes
or other sources, any such loan to be paid out of the revenue of
the year in which the loan is made, or (b) by a two-thirds vote
of the members of each house of the Legislature present and
voting thereon.
Certain independent authorities and agencies within the
Commonwealth are statutorily authorized to issue bonds and notes
for which the Commonwealth is either directly, in whole or in
part, or indirectly liable. The Commonwealth's liabilities with
respect to these bonds and notes are classified as either (a)
Commonwealth-supported debt, (b) Commonwealth-guaranteed debt or
(c) indirect obligations.
Debt service expenditures of the Commonwealth in fiscal
year 1992 totaled $898.3 million, representing a 4.7% decrease
from fiscal year 1991. Debt service expenditures for fiscal year
1993, fiscal year 1994 and fiscal year 1995 were $1.140 billion,
$1.155 billion and $1.230 billion, respectively, and are
projected to be $1.196 billion for fiscal year 1996. In January
1990, legislation was enacted which imposes a 10% limit on the
total appropriations in any fiscal year that may be expended for
payment of interest on general obligation debt (excluding Fiscal
Recovery Bonds) of Massachusetts.
The budgeted operating funds of the Commonwealth ended
fiscal year 1993 with a surplus of revenues and other sources
over expenditures and other uses of $13.1 million and aggregate
ending fund balances in the budgeted operating fund of the
Commonwealth of approximately $562.5 million. Budgeted revenues
and other sources for fiscal year 1993 totaled approximately
$14.710 billion, including tax revenues of $9.930 billion. The
budgeted operating funds of the Commonwealth ended fiscal year
1994 with a surplus of revenues and other sources over
expenditures and other uses of $26.8 billion and aggregate ending
fund balances in the budgeted operating funds of the Commonwealth
of approximately $589.3 million. Budgeted revenues and other
sources for fiscal year 1994 totaled approximately $15.550
billion, including tax revenues of $10.607 billion. Total
revenues and other sources increased by approximately 5.7% from
fiscal year 1993 to fiscal year 1994 while tax revenues increased
by 6.8% for the same period. Unaudited financial information
for fiscal year 1995 shows that budgeted revenues and other
sources collected in fiscal year 1995 were approximately $16.392
billion, approximately 5.4% above fiscal year 1994 budgeted
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revenues. Budgeted expenditures and other uses of funds in
fiscal year 1995 were approximately $16.529 billion,
approximately 4.7% above fiscal year 1994 budgeted expenditures.
The fiscal year 1996 budget was enacted by the
Legislature on June 12, 1995 and signed by the Governor on
June 21, 1995. Fiscal year 1996 appropriations in the Annual
Appropriations Act total approximately $16.847 billion, including
approximately $25 million in gubernatorial vetoes overridden by
the legislature. In the final supplemental budget for fiscal year
1995, approved on August 24, 1995, another $71.1 million of
appropriations were continued for use in fiscal year 1996. The
Executive Office for Administration and Finance projects that
fiscal year 1996 spending will total approximately $16.998
billion, a $739 million, or 4.5%, increase over fiscal year 1995
spending. The largest single spending increase in the fiscal
year 1996 budget is approximately $232 million to continue
funding the comprehensive education reform legislation enacted in
1993. Budgeted revenues and other sources to be collected in
fiscal year 1996 are estimated by the Executive Office for
Administration and Finance to be approximately $16.778 billion.
This amount includes estimated fiscal year 1996 tax revenues of
$11.653 billion, which is approximately $490 million, or 4.3%,
higher than fiscal year 1995 tax revenues. On November 1, 1995
the Governor of Massachusetts released a proposal to reorganize
state government. The Governor has estimated that his
reorganization proposals would result in budgetary saving more
than sufficient to offset his proposal to reduce income tax
rates. The cost to the Commonwealth of the proposed tax
reduction is estimated at $500 million per year.
Fiscal year 1996 non-tax revenues are projected to total
approximately $5.173 billion, approximately $55 million, or 1.1%,
less than fiscal year 1995 non-tax revenues of approximately
$5.228 billion. Federal reimbursements are projected to increase
by approximately $22 million, or 0.7%, from approximately $2.960
billion in fiscal year 1995 to approximately $2.982 billion in
fiscal year 1996, primarily as a result of increased
reimbursements for Medicaid spending, offset by a reduction in
reimbursements received in fiscal year 1995 for one-time Medicaid
expenses incurred in fiscal year 1994 and fiscal year 1995.
Fiscal year 1996 departmental revenues are projected to decline
by approximately $112 million, or 8.3%, from approximately $1.353
billion in fiscal year 1995 to approximately $1.241 billion in
fiscal year 1996. Fiscal year 1996 consolidated transfers are
projected to increase by approximately $35.0 million, or 3.8%,
from $915.4 million in fiscal year 1995 to approximately $950.4
million in fiscal year 1996, primarily as a result of a $35.7
million transfer from a non-budgeted fund to an economic
development fund established in the fiscal year 1996 budget.
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In November 1980, voters in the Commonwealth approved a
state-wide tax limitation initiative petition, commonly known as
Proposition 2 1/2, to constrain levels of property taxation and
to limit the charges and fees imposed on cities and towns by
certain government entities, including county governments. The
law is not a constitutional provision and accordingly is subject
to amendment or repeal by the legislature. Proposition 2 1/2
limits the property taxes that a Massachusetts city or town may
assess in any fiscal year to the lesser of (i) 2.5% of the full
and fair cash value of real estate and personal property therein
and (ii) 2.5% over the previous fiscal year's levy limit plus any
growth in the base from certain new construction and parcel
subdivisions. In addition, Proposition 2 1/2 limits any increase
in the charges and fees assessed by certain governmental
entities, including county governments, on cities and towns to
the sum of (i) 2.5% of the total charges and fees imposed in the
preceding fiscal year, and (ii) any increase in charges for
services customarily provided locally or services obtained by the
city or town. The law contains certain override provisions which
require a majority vote, in a general or special election.
During the 1980's, Massachusetts increased payments to
its cities, towns and regional school districts ("Local Aid") to
mitigate the impact of Proposition 2 1/2 on local programs and
services. In fiscal year 1996, approximately 19.1% of
Massachusetts' budget is estimated to be allocated to Local Aid.
Direct Local Aid decreased from $2.608 billion in fiscal year
1991 to $2.359 billion in fiscal year 1992, increased to $2.547
billion in fiscal year 1993 and to $2.727 billion in fiscal year
1994. Fiscal year 1995 direct Local Aid expenditures were $2.976
billion, an increase of about 9.1% from fiscal year 1994. Fiscal
year 1996 direct Local Aid is estimated at $3.242 billion, an
8.9% increase over 1995. In addition to direct Local Aid,
Massachusetts provides substantial indirect aid to local
governments.
In November 1990 voters approved a petition which
regulates the distribution of Local Aid by requiring, subject to
appropriation, distribution to cities and towns of no less than
40% of collection from personal income taxes, sales and use
taxes, corporate excise taxes, and lottery fund proceeds. The
Local Aid distribution to each city or town would equal no less
than 100% of the total Local Aid received for fiscal year 1989.
Distributions in excess of fiscal year 1989 levels would be based
on new formulas that would replace the current Local Aid
distribution formulas. By its terms, the new formulas would have
called for a substantial increase in direct Local Aid in fiscal
year 1992, and would call for such an increase in fiscal year
1993 and in subsequent years. However, Local Aid payments
expressly remain subject to annual appropriation, and fiscal year
1992, fiscal year 1993, fiscal year 1994 and fiscal year 1995
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appropriations for Local Aid did not meet, and fiscal year 1996
appropriations for Local Aid do not meet, the levels set forth in
the initiative law.
During fiscal years 1992, 1993 and 1994, Medicaid
expenditures of the Commonwealth were $2.818 billion, $3.151
billion, and $3.313 billion, respectively. The Comptroller's
Preliminary Financial Report for fiscal year 1995 indicates that
fiscal year 1995 Medicaid expenditures were $3.399 billion. The
average annual growth rate from fiscal year 1991 to fiscal year
1995 was 5.1%. The growth rate from fiscal year 1994 to fiscal
year 1995 was 2.6%. The Executive Office for Administration and
Finance estimates that fiscal year 1996 Medicaid expenditures
will be approximately $3.388 billion. Factoring out one-time
payments in fiscal year 1995 and fiscal year 1996 to settle bills
from hospitals and nursing homes dating back to the 1980's, and
adjusting for a change in the account structure of the Medicaid
program, this represents an increase from fiscal year 1995 to
fiscal year 1996 of 2.6%. The decrease in the rate of growth is
due to a number of savings and cost control initiatives that the
Division of Medical Assistance continues to implement and refine,
including managed care, utilization review and the identification
of third party liabilities.
Litigation
There are pending in courts within the Commonwealth
various suits in which the Commonwealth is a defendant. In the
opinion of the Attorney General, as of the date of the Official
Statement referred to above, no litigation was pending or, to his
knowledge, threatened which is likely to result, either
individually or in the aggregate, in final judgments against the
Commonwealth that would affect materially its financial
condition.
Michigan Portfolio
The Michigan Portfolio seeks the highest level of
current income exempt from both federal income tax and State of
Michigan ("Michigan" or the "State") personal income tax that is
available without assuming what the Fund's Adviser considers to
be undue risk to income or principal by investing in medium-
quality, intermediate and long-term debt obligations issued by
the State, its political subdivisions, agencies and
instrumentalities the interest on which, in the opinion of bond
counsel to the issuer, is exempt from federal income tax and
State of Michigan personal income tax. As a matter of
fundamental policy at least 65% of the Portfolio's total assets
will be so invested (except when the Portfolio is in a temporary
defensive position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be
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invested in such Michigan securities. As a matter of fundamental
policy, the Michigan Portfolio will invest at least 80% of its
net assets in municipal securities the interest on which is
exempt from federal income tax. Under normal market conditions,
at least 65% of the Michigan Portfolio's total assets will be
invested in income- producing securities (including zero coupon
securities). Shares of the Michigan Portfolio are available only
to Michigan residents.
The following is based on information obtained from an
Official Statement, dated July 20, 1995, relating to $180,000,000
State of Michigan General Obligation School Loan Bonds, Series
1995.
Economic Climate
In recent years, Michigan has made efforts to diversify
its economy in an attempt to be less dependent on manufacturing.
In 1960, employment in durable goods manufacturing (including
automobiles and components and office equipment) accounted for
33% of the State's workforce. This figure decreased to 14.9% in
1994. However, such manufacturing continues to be an important
part of the State's economy.
Michigan's economy is recovering from a recessionary
period. Employment growth for 1990 had dropped to negative 0.1%
from 2.3% in 1989. In 1992, 1993 and 1994, employment increased
by .4%, 1.8% and 1.1%, respectively, compared with a flat growth
in the region as well as the nation. The State's forecast for
the Michigan economy projected a 2.9% growth in salary and wage
employment in 1995. Unemployment rates, which had averaged
approximately 9.2% in 1991 and 8.8% in 1992, were reduced to 7.0%
in 1993 and 5.9% in 1994. State manufacturing employment, which
had decreased from 1990 to 1991, increased during 1992, 1993 and
1994. Similarly, Michigan's personal income amounts increased
during the same three years.
Financial Condition
As amended in 1978, Michigan's Constitution limits the
amount of total State revenues that may be raised from taxes and
other sources. State revenues (excluding federal aid and
revenues used for payment of principal and interest on general
obligation bonds) in any fiscal year are limited to a specified
percentage of Michigan personal income in the prior calendar year
or an average of the prior three calendar years, whichever is
greater. The percentage is based upon the ratio of the 1978-79
fiscal year revenues to total 1977 Michigan personal income (the
total income received by persons in Michigan from all sources as
defined and officially reported by the United States Department
of Commerce). If revenues in any fiscal year exceed the revenue
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limitation by one percent or more, the entire amount exceeding
the limitation must be rebated in the following fiscal year's
personal income tax or single business tax. Annual excesses of
less than one percent may be transferred into Michigan's Budget
and Economic Stabilization Fund ("BSF"). Michigan may raise
taxes in excess of the limit in emergency situations.
The State Constitution provides that the proportion of
State spending paid to all units of local government to total
State spending may not be reduced below 41.6%, the proportion in
effect in the 1978-79 fiscal year. If such spending does not
meet the required level in a given year, an additional
appropriation for local government units is required by the
"following fiscal year," which means the year following the
determination of the shortfall, according to an opinion issued by
the State's Attorney General. Spending for local units met this
requirement for fiscal years 1986-87 through 1993-94.
The State Constitution also requires the State to
finance any new or expanded activity of local governments
mandated by State law. Any expenditures required by this
provision would be counted as State spending for local units of
government for purposes of determining compliance with the
provision cited above.
Michigan finances its operations through its General
Fund and special revenue funds. The Michigan Constitution
provides that proposed expenditures from, and revenues of, any
fund must be in balance and that any prior year's surplus or
deficit in any fund must be included in the succeeding year's
budget for that fund.
The Michigan State General Fund balances for the
1989-90, 1990-91 and 1991-92 fiscal years were a positive $61.1
million, a negative $310 million and a negative $169.4 million,
respectively. The State's budget for the 1992-93 and 1993-94
fiscal years was balanced by several measures taken by the
Administration and the Legislature. These measures included a
combination of line veto, a deficit reduction compromise package
and some increased revenues.
The Michigan Constitution limits Michigan general
obligation debt to (i) short-term debt for State operating
purposes which must be repaid in the same fiscal year in which it
is issued and which cannot exceed 15% of the undedicated revenues
received by Michigan during the preceding fiscal year, (ii) short
and long- term debt unlimited in amount for the purpose of making
loans to school districts and (iii) long-term debt for voter-
approved purposes.
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On August 19, 1993, the Governor of the State signed
into law Act 145, Public Acts of Michigan, 1993 ("Act 145"), a
measure which would have significantly impacted financing of
primary and secondary school operations and which has resulted in
additional property tax and school finance reform legislation.
In order to replace local property tax revenues lost an a result
of Act 145, the Michigan Legislature, in December 1993, enacted
several statutes which address property tax and school finance
reform. The property tax and school finance reform measures
included a ballot proposal ("Proposal A") which was subject to
voter approval and was in fact approved on March 15, 1994. Under
Proposal A as approved, effective May 1, 1994, the State sales
and use tax was increased from 4% to 6%, the State income tax was
decreased from 4.6% to 4.4%, the cigarette tax was increased from
$.25 to $.75 per pack and an additional tax of 16% of the
wholesale price began to be imposed on certain other tobacco
products. A .75% real estate transfer tax became effective
January 1, 1995. Beginning in 1994, a State property tax of 6
mills began to be imposed on all real and personal property
subject to the general property tax. All local school boards
can, with voter approval, levy up to the lesser of 18 mills or
the number of mills levied in 1993 for school operating purposes,
on non-homestead and non-qualified agricultural property.
Proposal A contains additional provisions regarding the ability
of local school districts to levy taxes as well as a limit on
assessment increases for each parcel of property, beginning in
1995 to the lesser of 5% or the rate of inflation. When property
is subsequently sold, its assessed value will revert to the
current assessment level of 50% of true cash value. Under
Proposal A, much of the additional revenue generated by the new
taxes will be dedicated to the State School Aid Fund. Proposal A
shifts significant portions of the cost of local school
operations from local school districts to the State and raises
additional State revenues to fund these additional State
expenses. These additional revenues will be included within the
State's constitutional revenue limitations and may impact the
State's ability to raise additional revenues in the future.
Litigation
The State is involved in litigation that, if unfavorably
resolved from the point of view of the State, could substantially
affect State programs or finances. These lawsuits involve
programs generally in the areas of corrections, commerce and
budgetary reductions to school districts and governmental units
and court funding. Relief sought includes damages in tort cases
generally, alleviation of prison overcrowding, improvement of
prison medical and mental health care, and refund claims under
state taxes. The ultimate disposition and consequences of all of
these proceedings are not presently determinable.
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Minnesota Portfolio
The Minnesota Portfolio seeks the highest level of
current income exempt from both federal income tax and State of
Minnesota ("Minnesota" or the "State") personal income tax that
is available without assuming what the Fund's Adviser considers
to be undue risk to income or principal by investing in medium-
quality, intermediate and long-term debt obligations issued by
the State, its political subdivisions, agencies and
instrumentalities the interest on which, in the opinion of bond
counsel to the issuer, is exempt from federal income tax and
State of Minnesota personal income tax. As a matter of
fundamental policy at least 65% of the Portfolio's total assets
will be so invested (except when the Portfolio is in a temporary
defensive position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be
invested in such Minnesota securities. As a matter of
fundamental policy, the Minnesota Portfolio will invest at least
80% of its net assets in municipal securities the interest on
which is exempt from federal income tax. Under normal market
conditions, at least 65% of the Minnesota Portfolio's total
assets will be invested in income-producing securities (including
zero coupon securities). Shares of the Minnesota Portfolio are
available only to Minnesota residents.
The following is based on information obtained from an
Official Statement, dated July 25, 1995, relating to $215,000,000
State of Minnesota General Obligation State Various Purpose
Bonds.
Economic Climate
Minnesota resident population grew from 4,085,000 in
1980 to 4,390,000 in 1990 or, at an average annual compound rate
of 0.7%. In comparison, United States population grew at an
annual compound rate of 0.9% during this period. In 1994,
resident population increased to 4,567,000. Minnesota population
is currently forecast to grow at an annual compounded rate of
0.6% between 1990 and 2000.
In 1994, the structure of Minnesota's economy paralleled
the structure of the United States economy as a whole. State
employment in ten major sectors was distributed in approximately
the same proportions as national employment. In all sectors, the
share of total State employment was within two percentage points
of national employment share.
In the period 1980 to 1990, overall employment growth in
Minnesota increased by 17.9%, lagging behind the nation, whose
growth increased by 20.1%. While the importance of the
agricultural sector in the State has decreased, manufacturing has
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been a strong sector, with Minnesota employment growth
outperforming that of the United States in both the 1980-1990 and
1990-1994 periods. In the durable goods industries, the State's
employment in 1994 was highly concentrated in the industrial
machinery, instrument and miscellaneous categories. Of
particular importance is the industrial machinery category in
which 32.6% of the State's durable goods employment was
concentrated in 1994, as compared to 19.0% for the United States
as a whole.
The importance of the State's rich resource base for
overall employment is apparent in the employment mix in
non-durable goods industries. In 1994, 29.0% of Minnesota's non-
durable goods employment was concentrated in food and kindred
industries and 18.6% in paper and allied industries. This
compares to 21.4% and 8.8%, respectively, for comparable sectors
in the national economy. Both of these sectors rely heavily on
renewable resources in the State. Over half of the State's
acreage is devoted to agricultural purposes, and nearly one-third
to forestry. Printing and publishing is also relatively more
important in the State than in the U.S.
Mining is currently a less significant factor in the
State economy than it was previously. Mining employment,
primarily in the iron ore or taconite industry, dropped from
15,700 employed in 1980 to 7,600 employed in 1994. It is not
expected that mining employment will return to 1980 levels.
However, Minnesota retains vast quantities of taconite as well as
copper, nickel, cobalt, and peat which may be utilized in the
future.
Since 1980, State per capita personal income has been
within three percentage points of national per capita personal
income. In 1994, Minnesota per capita personal income was 103.0%
of its United States counterpart. During 1993-1994, personal
income in Minnesota grew more quickly than the United States
average with a growth of 8.04% in Minnesota as compared to a
United States average of 5.89%. During 1990-1994, wage and
salary disbursements, which constitute some 60% of total personal
income, grew 25.6% in Minnesota as compared to 22.5% for the
twelve-state North Central Region. Between 1983 and 1994,
increases in retail sales in Minnesota averaged 6.4% per year,
compounded. This growth, however, was not uniform from year to
year. For example, retail sales declined 0.1% in 1987, while
growing 11.9% in 1984 and 10.5% in 1992.
During 1994 and the first six months of 1995, the
State's monthly unemployment rate was generally less than the
national unemployment rate, averaging 4.0% in 1994, as compared
to the national average of 6.1%. Employment data through June
1995 indicate the recession which began in July 1990 was less
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severe in Minnesota than in the national economy. As of June
1995, Minnesota's unemployment rate averaged 3.9%, while
averaging 5.8% nationally.
Financial Condition
Minnesota operates on a biennial budget basis. Prior to
each fiscal year of a biennium, the Department of Finance allots
a portion of the applicable biennial appropriation to each State
agency or other entity for which an appropriation has been made.
Supplemental appropriation and changes in revenue measures are
sometimes adopted by the Legislature during the biennium. An
agency or entity may not expend moneys in excess of its
allotment. The State's principal sources of nondedicated
revenues are taxes of various types. The Accounting General Fund
receives no unrestricted federal grants. The only federal funds
deposited into the Accounting General Fund are to reimburse the
State for expenditures on behalf of federal programs.
In January 1995, the Governor submitted a proposed
budget to the legislature for the 1995-97 biennium (the "Current
Biennium"). The proposed budget was based on the November 1994
forecast of Accounting General Fund revenues and expenditures.
In March 1995, the Department of Finance prepared a
revised forecast of revenues and expenditures, and on the basis
of this forecast, the Governor provided supplemental budget
recommendations to the legislature in March 1995. Legislative
hearings were conducted, after which the legislature enacted
appropriation and tax bills having the effect of either adopting
or modifying the Governor's proposals. The Governor signed into
law most of the bills passed by the legislature, but he also
exercised his authority to veto appropriation bills in total or
on an item-by-item basis.
Prior to the Current Biennium, Minnesota law established
a Budget Reserve and Cash Flow Account in the Accounting General
Fund which served two functions. In 1995, the Minnesota
legislature separated the Budget Reserve and Cash Flow Account
into two separate accounts; the Cash Flow Account and the Budget
Reserve Account, each having a different function.
The Cash Flow Account was established in the Accounting
General Fund for the purpose of providing sufficient cash
balances to cover monthly revenue and expenditure imbalances. The
use of funds from the Cash Flow Account is governed by statute.
The Cash Flow Account Balance is set for the Current Biennium at
$350 million. No provision has been made for increasing the
balance of the Cash Flow Account from increases in forecast
revenues over forecast expenditures.
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The Budget Reserve Account was established in the
Accounting General Fund for the purpose of reserving funds to
cushion the State from an economic downturn. The use of funds
from the Budget Reserve Account and the allocation of surplus
forecast balances to the Budget Reserve Account are governed by
statute. The Budget Reserve Account balance is set for the
Current Biennium at $204 million. However, under current law, if
during the first year of the Current Biennium Accounting General
Fund revenues are forecast to exceed forecast Accounting General
Fund expenditures by more than previously forecast, any forecast
increased balance is first allocated to increase the Budget
Reserve Account to a balance of $220 million. Second, any
additional forecast balances in an odd-numbered fiscal year are
allocated to reducing school aid property tax recognition
percentages to zero. Any remaining forecast balance is
unallocated.
On the basis of the Governor's February recommendation,
the Accounting General Fund would end the Current Biennium on
June 30, 1997 with an Unreserved Accounting General Fund balance
of $573 million, comprising a Cash Flow Account of $350 million,
a Budget Reserve Account of $220 million and an Unrestricted
Accounting General Fund balance of $3 million.
During the 1995 legislative session and the First
Special Session, revenue and expenditure measures were enacted
for the Current Biennium. Compared to the Governor's February
recommendation, these measures increased total resources by $137
million, increased expenditures by $156 million and reduced the
recommended Budget Reserve Account by $16 million, from $220
million to $204 million.
Total Accounting General Fund resources for the Current
Biennium are projected to be $18.774 billion. Of this amount
$921 million comprises the Unreserved Accounting General Fund
balance from the previous biennium and $17.853 billion comprises
non-dedicated and dedicated revenues are projected to be
generated during the Current Biennium.
The legislative measures enacted for the Current
Biennium contain no significant changes to existing tax laws and
do not provide for a significant revenue increase. Changes which
were enacted included federal conformity changes for personal and
corporate income taxes and a rate increase for insurance gross
earnings taxes. Individually and in total these changes are not
deemed significant by the State.
Authorized Accounting General Fund spending for the
Current Biennium is estimated at $18.220 billion. Compared to
previous biennium expenditures, this represents a biennial
expenditure growth of $1.395 billion, or 8.3 percent. The
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legislature authorized $200 million more for elementary and
secondary education, $57 million more in local government aids,
and $29 million more for post-secondary education, than
recommended by the Governor. The higher spending level was
financed by reductions of 3 to 5 percent in recommended funding
levels for health and human services, State government and other
program areas.
Legislation passed by the 1992 legislature established
the Minnesota Care program to provide subsidized health care
insurance for long term uninsured Minnesotans, reform individual
and small group health insurance regulations, create a health
care analysis unit to collect condition-specific data about
health care practices in order to develop practice parameters for
health care providers, implement certain cost containment
measures into the system, and establish an office of rural health
to ensure the health care needs of all Minnesotans are being met.
A separate account, the Health Care Access Fund, has
been established in the State's Special Revenue Fund to account
for revenues and expenditures for the Minnesota Care program.
Program expenditures are limited to revenues received in the
account. Total resources available to the Health Care Access
Fund are forecast to total $461 million in the Current Biennium.
A previously required transfer from the Health Care
Access Fund to the Accounting General Fund was eliminated after
Fiscal Year 1995. The purpose of the transfer was to pay for
increased costs in the generally funded Medicaid ("MA") and
General Assistance Medical Care ("GAMC") programs, due to
applicants found ineligible for MinnesotaCare, but qualifying for
MA or GAMC.
The 1995 legislature increased eligibility for
MinnesotaCare, the program for low income working Minnesotans.
Single adults earning up to 135 percent of the federal poverty
level will be eligible for enrollment beginning October 1, 1995.
Currently, single adults earning up to 125 percent of the federal
poverty level may enroll in the program. The increased
enrollment may only occur if projected expenditures do not exceed
revenues.
Based on the level of the Cash Flow Account, the Budget
Reserve Account and existing statutory authority to adjust State
aid payments to local taxing districts and systems of higher
education, the Commissioner of Finance currently estimates that
no short-term borrowing will be required during the Current
Biennium.
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Litigation
There are now pending against the State legal actions
which could, if determined adversely to the State, have a
material adverse effect on the State's expenditures and revenues
during the Current Biennium.
New Jersey Portfolio
The New Jersey Portfolio seeks the highest level of
current income exempt from both federal income tax and State of
New Jersey ("New Jersey" or the "State") personal income tax that
is available without assuming what the Fund's Adviser considers
to be undue risk to income or principal by investing in
medium-quality, intermediate and long-term debt obligations
issued by the State, its political subdivisions, agencies and
instrumentalities the interest on which, in the opinion of bond
counsel to the issuer, is exempt from federal income tax and
fundamental policy at least 65% of the Portfolio's total assets
will be so invested (except when the Portfolio is in a temporary
defensive position). The Fund will invest at least 80% of its
net assets in securities the interest on which is exempt from New
Jersey personal income tax (i.e. New Jersey municipal
securities). In addition, during periods when the Fund's Adviser
believes that New Jersey municipal securities that meet the
Portfolio's standards are not available, the Portfolio may invest
a portion of its assets in securities whose interest payments are
only federally tax-exempt. However, it is anticipated that under
normal circumstances substantially all of the Portfolio's total
assets will be invested in New Jersey municipal securities. As a
matter of fundamental policy, the New Jersey Portfolio will
invest at least 80% of its net assets in municipal securities the
interest on which is exempt from federal income tax. Under
normal market conditions, at least 65% of the New Jersey
Portfolio's total assets will be invested in income-producing
securities (including zero coupon securities). Shares of the New
Jersey Portfolio are available only to New Jersey residents.
The following is based on information obtained from an
Official Statement, dated December 1, 1995, relating to
$143,645,000 New Jersey Educational Facilities Authority Revenue
Bonds, University of Medicine and Dentistry of New Jersey Issue,
Series 1995B.
Economic Climate
New Jersey is the ninth largest state in population and
the fifth smallest in land area. With an average of 1,062
persons per square mile, it is the most densely populated of all
the states. New Jersey's population grew rapidly in the years
following World War II, before slowing to an annual rate of 0.27
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percent in the 1970s. Between 1980 and 1990 the annual
population growth rose to .49% and between 1990 and 1993 the
growth rate accelerated to .59%. While this rate of growth is
less than that for the United States, it compares favorably with
other Middle Atlantic States.
The State's economic base is diversified, consisting of
a variety of manufacturing, construction and service industries,
supplemented by commercial agriculture. New Jersey has the
Atlantic seashore on the east and lakes and mountains in the
north and northwest which provide recreation for residents as
well for out-of-state visitors. In 1976, voters approved casino
gambling for Atlantic City, and that city has again become an
important State tourist attraction.
Total personal income in New Jersey stood at $204.1
billion for 1992 and increased to $210.6 billion for 1993.
Personal income increased 3.2% between 1992 and 1993 but was
below the national rate of 4.4%. Historically, New Jersey's
average per capita income has been well above the national
average. The differential narrowed during the 1970s but widened
in the 1980s. In 1993, the State ranked second among all states
in per capita personal income ($26,732).
After experiencing a boom during the mid-1980s, New
Jersey as well as the rest of the Northeast slipped into a
slowdown well before the onset of the national recession which
officially began in July 1990 (according to the National Bureau
of Economic Research). By the beginning of the national
recession, there had already been a decline in construction
activity and the growth in the service sectors and the long-term
downtrend of factory employment had accelerated, partly because
of a leveling off of industrial demand nationally. The onset of
recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn
in such previously growing sectors as wholesale trade, retail
trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary
employment from a peak of 3,689,800 in March 1989 to a low of
3,445,000 in March 1992. This loss has been followed by an
employment gain of 118,700 from March 1992 to September 1994.
Reflecting the downturn, the rate of unemployment in New
Jersey rose from a low of 3.6% during the first quarter of 1989
to a recessionary peak of 8.4% in 1992. Since then, the
unemployment rate fell to 6.9% during the first quarter of 1995.
In the first nine months of 1994, relative to the same
period in 1993, job growth took place in services (3.5%) and
construction (5.7%), more moderate growth took place in trade
(1.9%), transportation and utilities (1.2%) and finance/
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insurance/real estate (1.4%), while manufacturing and government
declined (by 1.5% and 0.1%, respectively). The net result was a
1.6% increase in average employment during the first nine months
of 1994 compared to the first nine months of 1993.
Just as New Jersey was hurt by the national recession,
evidence of the State's improving economy can be found in
increased homebuilding, and other areas of construction activity,
rising consumer spending for new cars and light trucks,
substantial new job creation and the decline in the unemployment
rate.
One of the major reasons for cautious optimism is found
in the construction industry. Total construction contracts
awarded in New Jersey have turned around, rising by 11.8% in the
first two months of 1995 compared with 1994. By far the largest
boost came from residential construction awards which increased
by 32.8% in 1995 compared with 1994. Nonbuilding construction
awards increased approximately 12% in the first two months of
1995 compared with the same period in 1994. New passenger car
registrations issued during 1994 were virtually unchanged in New
Jersey from 1993. However, registrations of new light trucks and
vans (up to 10,000 lbs.) advanced strongly, increasing 19% during
1994.
Financial Condition
Pursuant to Article VIII, Section II, par. 2 of the
State Constitution, no money may be drawn from the State Treasury
except for appropriations made by law. In addition, all monies
for the support or State government and all other State purposes,
as far as can be ascertained or reasonably foreseen, must be
provided for in one general appropriation law covering one and
the same fiscal year. No general appropriations law or other law
appropriating money for any State purpose shall be enacted if the
amount of money appropriated therein, together with all other
prior appropriations made for the same fiscal year, exceeds the
total amount of revenue on hand and anticipated to be available
for such fiscal year, as certified by the Governor.
Should it appear that revenues will be less than the
amount anticipated in the budget for a fiscal year, the Governor
may take steps to reduce State expenditures. The State
Constitution additionally provides that no supplemental
appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such
appropriation.
For the fiscal year ended June 30, 1995, the
undesignated fund balances in the General Fund, in which the
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largest part of the financial operations of the state is
accounted for, were projected to be $926 million. For the fiscal
year ending on June 30, 1996 the estimated balance is projected
to be $569.2 million. Such balance was $1.4 million for the 1992
fiscal year, $760.8 million for the 1993 fiscal year and $937.4
million for the 1994 fiscal year.
There are 567 municipalities and 21 counties in New
Jersey. During 1993, 1994 and 1995 no county exceeded its
statutory debt limitations or incurred a cash deficit in excess
of 4% of its tax levy. Only two municipalities had a cash
deficit greater than 4% of their tax levies for 1994 and 1995.
The number of municipalities which exceeded statutory debt limits
was six as of December 31, 1994. No New Jersey municipality or
county has defaulted on the payment of interest or principal on
any outstanding debt obligation since the 1930's.
The Local Authorities Fiscal Control Law provides for
State supervision of the fiscal operations and debt issuance
practices of independent local authorities and special taxing
districts by the State Department of Community Affairs. The
Local Authorities Fiscal Control law applies to all autonomous
public bodies created by counties or municipalities empowered to
issue bonds, impose facility or service charges, or levy taxes in
their districts. This encompasses most autonomous local
authorities (sewerage, municipal utilities, parking, pollution
control, improvement, among others) and special taxing districts
(fire, water, among others). Authorities which are subject to
differing State or federal financial restrictions are exempted,
but only to the extent of that difference.
As of June 30, 1994, there were 196 locally created
authorities with a total outstanding capital debt of
$7,000,077,854 (figures do not include housing authorities and
redevelopment agencies). This amount reflects outstanding bonds,
notes, and loans payable by the authorities as of their
respective fiscal years ended nearest to June 30, 1994.
Litigation
The State is presently involved in certain legal
proceedings that, if decided against the State, may require the
State to make significant future expenditures or may impair
future revenue sources.
Ohio Portfolio
The Ohio Portfolio seeks the highest level of income
exempt from both federal income tax and State of Ohio ("Ohio" or
the "State") personal income tax that is available without
assuming what the Fund's Adviser considers to be undue risk to
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income or principal by investing in medium-quality, intermediate
and long- term debt obligations issued by the State, its
political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt from federal income tax and State of Ohio personal
income tax. As a matter of fundamental policy at least 65% of the
Portfolio's total assets will be so invested (except when the
Portfolio is in a temporary defensive position), although it is
anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Ohio securities.
As a matter of fundamental policy, the Ohio Portfolio will invest
at least 80% of its net assets in municipal securities the
interest on which is exempt from federal income tax. Under
normal market conditions, at least 65% of the Ohio Portfolio's
total assets will be invested in income-producing securities
(including zero coupon securities). Shares of the Ohio Portfolio
are available only to Ohio residents.
The following is based on information obtained from an
Official Statement, dated September 15, 1995, relating to
$100,000,000 State of Ohio Highway Obligation Bond, Series U.
Economic Climate
Ohio's 1993 census population of over 11 million ranked
Ohio seventh among the states in population. The greatest growth
in Ohio employment in recent years, consistent with national
trends, has been in the nonmanufacturing area. Nonmanufacturing
industries now employ more than three-fourths of all payroll
workers in Ohio. However, manufacturing (including auto-related
manufacturing) remains an important part of Ohio's economy and
Ohio ranked third in the nation in 1990 in gross state product
derived from manufacturing. Economic activity in Ohio, as in
many other industrially developed states, tends to be more
cyclical than in some other states and in the nation as a whole.
Since 1960 the ratio of Ohio to United States aggregate personal
income has declined, with Ohio moving from fifth among the states
in 1960 to seventh in 1994. Ohio's per capita income ranking was
16th in 1970 and 22nd in 1994. The unemployment rate in Ohio has
not fluctuated significantly during the past year, registering
5.1% in January 1995 and dropping slightly to 4.9% by August
1995.
Financial Condition
Ohio operates on the basis of a fiscal biennium for its
appropriations and expenditures. The State Constitution imposes
a duty on the Ohio General Assembly to "provide for raising
revenue, sufficient to defray the expenses of the State, for each
year, and also a sufficient sum to pay the principal and interest
as they become due on the State debt." The State is effectively
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precluded by law from ending a fiscal year or a biennium in a
"deficit" position. State borrowing to meet casual deficits or
failures in revenues or to meet expenses not otherwise provided
for is limited by the Constitution to $750,000. The Governor has
the power to issue orders to State agencies that will prevent
their expenditures and incurred obligations from exceeding
available revenue receipts and balances, if he ascertains that
such revenue receipts and balances for a current fiscal year will
in all probability be less than the appropriations for such year.
Most State operations are financed through the General
Revenue Fund ("GRF") with personal income and sales-use taxes
being the major GRF sources. State statutory provisions provide
for the use of the Total Operating Fund ("TOF") to manage
temporary GRF cash flow deficiencies by permitting the adjustment
of payment schedules. The State does not do external revenue
anticipation borrowing.
The TOF includes the total consolidated cash balances,
revenues, disbursements and transfers of the GRF and several
other specified funds. The TOF cash balance at June 30, 1994 was
$3.1 billion. These cash balances are consolidated only for the
purpose of meeting cash flow requirements and, except for the
GRF, a positive cash balance must be maintained for each discrete
fund included in the TOF. The GRF is permitted to incur a
temporary cash deficiency by drawing upon the available
consolidated cash balance in the TOF. The amount of that
permitted GRF cash deficiency at any time is limited to 10%
(raised from 7% in 1992 legislation in order to better avoid the
need for even short delays in payments) of GRF revenues for the
then preceding fiscal year. GRF cash flow deficiencies occurred
in 4 months in fiscal year 1995 with the highest of $337.9
million in November 1994. All those actual, and those projected,
cash flow deficiencies are within the TOF limitations discussed
above.
Ohio has a mixture of urban and rural population, with
approximately three-quarters urban. There are approximately 943
incorporated cities and villages (municipalities with populations
under 5,000) in the State. Six cities have population of over
100,000 and 19 over 50,000.
The creditworthiness of obligations issued by local Ohio
issuers may be unrelated to the creditworthiness of obligations
issued by the State, and generally there is no responsibility on
the part of the State to make payments on those local
obligations.
Local school districts in Ohio receive a major portion
(on a state-wide basis, in the range of 44% in recent years) of
their operating moneys from State subsidies, but are dependent on
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local ad valorem property taxes and, in 115 districts, income
taxes for significant portions of their budgets. A number of the
State's 612 local school districts have in any year required
special assistance to avoid year-end deficits. A current program
provides for school district cash need borrowing directly from
commercial lenders, with State diversion of subsidy distributions
to repayment. In fiscal year 1995 under this program, 29
districts borrowed a total of $71,107,400.
In July 1994, a Perry County judge ruled Ohio's current
method of subsidizing local schools unconstitutional because it
permits wide spending disparities among districts. The State
appealed, and in August 1995 a court of appeals reversed the
trial court's findings. The plaintiffs intend to appeal the
court of appeals decision to the Ohio Supreme Court and a final
decision is not expected for years.
Ohio's 943 incorporated cities and villages rely
primarily on property and municipal income taxes for their
operations, and, with other local governments, receive local
government support and property tax relief moneys distributed by
the State. Procedures have been established for those few
municipalities that have on occasion faced significant financial
problems, which include establishment of a joint State/local
commission to monitor the municipality's fiscal affairs, with a
financial plan developed to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been
applied to 23 cities and villages. In 18 of these cities and
villages the fiscal situation has been resolved and the
procedures terminated.
At present the State itself does not levy any ad valorem
taxes on real or tangible personal property. Those taxes are
levied by political subdivisions and other local taxing
districts. The State Constitution limits the amount of the
aggregate levy of ad valorem property taxes, without a vote of
the electors or municipal charter provision, to 1% of true value
in money, and statutes limit the amount of the aggregate levy
without a vote or charter provision to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are
payable from property taxes unlimited as to amount or rate.
Pennsylvania Portfolio
The Pennsylvania Portfolio seeks the highest level of
current income exempt from both federal income tax and
Commonwealth of Pennsylvania ("Pennsylvania" or the
"Commonwealth") personal income tax that is available without
assuming what the Fund's Adviser considers to be undue risk to
income or principal by investing in medium-quality, intermediate
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and long-term debt obligations issued by the Commonwealth, its
political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt from federal income tax and Commonwealth of
Pennsylvania personal income tax. As a matter of fundamental
policy at least 65% of the Portfolio's total assets will be so
invested (except when the Portfolio is in a temporary defensive
position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be
invested in such Pennsylvania securities. As a matter of
fundamental policy, the Pennsylvania Portfolio will invest at
least 80% of its net assets in municipal securities the interest
on which is exempt from federal income tax. Under normal market
conditions, at least 65% of the Pennsylvania Portfolio's total
assets will be invested in income-producing securities (including
zero coupon securities). Shares of the Pennsylvania Portfolio
are available only to Pennsylvania residents.
The following was obtained from an Official Statement
dated November 28, 1995, relating to the issuance of $179,500,000
General Obligation Bonds, Second Series of 1995.
Economic Climate
The Commonwealth of Pennsylvania is the fifth most
populous state. Pennsylvania historically was identified as a
heavy industry state, although that reputation changed as the
industrial composition of the Commonwealth diversified when the
coal, steel and railroad industries began to decline. The major
new sources of growth in Pennsylvania are in the service sector,
including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries
are also an important component of the Commonwealth's economic
structure, accounting for more than $3.73 billion in crop and
livestock products annually, while agribusiness and food related
industries support $37 billion in economic activity annually.
Non-agricultural employment in the Commonwealth from
1983- 1990 increased 14.3%. Non-manufacturing employment reached
the level of 81.8% of total Commonwealth employment in 1994.
Consequently, manufacturing employment constitutes a diminished
share of total employment within the Commonwealth. Manufacturing,
contributing 18.2% of 1994 non-agricultural employment, has
fallen behind both the services sector and the trade sector as
the largest single source of employment within the Commonwealth.
In 1994, the services sector accounted for 30.1% of all non-
agricultural employment while the trade sector accounted for
22.5%.
From 1983 to 1989, Pennsylvania's annual average
unemployment rate dropped from 11.8% to 4.5%, falling below the
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national rate in 1986 for the first time in over a decade.
Pennsylvania's annual average unemployment rate remained below
the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise
to 6.9% in 1991 and 7.5% in 1992. The resumption of faster
economic growth resulted in a decrease in the Commonwealth's
unemployment rate to 7.1% in 1993. In 1994, unemployment fell to
6.2%. As of October 1995, the seasonally adjusted unemployment
rate for the Commonwealth was 5.1%, compared to 5.5% for the
United States.
Personal income in the Commonwealth for 1994 was $267.5
billion, an increase of 4.33% over the previous year. During the
same period, national personal income increased at a rate of
5.31%. Based on the 1994 personal income estimates, per capita
income for 1994 is estimated at $22,196 in the Commonwealth,
compared to per capita income in the United States of $21,699.
Financial Condition
Pennsylvania utilizes the fund method of accounting.
The General Fund, the Commonwealth's largest and principal
operating fund, receives all tax revenues, non-tax revenues and
federal grants and entitlements that are not specified by law to
be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the
General Fund. Debt service on all bond indebtedness of the
Commonwealth, except that issued for highway purposes or for the
benefit of other special revenue funds, is payable from the
General Fund.
Financial information for the General Fund is maintained
on a budgetary basis of accounting. Since 1984 the Commonwealth
has also prepared annual financial statements in accordance with
generally accepted accounting principles (GAAP).
On a budgetary basis, Commonwealth revenues during
fiscal year 1994 totaled $15.21 billion, $38.6 million above the
fiscal year estimate, and 3.9 percent over Commonwealth revenues
during the previous fiscal year. The sales tax was an important
contributor to the higher than estimated revenues. The strength
of collections from the sales tax off-set the lower than budgeted
performance of the personal income tax. The shortfall in the
personal income tax was largely due to shortfalls in income not
subject to withholding such as interest, dividends and other
income. Tax refunds in fiscal year 1994 were reduced
substantially below the $530 million amount provided in fiscal
year 1993.
Expenditures, excluding pooled financing expenditures
and net of all fiscal year 1994 appropriation lapses, totaled
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$14.93 billion, representing a 7.2 percent increase over fiscal
1993 expenditures. Medical assistance and corrections spending
contributed to the rate of spending growth for the fiscal year.
The Commonwealth maintained an operating balance on a
budgetary basis for fiscal 1994 producing a fiscal year ending
unappropriated surplus of $335.8 million. By Commonwealth
statute, ten percent ($33.6 million) of that surplus transferred
to the Tax Stabilization Reserve Fund and the remaining balance
will be carried over into the fiscal 1995 fiscal year. The
balance in the Tax Stabilization Reserve Fund as of October 31,
1994 was $63.9 million.
In fiscal year 1995, the major tax sources for the
General Fund were the sales tax, which accounted for $5.53
billion or 34.1% of tax revenues, the personal income tax, which
accounted for $5.0 billion or 31.3% of tax revenues, and the
corporate net income tax, which accounted for $1.91 billion, or
11.7% of tax revenues. The primary expenditures of the
Commonwealth's major operating funds are for education and public
health and welfare. Total funding for education purposes was $6.7
billion for the 1995 fiscal year. The enacted budget for fiscal
year 1996 increases funding for education by 3.5% to $6.9
billion.
On a budgetary basis, Commonwealth revenues for fiscal
year 1995 were above estimate and exceeded fiscal year
expenditures and encumbrances. Fiscal year 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in
the fiscal year-end unappropriated balance. Prior to reserves
for transfer to the Tax Stabilization Reserve Fund, the fiscal
year 1995 closing unappropriated surplus was $540.0 million, an
increase of $204.2 million over the fiscal year 1994 closing
unappropriated surplus prior to transfers.
Commonwealth revenues, which on a budgetary basis
totaled $15.8 billion, were $459.4 million, or 2.9 percent, above
the estimate of revenues used at the time the budget was enacted.
Corporation taxes contributed $329.4 million of the additional
receipts largely due to higher receipts from the corporate net
income tax. Fiscal year 1995 revenues from the corporate net
income tax were 22.6 percent over collections in fiscal year
1994. Personal income tax receipts for fiscal year 1995 were
slightly above the budgeted estimate. Receipts totaled $5.08
billion, $5.1 million above the estimate and 4.3 percent over
collections for fiscal year 1994. The higher rate of economic
growth for the nation and the state gave rise to increases in
employment, income and sales higher than expected, which
translated into above-estimate tax revenues.
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Tax revenue refunds were also higher than estimated in
the budget. The reserve for tax refunds was increased during the
fiscal year from $410 million to $460 million, a 110 percent
increase over refunds budgeted in fiscal year 1994, which were
unusually low due to a carryover of $160 million of reserves for
tax refunds from fiscal year 1993. An acceleration of the tax
refund process for corporation taxes, litigation settlements, and
an increase in the personal income tax poverty exemption
contributed to tax refunds being higher than initially budgeted.
Expenditures from Commonwealth revenues (excluding pooled
financing expenditures), including $65.5 million of supplemental
appropriations enacted at the close of the 1995 fiscal year,
totaled $15.67 billion, representing an increase of 5 percent
over spending during fiscal year 1994. Funds held in reserve at
the end of fiscal year 1995 for transfer to the Tax Stabilization
Reserve Fund totaled $111.0 million. Upon approval by the
General Assembly of the additional transfers used and the
completion of the required and proposed transfers, the Tax
Stabilization Reserve Fund is anticipated to have an available
balance of $177.3 million, representing approximately 1.1 percent
of General Fund annual Commonwealth revenues.
The enacted fiscal year 1996 budget provides for
expenditures from Commonwealth revenues of $16.16 billion, a 2.7
percent increase over total appropriations from Commonwealth
revenues in fiscal year 1995. The appropriations increase for
fiscal year 1996 is one of the lowest rates in recent years. The
fiscal year 1996 budget is based on anticipated Commonwealth
revenues, net of enacted tax changes, of $16.27 billion, an
increase over actual fiscal year 1995 Commonwealth revenues of
0.3 percent. Excluding the estimated effects of the tax changes
enacted in 1994 and 1995, Commonwealth revenues for fiscal year
1996 are estimated to increase by approximately 2.9 percent. The
fiscal year 1995 revenue estimate is based on a forecast of the
national economy for gross domestic product growth to slow from
4.1 percent in 1994 to an average annual rate for 1995 of 2.4
percent and then to 1.3 percent in 1996. The lower rate of
growth is a consequence of anticipated smaller rates of increase
for consumer spending, business fixed investment and exports. The
anticipated decline in the rate of economic growth is also
expected to lead to an increase in the national unemployment rate
to a rate above 6 percent by the end of 1995 and above a rate of
6.5 percent by the end of fiscal year 1996. Tax changes enacted
with the fiscal year 1996 budget totaled $282.9 million,
representing approximately 1.7 percent of base revenues.
Increases in authorized spending for fiscal year 1996
emphasize education. Appropriations for the basic subsidy for
public schools were increased $143 million, representing a 4.4
percent increase. The budget also contemplates several changes
to certain public welfare programs. Changes made by the General
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Assembly include the termination of the category of
transitionally needy for cash assistance after June 30, 1995.
Newly qualifying members of this category would no longer be
eligible for cash payments for up to two months every two years,
but would continue to be eligible for food stamps and medical
assistance benefits. The legislation also eliminated cash
assistance payments for certain other limited recipients.
Estimated savings are approximately $27 million based on a
caseload of approximately 90,000 persons per year. The enacted
budget also included most of the Governor's proposed
consolidation and elimination of several organizations and/or
appropriations. The consolidated programs were absorbed within
existing organizations. Savings of $5.2 million are anticipated
to result from these consolidations and eliminations.
For the fiscal year 1996 through October, revenue
receipts have totaled $24.2 million above estimate, representing
approximately 0.5 percent over the estimate for the period. The
above-estimate receipts were due to corporate tax collections
during the period that were $27.0 million above estimate.
Expenditures in certain items were above estimated levels during
the first four months of the fiscal year. These areas are being
analyzed for any potential need for supplemental appropriations
for the fiscal year.
City of Philadelphia
Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census. The audited General Fund balances of Philadelphia as of
June 30, 1994 showed a surplus of approximately $15.4 million, up
from approximately $3 million as of June 30, 1993. Preliminary
unaudited General Fund financial settlements at June 30, 1995
project a surplus of approximately $59.6 million.
In June 1991, the Pennsylvania Intergovernmental
Cooperation Authority ("PICA") was created to assist the City of
Philadelphia in remedying fiscal emergencies through the issuance
of funding debt to make factual findings and recommendations to
Philadelphia concerning its budgetary and fiscal affairs. PICA
has issued $1,418,680,000 of its Special Tax Revenue Bonds.
Currently, Philadelphia is operating under a five-year fiscal
plan approved by PICA on April 17, 1995. PICA approved a revised
five-year plan on July 18, 1995.
Commonwealth Debt
The current Constitutional provisions pertaining to
Commonwealth debt permit the issuance of the following
types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster, (ii) electorate approved
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debt, (iii) debt for capital projects subject to an aggregate
debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years, and (iv) tax anticipation notes
payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular
amounts.
Outstanding general obligation debt totaled $5.04
billion at June 30, 1995, a decrease of $30.4 million from June
30, 1994. Over the 10-year period ending June 30, 1995, total
outstanding general obligation debt increased at an annual rate
of 1.1 percent. Within the most recent 5-year period, outstanding
general obligation debt has grown at an annual rate of 1.7
percent.
Certain state-created organizations have statutory
authorization to issue debt for which state appropriations to pay
debt service thereon are not required. The debt of these
organizations is funded by assets of, or revenues derived from
the various projects financed and is not a statutory or moral
obligation of the Commonwealth. However, some of these
organizations are indirectly dependent upon Commonwealth
operating appropriations. In addition, the Commonwealth may
choose to take action to financially assist these organizations.
Litigation
On September 28, 1978 the General Assembly approved a
limited waiver of sovereign immunity. Damages for any loss are
limited to $250,000 for each person and $ 1,000,000 for each
accident. The Supreme Court of Pennsylvania held that this
limitation is constitutional. Approximately 3,500 suits against
the Commonwealth remain open.
The Commonwealth's Office of Attorney General and its
Office of General Counsel have reviewed the status of pending
litigation against the Commonwealth, its officers and employees,
and have identified certain cases as ones where an adverse
decision may have a material effect on government operations of
the Commonwealth and, consequently, the Commonwealth's ability to
pay debt service on its obligations.
The following are certain significant cases pending
against the Commonwealth:
Baby Neal v. Commonwealth et al.
The American Civil Liberties Union and various named
plaintiffs are seeking an order that would require the
Commonwealth to provide additional funding for child welfare
services. No figures for the amount of funding sought are
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available. A similar lawsuit filed in the Commonwealth Court of
Pennsylvania was resolved through a court approved settlement
that provided for more Commonwealth funding for these services
for fiscal year 1991 as well as a commitment to pay to counties
$30.0 million over five years.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity")
filed a declaratory judgment action in the Commonwealth Court of
Pennsylvania in which Fidelity raised various challenges to the
constitutional validity of the amended Bank Shares Act and
related legislation. Pursuant to a Settlement Agreement dated as
of April 21, 1995, the Commonwealth agreed to enter a credit in
favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues, including
interest. Pursuant to a separate Settlement Agreement dated as
of April 21, 1995, the Commonwealth settled with intervening
banks.
Although the described settlements have quantified the
Commonwealth's exposure to Fidelity and the intervening banks,
other banks have filed protective Petitions which are currently
pending with the Board of Appeals or Board of Finance and
Revenue. Depending upon the outcomes of these administrative
appeals, one or more of these banks may seek to raise the issues
which were advanced by Fidelity, although not brought to final
resolution by the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools
("PARSS") v. Casey
This litigation challenges the constitutionality of the
Commonwealth's system for funding local school districts. The
trial in state court has not yet been scheduled and the federal
court case has been indefinitely stayed.
Envirotest/Synterra Partners
This litigation was brought by companies which had
invested $200 million in reliance on the Commonwealth's
adopting an emissions testing program. After the program was
canceled, the companies sued the Commonwealth, seeking damages in
excess of $350 million. The Office of General Counsel believes
it is premature at this time to estimate the nature and size of
the potential recovery in this matter.
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Virginia Portfolio
The Virginia Portfolio seeks the highest level of
current income exempt from both federal income tax and
Commonwealth of Virginia ("Virginia" or the "Commonwealth")
personal income tax that is available without assuming what the
Fund's Adviser considers to be undue risk to income or principal
by investing in medium-quality, intermediate and long-term debt
obligations issued by the Commonwealth, its political
subdivisions, agencies and instrumentalities the interest on
which, in the opinion of bond counsel to the issuer, is exempt
from federal income tax and Commonwealth of Virginia personal
income tax. As a matter of fundamental policy at least 65% of
the Portfolio's total assets will be so invested (except when the
Portfolio is in a temporary defensive position), although it is
anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Virginia
securities. As a matter of fundamental policy, the Virginia
Portfolio will invest as least 80% of its net assets in municipal
securities the interest on which is exempt from federal income
tax. Under normal market conditions, at least 65% of the
Virginia Portfolio's total assets will be invested in income-
producing securities (including zero coupon securities). Shares
of the Virginia Portfolio are available only to Virginia
residents.
The following is based on information obtained from an
Official Statement, dated September 20, 1995, relating to
$26,960,000 Commonwealth of Virginia General Obligation Bonds,
Series 1995.
Economic Climate
The Commonwealth of Virginia is the twelfth most
populous state in the nation, with approximately 6,552,000
residents. In 1994 its population density was 165 persons per
square mile, compared with 72 persons per square mile for the
United States.
The largest metropolitan area is the northern Virginia
portion of the Washington, D.C. Metropolitan Statistical Area
("MSA"). This is the fastest growing metropolitan area in
Virginia and had a 1994 population of 1,889,900. Northern
Virginia has long been characterized by the large number of
people employed in both civilian and military work with the
federal government. However, it is also one of the nation's
leading high-technology centers for computer software and
telecommunications. Per capita income for the Northern Virginia
portion of the Washington, D.C. MSA in 1993 was $27,761.
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Spanning Hampton Roads is the Norfolk-Virginia Beach-
Newport News MSA, which has large military installations and
outstanding port facilities. It had a 1994 population of
1,513,600 and is an important center of manufacturing and
tourism. The Richmond- Petersburg MSA is a leading center of
diversified manufacturing activity including chemicals, tobacco,
printing, paper, metals and machinery. Richmond is also the
capital of Commonwealth and a financial center which includes the
Fifth District Federal Reserve Bank. The Roanoke MSA is the
manufacturing, trade and transportation center for the western
part of Virginia. It had a 1994 population of 228,600. Also in
the western part of Virginia are the Lynchburg and Johnson City-
Kingsport-Bristol MSAs, which are both manufacturing centers and
had 1994 populations of 202,900 and 88,900, respectively.
According to the U.S. Department of Commerce, Virginians
received more than $148 billion in personal income in 1994,
representing an increase of 89% over 1985 and greater than the
national gain of 71.3% for the same period. In 1994, Virginia
had per capita income of $22,594, the highest of the Southeast
region and greater than the national average of $21,809.
Virginia's per capita income rose from 94% to 104% of the
national average from 1970 to 1994. However, Virginia per capita
personal income in 1990, 1992 and 1994 grew at a lower rate than
the U.S. average. Much of Virginia's per capita income gain in
the last decade has been due to the continued strength of the
manufacturing sectors, rapid growth of high technology
industries, basic business services, corporate headquarters and
regional offices and the attainment of parity with the nation in
labor force participation rates.
Services, the largest employment sector, accounts for
27.6% of nonagricultural employment, and increased 13.2% from
1990- 1994, compared to 3.8% growth in total nonagricultural
employment in Virginia during that same period. Manufacturing is
also a significant employment sector, accounting for 13.5% of
nonagricultural employment in 1994. The industries with the
greatest manufacturing employment are transportation equipment,
textiles, food processing, electric and electronic equipment,
printing, chemicals, apparel, lumber and wood products and
furniture. These nine industries account for two-thirds of the
Commonwealth's total manufacturing employment. Employment in the
manufacturing sector decreased 5.1% from 1990-1994.
Virginia generally has one of the lowest unemployment
rates in the nation, according to statistics published by the
U.S. Department of Labor. During 1994, an average of 4.9% of
Virginia's citizens were unemployed as compared with the national
average which was 6.1%.
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Virginia is one of twenty states with a Right-to-Work
Law and has a record of good labor management relations. Its
favorable business climate is reflected in the relatively small
number of strikes and other work stoppages it experiences.
Virginia is one of the least unionized of the more
industrialized states. Three major reasons for this situation
are the Right-to-Work Law, the importance of manufacturing
industries such as textiles, apparel, electric and electronic
equipment, and lumber, which are not highly organized in
Virginia, and the importance of federal civilian and military
employment. Typically the percentage of nonagricultural
employees who belong to unions in the Commonwealth has been
approximately half the U.S. average.
Budgetary Process
The Constitution of Virginia limits the ability of the
Commonwealth to create debt. The Constitution requires the
Governor to ensure that expenses do not exceed total revenues
anticipated plus fund balances during the period of two years and
six months following the end of the General Assembly session in
which the appropriations are made. An amendment to the
Constitution, effective January 1, 1993, established the Revenue
Stabilization Fund. The Revenue Stabilization Fund is available
to offset, in part, anticipated shortfalls in revenues in years
when appropriations, based on previous forecasts, exceed expected
revenues in subsequent forecasts. As of June 30, 1995,
$79,897,000 was on deposit in the Revenue Stabilization Fund for
the 1994-1996 Biennium.
Tax-supported debt of Virginia includes both general
obligation debt and debt of agencies, institutions, boards and
authorities for which debt service is expected to be made in
whole or in part from appropriations of tax revenues. Certain
bonds issued by certain authorities that are designed to be self-
supporting from their individual loan programs are secured in
part by a moral obligation pledge of Virginia. Virginia may fund
deficiencies that may occur in debt service reserves for moral
obligation debt. To date, these authorities have not requested
that the Commonwealth fund reserve deficiencies for this debt.
There are also several authorities and institutions of the
Commonwealth that issue debt for which debt service is not paid
through appropriations of state tax revenues and for which there
is no moral obligation pledge to consider funding debt service or
reserve fund deficiencies.
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Financial Condition
The Commonwealth ended the fiscal year on June 30, 1995
with general fund revenues exceeding budget projections by $64.9
million. The majority of the increase, $51.6 million, came from
tax and other revenues, $10.6 million from additional Lottery
profits and the balance from The Department of Alcohol Beverage
Control profits and miscellaneous transfers. The preliminary
unaudited results for the fiscal year 1995 show a general fund
balance of $350.7 million which is slightly above the fiscal year
1993 balance, but below that of fiscal year 1994. The fund
balance for fiscal year 1994, however, was unusually large,
resulting from greater than expected revenue collections, coupled
with expenditure rates lower than anticipated.
Of the June 30, 1995 fund balance, $79.9 million is
reserved for the Revenue Stabilization Fund. On a routine basis,
this fund is segregated from the general fund and can only be
used for constitutionally authorized purposes. Virginia law
directs that the fund be included as a component of the general
fund only for financial reporting purposes. Also reserved is the
second annual installment of the federal retiree settlement,
$70.0 million, and $1.7 million in working capital advances.
Although revenues exceeded expenditures in fiscal year
1995, the general fund balance decreased by $168.0 million. This
is attributable to a 32% increase in transfers from the general
fund. The large change in transferees is due to the first
federal retiree settlement payment of $60.0 million, a $35.6
million transfer to the newly created Public Safety Fund, and a
$30.0 million increase in transfers to higher education
institutions.
Litigation
In Davis v. Michigan (decided March 28, 1989), the
United States Supreme Court ruled unconstitutional states'
exempting from state income tax the retirement benefits paid by
the state or local governments and not exempting retirement
benefits paid by the federal government. At that time, Virginia
exempted state and local retirement benefits but not federal
retirement benefits. At a Special Session held in April 1989,
the General Assembly repealed the exemption of state and local
retirement benefits. In Harper v. Virginia Department of
Taxation (decided June 18, 1993), the United States Supreme Court
held, in a suit involving claims for refunds by federal retirees
living in Virginia that Virginia state income tax statutes
violated the principles of Davis v. Michigan, and remanded the
case for further relief so long as the relief was consistent with
federal due process procedures. In a Special Session, the
Virginia General Assembly on July 9, 1994, passed emergency
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legislation to provide payments to federal retirees in settlement
of the retirees' claims as a result of Davis v. Michigan. The
total amount of authorized appropriations was $340 million plus
earnings on the investment of appropriations, payable through
March 31, 1999. The total principal amount of the claims of the
retirees opting out of the settlement was in excess of $47
million. Those retirees opting out of the settlement elected to
be bound by the final court decision. On September 15, 1995, the
Supreme Court of Virginia entered final judgment in favor of the
taxpayers, directing that the amounts unlawfully collected be
refunded with statutory interest. Virginia, Attorney General is
analyzing the opinion and considering its options in response to
the decision. The potential cost of refunding all Virginia
income taxes paid on federal government pensions for taxable
years 1985-1988 to federal government pensioners who opted out of
the settlement is approximately $78.4 million, including interest
earnings, as of September 18, 1995.
The foregoing 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
Portfolios will invest or the private business entities whose
obligations support the payments on AMT-Subject Bonds in which
the Portfolios will invest. For further information on these
securities and their issuers, see the general discussions above
under "Risks of Concentration In a Single State" and below under
"Additional Investment Policies."
Additional Investment Policies
General. Municipal securities include municipal bonds
as well as short-term (i.e., maturing in under one year to as
much as three years) municipal notes, demand notes and tax-exempt
commercial paper. In the event a Portfolio invests in demand
notes, the Adviser will continually monitor the ability of the
obligor under such notes to meet its obligations. Typically,
municipal bonds are issued to obtain funds used to construct a
wide range of public facilities, such as schools, hospitals,
housing, mass transportation, airports, highways and bridges. The
funds may also be used for general operating expenses, refunding
of outstanding obligations and loans to other public institutions
and facilities.
Municipal bonds have two principal classifications:
general obligation bonds and revenue or special obligation bonds.
General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal
and interest. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
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special excise tax or other specific revenue source but not from
general tax and other unrestricted revenues of the issuer. The
term "issuer" means the agency, authority, instrumentality or
other political subdivision whose assets and revenues are
available for the payment of principal of and interest on the
bonds. Certain types of private activity bonds are also
considered municipal bonds if the interest thereon is exempt from
federal income tax. Private activity bonds are issued by or on
behalf of public authorities to obtain funds for various
privately-operated manufacturing facilities, airports, housing
projects, resource recovery programs, solid waste disposal
facilities, student loan programs and water and sewage disposal
facilities.
Private activity bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the
principal and interest on such private activity bonds depends
solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for
such payment.
A 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.
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A Portfolio may also invest in municipal securities, the
interest rate on which has been divided into two different and
variable components, which together result in a fixed interest
rate. Typically, the first of the components (the "Auction
Component") pays an interest rate that is reset periodically
through an auction process, whereas the second of the components
(the "Residual Component") pays a current residual interest rate
based on the difference between the total interest paid by the
issuer on the municipal securities and the auction rate paid on
the Auction Component. A Portfolio may purchase both Auction and
Residual Components.
Because the interest rate paid to holders of Residual
Components is generally determined by subtracting the interest
rate paid to the holders of Auction Components from a fixed
amount, the interest rate paid to Residual Component holders will
decrease the Auction Component's rate increases and increase as
the Auction Component's rate decreases. Moreover, the extent of
the increases and decreases in market value of Residual
Components may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal
security having similar credit quality, redemption provisions and
maturity.
Municipal notes in which a Portfolio may invest include
demand notes, which are tax-exempt obligations that have stated
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.
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Tax-exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less (however, issuers
typically do not issue such obligations with maturities longer
than seven days). Such obligations are issued by state and local
municipalities to finance seasonal working capital needs or as
short-term financing in anticipation of longer-term financing.
There are, of course, variations in the terms of, and
the security underlying, municipal securities, both within a
particular rating classification and between such
classifications, depending on many factors. The ratings of
Moody's, S&P and Fitch represent their opinions of the quality of
the municipal securities rated by them. It should be emphasized
that such ratings are general and are not absolute standards of
quality. Consequently, municipal securities with the same
maturity, coupon and rating may have different yields, while the
municipal securities of the same maturity and coupon, but with
different ratings, may have the same yield. The Adviser
appraises independently the fundamental quality of the securities
included in the Fund's portfolios.
Yields on municipal securities are dependent on a
variety of factors, including the general conditions of the
municipal securities market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. An
increase in interest rates generally will reduce the market value
of portfolio investments, and a decline in interest rates
generally will increase the value of portfolio investments.
Municipal securities with longer maturities tend to produce
higher yields and are generally subject to greater price
movements than obligations with shorter maturities. Under normal
circumstances the average weighted maturity of the securities in
each Portfolio will range between 10 and 25 years. However, no
Portfolio has any restrictions on the maturity of municipal
securities in which it may invest. Since the Portfolios'
objective is to provide high current income, they will emphasize
income rather than stability of net asset values, and the average
maturity of the Portfolios will vary depending on anticipated
market conditions. The Portfolios will seek to invest in
municipal securities of such maturities that, in the judgment of
the Adviser, will provide a high level of current income
consistent with liquidity requirements and market conditions.
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, although from time
to time there have been proposals which would require
registration in the future.
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After purchase by a Portfolio, a municipal security may
cease to be rated or its rating may be reduced below the minimum
required for purchase by such Portfolio. Neither event requires
sales of such security by such Portfolio, but the Adviser will
consider such event in its determination of whether such
Portfolio should continue to hold the security. To the extent
that the ratings given by Moody's, S&P or Fitch may change as a
result of changes in such organizations or their rating systems,
the Adviser will attempt to use such changed ratings in a manner
consistent with the Fund's quality criteria as described in the
Prospectus for each of its Portfolios.
Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Code. In addition, the obligations of such
issuers may become subject to laws enacted in the future by
Congress, state legislatures, or referenda extending the time for
payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the
possibility that, as a result of litigation or other conditions,
the ability of any issuer to pay, when due, the principal or the
interest on its municipal bonds may be materially affected.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
securities. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the
availability of municipal securities for investment by the Fund
and the value of the Fund's Portfolios would be affected.
Additionally, the Fund would reevaluate its investment objectives
and policies.
Defensive Position. Under normal circumstances,
substantially all of the total assets of each Portfolio will be
invested in the types of securities described in "Investment
Objective and Policies" in the Prospectus. For temporary
defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P,
MIG-2 (or VMIG-2) or higher by Moody's, or FIN-2 or higher by
Fitch, or in taxable cash equivalents, including, in the case of
each Portfolio other than the Florida Portfolio, (i) short-term
obligations of the U.S. Government and its agencies or
instrumentalities ("U.S. Government Securities"), (ii)
certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of
more than $1 billion and which are members of the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality
rated A-1 or higher by S&P, Prime-1 or higher by Moody's, or
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Fitch-1 or higher by Fitch or, if not rated, issued by companies
which have an outstanding debt issue rated AA or higher by S&P or
Fitch or Aa or higher by Moody's and (iv) repurchase agreements
and, in the case of the Florida Portfolio, only (a) short-term
U.S. Government Securities and (b) repurchase agreements. If for
any reason there is not an adequate supply of Minnesota municipal
securities, the Minnesota Portfolio may have to hold cash
uninvested in order to preserve the Minnesota tax status of its
dividends. Cash held uninvested will not earn income. See
"Dividends, Distributions and Taxes."
Apart from temporary defensive purposes, each Portfolio,
other than the Florida Portfolio, may at any time elect to invest
up to 20% of its total assets in taxable cash equivalents and
repurchase agreements of the types specified in the preceding
paragraph. The Florida Portfolio may at any time elect to invest
up to 20% of its total assets in short-term U.S. Government
Securities and repurchase agreements of the types specified in
the preceding paragraph. Nonetheless, it is anticipated that
under normal circumstances substantially all of the assets of the
Portfolios will be invested in municipal securities generating
tax-exempt income.
Non-Diversified Status. Each Portfolio is
non-diversified, which means that the Portfolio is not subject to
any statutory restriction under the Investment Company Act of
1940, as amended (the "Act") with respect to the investment of
its assets in the securities of a relatively few municipal
issuers. As a non-diversified investment company, each Portfolio
may present greater risks than a diversified company.
Nevertheless, in order to qualify as a "regulated investment
company" for Federal income tax purposes, each Portfolio will be
restricted in that, among other limitations, at the close of each
quarter of the taxable year, at least 50% of the value of each
Portfolio's total assets must be represented by cash, government
securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of each
Portfolio, and to not more than 10% of the outstanding voting
securities of any one issuer. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of each
Portfolio's total assets may be invested in securities of one
issuer.
Futures Contracts and Options on Futures Contracts.
Each Portfolio may enter into contracts for the purchase or sale
for future delivery of municipal securities, U.S. Government
Securities or contracts based on financial indices, including any
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
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acquisition of a contractual obligation to deliver the securities
called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the incurring of
a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. The
purchaser of a futures contract on an index agrees to take or
make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on
the expiration date of the contract ("current contract value")
and the price at which the contract was originally struck. No
physical delivery of the fixed-income securities underlying the
index is made. Options on futures contracts written or purchased
by a Portfolio will be traded on U.S. exchanges or over-the-
counter. These investments techniques will be used only to hedge
against anticipated future changes in interest rates which
otherwise might either adversely affect the prices of securities
which a Portfolio intends to purchase at a later date.
A Portfolio's ability to dispose of its position in
futures contracts and options on futures contracts will depend on
the availability of liquid markets in such instruments. Markets
in futures contracts and options on futures contracts 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 a secondary market does 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 may not be able to sell
portfolio securities covering an option written by the Portfolio
until the option expires or it delivers the underlying security
or futures contract upon exercise. Therefore, no assurance can
be given that a Portfolio will be able to utilize these
instruments effectively for the purposes set forth above.
Furthermore, a Portfolio's ability to engage in options and
futures transactions may be limited by tax considerations.
The Trustees have adopted the requirement that futures
contracts and options on futures contracts only be used as a
hedge and not for speculation. In addition to this requirement,
the Trustees have also restricted the Portfolios' use of futures
contracts so that the aggregate of the market value of the
outstanding futures contracts of the Portfolio and the market
value of the futures contracts subject to outstanding options
written by the Portfolio not exceed 50% of the market value of
the total assets of the Portfolio. These restrictions will not
be changed by the Fund's Trustees without considering the
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policies and concerns of the various applicable Federal and state
regulatory agencies.
The successful use of futures and related options draws
upon the Adviser's special skills and experience with respect to
such instruments and usually depends on the Adviser's ability to
forecast interest rate movements correctly. 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. Should
interest rates move in an unexpected manner, a Portfolio may not
achieve the anticipated benefits of futures contracts or options
on futures contracts or may realize losses and thus will be in a
worse position than if such strategies had not been used. In
addition, 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 cash, or
liquid, high-grade debt obligations equal to the market value of
the futures contract (less related margin) in a segregated
account with the Fund's custodian or a futures margin account
with a broker. 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.
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.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
Options on Municipal and U.S. Government Securities. In
an effort to increase current income and to reduce fluctuations
in net asset value, the Portfolios intend to write covered put
and call options and purchase put and call options on municipal
securities and U.S. Government Securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and
purchasing of options by those Portfolios.
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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 cash and liquid high-grade debt securities in a
segregated account with the Fund's custodian. A put option
written by a Portfolio is "covered" if the Portfolio maintains
cash or liquid high-grade debt securities 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 cash or liquid high-grade debt
securities in an amount not less than the market value of the
underlying security, marked to market daily. A Portfolio would
write a call option for cross-hedging purposes, instead of
writing a covered call option, when the premium to be received
from the cross-hedge transaction would exceed that which would be
received from writing a covered call option 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
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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 monitoring the creditworthiness of such entities.
Options purchased or written in negotiated transactions are
illiquid and it may not be possible for the Portfolios to effect
a closing transaction at a time when the Adviser believes it
would be advantageous to do so. See "Description of the
Portfolios - Additional Investment Policies - Illiquid
Securities" in the Prospectus.
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Interest Rate Transactions. Each Portfolio may enter
into interest rate swaps and may purchase or sell interest rate
caps and floors. 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 purchaser 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 they are hedging their assets or their
liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, on the 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
cash or liquid high-grade debt securities 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 cap on other than a net
basis, the Portfolio will maintain in a segregated account with
the Custodian the full amount, accrued daily, of the Portfolio's
obligations with respect to the swap. A Portfolio will not enter
into any interest rate swap, cap or floor unless the unsecured
senior debt or the claims paying ability of the other party
thereto is then rated in the highest 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 as
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 having an aggregate net asset value at
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least equal to the full amount, accrued daily, of the Portfolio's
obligations with respect to any caps or floors.
The use of interest rate swaps is a highly specialized
activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities
transactions. If the Adviser were incorrect in its forecasts of
market values, interest rates and other applicable factors, the
investment performance of the Portfolios would diminish compared
with what they would have been if these investment techniques
were not used. Moreover, even if the Adviser is correct in its
forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being
hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by any of the Portfolios.
These transactions do not involve the delivery of securities or
other underlying assets of principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net
amount of interest payments that a Portfolio is contractually
obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount
of interest payments that the Portfolio contractually is entitled
to receive. A Portfolio may purchase and sell (i.e., write) caps
and floors without limitation, subject to the segregated account
requirement described above.
When-Issued Securities and Forward Commitments. Each
Portfolio may purchase municipal securities offered on a
"when-issued" basis and may purchase or sell municipal securities
on a "forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment by a
Portfolio and settlement, no payment is made for the securities
purchased by the purchaser, and, thus, no interest accrues to the
purchaser from the transaction. The use of when-issued
transactions and forward commitments enables a Portfolio to hedge
against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling bond
prices, a Portfolio might sell municipal securities which it
owned on a forward commitment basis to limit its exposure to
falling 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
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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, cash or liquid, high-grade debt securities 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 and
if issued" basis may increase the volatility of the Portfolio's
net asset value. At the time a Portfolio makes the commitment to
purchase or sell a municipal security on a when-issued or forward
commitment basis, it records the transaction and reflects the
value of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. No when-issued or
forward commitments will be made by any Portfolio if, as a
result, more than 20% of the value of such Portfolio's total
assets would be committed to such transactions.
Repurchase Agreements. Each Portfolio may seek
additional income by investing in repurchase agreements
pertaining only to U.S. Government Securities. A repurchase
agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an
agreed-upon future date, normally one day or a few days later.
The resale price is greater than the purchase price, reflecting
an agreed-upon market rate which is effective for the period of
time the buyer's money is invested in the security and which is
not related to the coupon rate on the purchased security. Such
agreements permit a Portfolio to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. Each Portfolio maintains procedures for
evaluating and monitoring the creditworthiness of vendors of
repurchase agreements. In addition, each Portfolio requires
continual maintenance of collateral held by the Fund's Custodian
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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 United States Government securities. It is the
Fund's current practice to enter into repurchase agreements only
with such primary dealers.
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 the
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. 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 of 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
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in options and futures transactions may be limited by tax
consideration.
Illiquid Securities. Subject to any applicable
fundamental investment policy, each Portfolio may maintain up to
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, the Portfolios may not be
able to realize their value upon sale.
Defensive Position. Under normal circumstances,
substantially all of the total assets of each Portfolio will be
invested in the types of municipal securities described in
"Description of the Portfolios - How The Portfolios Pursue Their
Objective" in the Prospectus. However, when business or
financial conditions warrant, each Portfolio may assume a
temporary defensive position and invest without limits in other
municipal securities that are in all other respects consistent
with the Portfolio's investment policies. For temporary
defensive purposes, each Portfolio may also invest without limit
in high-quality municipal notes, rated SP-2 or higher by S&P,
MIG-2 (or VMIG-2) or higher by Moody's, or FIN-2 or higher by
Fitch, or taxable cash equivalents (limited, in the case of the
Florida Portfolio, to short-term U.S Government Securities or
repurchase agreements).
Portfolio Turnover. From time to time, the Portfolios
may engage in active short-term trading to benefit from yield
disparities among different issues of municipal securities, to
seek short-term profits during periods of fluctuating interest
rates, or for other reasons. Such trading will increase a
Portfolio's rate of turnover and the incidence of short-term
capital gain taxable as ordinary income. Management anticipates
that the annual turnover in each Portfolio will not exceed 250%.
An annual turnover rate of 200% occurs, for example, when all of
the securities in a Portfolio are replaced twice in a period of
one year. A high rate of portfolio turnover involves
correspondingly greater expenses than a lower rate, which
expenses must be borne by a Portfolio and its shareholders.
However, the execution costs for municipal securities are
substantially less than those for equivalent dollar value of
equity securities. See "Dividends, Distributions and Taxes."
The portfolio turnover rates of securities of the
Arizona Portfolio, Florida Portfolio, Massachusetts Portfolio,
Michigan Portfolio, Minnesota Portfolio, New Jersey Portfolio,
Ohio Portfolio, Pennsylvania Portfolio and Virginia Portfolio for
the fiscal period or fiscal year ended September 30, 1994 were
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81%, 185%, 146%, 222%, 143%, 171%, 161%, 156% and 65%,
respectively.
The portfolio turnover rates of securities of the
Arizona Portfolio, Florida Portfolio, Massachusetts Portfolio,
Michigan Portfolio, Minnesota Portfolio, New Jersey Portfolio,
Ohio Portfolio, Pennsylvania Portfolio and Virginia Portfolio for
the fiscal year ended September 30, 1995 were 85%, 146%, 155%,
151%, 117%, 86%, 108%, 114% and 128%, respectively.
Special Risk Considerations. Securities rated Baa are
considered by Moody's to have speculative characteristics.
Sustained periods of deteriorating economic conditions or rising
interest rates are more likely to lead to a weakening in the
issuer's capacity to pay interest and repay principal than in the
case of higher-rated securities. Securities rated below
investment grade, i.e., Ba or BB and lower, ("lower-rated
securities") are subject to greater risk of loss of principal and
interest than higher-rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic
conditions or rising interest rates. They are also generally
considered to be subject to greater market risk than higher-rated
securities in times of deteriorating economic conditions. In
addition, lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions
than investment grade securities.
The market for lower-rated securities may be thinner and
less active than that for higher-quality securities, which can
adversely affect the prices at which these securities can be
sold. To the extent that there is no established secondary
market for lower-rated securities, the Portfolio may experience
difficulty in valuing such securities and, in turn, the
Portfolio's assets. In addition, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities. Under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989,
federally-insured savings and loan associations are required to
divest their investments in non-investment grade corporate debt
securities by July 1, 1994. Such divestiture could have a
material effect on the market and prices of such securities.
The ratings of fixed-income securities by Moody's, S&P
and Fitch are a generally accepted barometer of credit risk.
They are, however, subject to certain limitations from an
investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between
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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
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.
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.
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Investment Restrictions
Unless specified to the contrary, the following
restrictions apply to each Portfolio and are fundamental policies
which may not be changed with respect to any such Portfolio
without the affirmative vote of the holders of a majority of such
Portfolio's outstanding voting securities, which means with
respect to any such Portfolio (1) 67% or more or the shares
represented at a meeting at which more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of the outstanding shares, whichever is less. Each such
Portfolio may not:
(1) Invest 25% or more of its total assets in the
securities of issuers conducting their principal
business activities in any one industry, provided that
for purposes of this policy (a) there is no limitation
with respect to investments in municipal securities
issued by governmental users (including private activity
bonds issued by governmental users) or securities issued
or guaranteed by the United States Government and (b)
consumer finance companies, industrial 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
with the primary responsibility for the payment of
interest an principal as the issuer);
(2) Pledge, hypothecate, mortgage or otherwise
encumber its assets, except in an amount of not more
than 15% of the value of its total assets, to secure
borrowings for temporary or emergency purposes;
(3) Make short sales of securities, maintain a
short position or purchase securities on margin;
(4) Participate on a joint or joint and several
basis in any securities trading account;
(5) Issue any senior security within the meaning
of the Act, except that the Fund may borrow money 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
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of 5% of the value of the Fund's total assets will be
repaid before any subsequent investments are made;
(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 8 below and
(iii) entering into repurchase agreements;
(7) Act as an underwriter of securities of other
issuers, except that a Portfolio may acquire restricted
or not readily marketable securities under circumstances
where, if such securities were sold, the Fund might be
deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended;
(8) Purchase or sell commodities or commodity
contracts, (except forward commitment contracts or
contracts for the future acquisition of debt securities
and related options, futures contracts and options on
futures contracts and other similar contracts);
(9) Write put and call options except in
accordance with its investment objective and policies;
or
(10) Purchase or sell real estate.
To reduce investment risk, the Portfolios have adopted
the following fundamental policies:
No Portfolio other than the Insured California Portfolio
may: (i) invest more than 5% of its total assets in the
securities of any one issuer except the U.S. Government, although
with respect to 25% of the total assets of the National and
Insured National Portfolios and 50% of the total assets of the
State Portfolios (other than the Insured California Portfolio)
each such Portfolio may invest in any number of issuers; (ii)
invest 25% or more of its total assets in the securities of
issuers conducting their principal business activities in any one
industry, provided that for purposes of this policy (a) there is
no limitation with respect to investments in municipal securities
issued by governmental users (including private activity bonds
issued by governmental users), U.S. Government Securities and (b)
consumer finance companies, industrial finance companies and gas,
electric, water and telephone utility companies are each
considered to be separate industries (for purposes of this
restriction, the Portfolio will regard the entity with the
primary responsibility for the payment of interest and principal
as the issuer); (iii) purchase more than 10% of any class of the
voting securities of any one issuer; (iv) have more than 5% of
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its assets invested in repurchase agreements with the same
dealer; (v) borrow money except from banks for temporary or
emergency purposes and then in amounts not exceeding 20% of its
total assets - or (vi) in the case of the National, Insured
National, New York and California Portfolios, invest more than
10% of its total assets in repurchase agreements not terminable
within seven days (whether or not illiquid) or other illiquid
investments.
The Insured California Portfolio may not: (i) except
when investing for temporary defensive purposes, invest more than
35% of its total assets in securities not covered by insurance
which provides for the payment of principal of and interest on
such securities or invest more than 20% of its total assets in
securities the interest from which is subject to Federal income
tax and California personal income tax (there is no limit on the
amount of securities that may be insured by a single insurance
company); (ii) invest more than 5% of its total assets in the
securities of any one issuer or invest in more than 10% of the
voting securities of any one issuer except that up to 50% of the
Insured California Portfolio's total assets may be invested
without regard to this limitation and except that this does not
limit the amount of the Insured California Portfolio's assets
that may be invested in U.S. Government Securities; (iii) invest
more than 25% of its total assets in a single industry, except
that there is no limit on the amount of its assets which may be
invested in municipal securities issued by governments or
political subdivisions thereof, in a particular segment of the
municipal securities market or (subject to (ii) above) in U.S.
Government Securities; (iv) invest more than 10% of its total
assets in repurchase agreements not terminable within seven days
(whether or not illiquid) or other illiquid investments; or
(v) borrow money, except from banks for temporary purposes and
then in amounts not in exceeds of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such
borrowing in amounts not in excess of 15% of its total assets at
the time of such borrowing.
Whenever any of the investment restrictions listed above
states a minimum or maximum percentage of a Portfolio's assets
which may be invested in any security or other asset, it is
intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of a Portfolio's
acquisition of such security or other asset. Accordingly, any
later increase or decrease in percentage beyond the specified
limitations resulting from a change in values or net assets will
not be considered a violation. Under the Act, a Portfolio is not
permitted to borrow unless immediately after such borrowing there
is "asset coverage," as that term is defined and used in the Act
of at least 300% for all borrowings of the Portfolio. In
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addition, under the Act, in the event asset coverage falls below
300%, a Portfolio must within three days reduce the amount of its
borrowing to such an extent that the asset coverage of its
borrowings is at least 300%.
_________________________________________________________________
MANAGEMENT OF THE FUND
_________________________________________________________________
Adviser
Alliance Capital Management L.P., a New York Stock
Exchange listed company with principal offices at 1345 Avenue of
the Americas, New York, New York 10105, has been retained under
an investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision and control of the Fund's Board of Directors.
The Adviser is a leading international investment
manager supervising client accounts with assets as of December
31, 1995 of more than $146 billion (of which more than $48
billion represented the assets of investment companies). The
Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies,
foundations and endowment funds and included, as of December 31,
1995, 29 of the FORTUNE 100 Companies. As of that date, the
Adviser and its subsidiaries employed approximately 1,350
employees who operated out of domestic offices and the overseas
offices of subsidiaries in Bombay, Istanbul, London, Sydney,
Tokyo, Toronto, Bahrain, Luxembourg and Singapore. The 51
registered investment companies comprising 107 separate
investment portfolios managed by the Adviser currently have more
than two million shareholders.
Alliance Capital Management Corporation, the sole
general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary
of The Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
United States and a wholly-owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company. As of June 30, 1995,
ACMC, Inc. and Equitable Capital Management Corporation, each a
wholly-owned direct or indirect subsidiary of Equitable, together
with Equitable, owned in the aggregate approximately 59% of the
issued and outstanding units representing assignments of
beneficial ownership of limited partnership interests in the
Adviser ("Units"). As of June 30, 1995, approximately 33% and 8%
of the Units were owned by the public and employees of the
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Adviser and its subsidiaries, respectively, including employees
of the Adviser who serve as Directors of the Fund.
AXA owns approximately 60% of the outstanding voting
shares of common stock of ECI. AXA is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations are comprised of
activities in life insurance, property and casualty insurance and
reinsurance. The insurance operations are diverse geographically
with activities in France, the United States, the United Kingdom,
Canada and other countries, principally in Europe. AXA is also
engaged in asset management, investment banking and brokerage,
real estate and other financial services activities in the United
States and Europe. Based on information provided by AXA, as of
January 1, 1995, 42.3% of the issued shares (representing 54.7%
of the voting power) of AXA were owned by Midi Participations, a
French corporation that is a holding company. The voting shares
of Midi Participations are in turn owned 60% by Finaxa, a French
corporation that is a holding company, and 40% by subsidiaries of
Assicurazioni Generali S.p.A., an Italian corporation (one of
which, Belgica Insurance Holding S.A., a Belgian corporation,
owned 34.1%). As of January 1, 1995, 62.1% of the issued shares
(representing 75.7% of the voting power) of Finaxa were owned by
five French mutual insurance companies (the "Mutuelles AXA") (one
of which, AXA Assurances I.A.R.D. Mutuelle, owned 31.8% of the
issued shares) (representing 39.0% of the voting power), and
26.5% of the issued shares (representing 16.6% of the voting
power) of Finaxa were owned by Banque Paribas, a French bank.
Including the shares owned by Midi Participations, as of January
1, 1995, the Mutuelles AXA directly or indirectly owned 51.3% of
the issued shares (representing 65.8% of the voting power) of
AXA. In addition, certain subsidiaries of AXA own 0.4% of the
shares of AXA which are not entitled to be voted. Acting as a
group, the Mutuelles AXA control AXA, Midi Participations and
Finaxa.
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
the Fund and pays all compensation of Trustees and officers of
the Fund who are affiliated persons of the Adviser. The Adviser
or its affiliates also furnishes the Fund, without charge,
management supervision and assistance and office facilities and
provides persons satisfactory to the Fund's Trustees to serve as
the Fund's officers. The advisory fee is accrued daily and paid
monthly.
The Advisory Agreement provides that the Adviser will
reimburse the Fund for the net expenses allocable to each
Portfolio (exclusive of interest, taxes, brokerage, expenditures
pursuant to the Distribution Services Agreement described below,
and extraordinary expenses, all to the extent permitted by
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<PAGE>
applicable state securities laws and regulations) which in any
year exceed the limits prescribed by any state in which the
Portfolio's shares are qualified for sale. A Portfolio may not
qualify its shares for sale in every state. Currently, the state
in which shares of each Portfolio are qualified for sale does not
maintain an expense limitation. Therefore, there is no state
expense limitation applicable to any Portfolio. However, the
most restrictive state expense ratio limitation applicable to a
mutual fund is 2.5% of the first $30 million of the mutual fund's
average net assets, 2.0% of the next $70 million of its average
net assets and 1.5% of its average net assets in excess of $100
million. The Adviser has voluntarily undertaken to reimburse the
Fund to the extent necessary to enable the Fund to avoid
exceeding these expense limitations with respect to a Portfolio.
Although there can be no assurance that this undertaking will
continue to be adhered to, the Adviser has the present intention
of continuing to adhere to it.
For the fiscal year ended September 30, 1994 advisory
fees payable to the Adviser with respect to the Florida,
Minnesota, New Jersey, Ohio and Pennsylvania Portfolios amounted
to $0, $0, $0, $0 and $0, respectively.
For the fiscal period from February 25, 1994
(commencement of operations) to September 30, 1994 advisory fees
payable to the Adviser with respect to the Michigan Portfolio
amounted to $0.
For the fiscal period from March 29, 1994 (commencement
of operations) to September 30, 1994 advisory fees payable to the
Adviser with respect to the Massachusetts Portfolio amounted to
$0.
For the fiscal period from April 29, 1994 (commencement
of operations) to September 30, 1994 advisory fees payable to the
Adviser with respect to the Virginia Portfolio amounted to $0.
For the fiscal period from June 1, 1994 (commencement of
operations) to September 30, 1994 advisory fees payable to the
Adviser with respect to the Arizona Portfolio amounted to $0.
For the fiscal year ended September 30, 1995 advisory
fees payable to the Adviser with respect to the Arizona, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios amounted to $0, $12,756,
$0, $0, $0, $58,162, $0, $80,386 and $0, respectively.
The Advisory Agreement became effective on May 12, 1993
having been approved by the unanimous vote, cast in person, of
the Fund's Trustees, including the Trustees who are not parties
to the Advisory Agreement or interested persons as defined in the
Act of any such party, at a meeting called for that purpose and
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<PAGE>
held on May 12, 1993, and by each Portfolio's initial shareholder
on May 12, 1993.
The Advisory Agreement will continue in effect from year
to year with respect to each Portfolio if approved at least
annually by a vote of a majority of the outstanding voting
securities of each Portfolio or by the Fund's Trustees, including
in either case, approval by a majority of the Trustees who are
not parties to the Advisory Agreement or interested persons of
any such party as defined by the Act. Most recently, the
Trustees approved the continuance of the Advisory Agreement until
September 30, 1996 at their meeting held on September 13, 1995.
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 Trustees 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 investment adviser to the following registered investment
companies ACM Institutional Reserves, Inc., AFD Exchange
Reserves, Alliance All-Asia Investment Fund, Inc., The Alliance
Fund, Inc., Alliance Balanced Shares, Inc., Alliance Bond Fund,
Inc., Alliance Capital Reserves, Alliance Counterpoint Fund,
Alliance Developing Markets Fund, Inc., Alliance Global Dollar
Government Fund, Inc., Alliance Global Small Cap Fund, Inc.,
Alliance Global Strategic Income Trust, Inc., Alliance Government
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<PAGE>
Reserves, Alliance Growth and Income Fund, Inc., Alliance Income
Builder Fund, Inc., Alliance International Fund, Alliance Money
Market Fund, Alliance Mortgage Securities Income Fund, Inc.,
Alliance Mortgage Strategy Trust, Inc., Alliance Multi-Market
Strategy Trust, Inc., Alliance Municipal Income Fund, Inc.,
Alliance Municipal Income Fund II, Alliance Municipal Trust,
Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Short-Term Multi-
Market Trust, Inc., Alliance Technology Fund, Inc., Alliance
Utility Income Fund, Inc., Alliance Variable Products Series
Fund, Inc., Alliance World Income Trust, Inc., Alliance Worldwide
Privatization Fund, Inc., The Alliance Portfolios, Fiduciary
Management Associates and The Hudson River Trust, all registered
open-end investment companies; and to ACM Government Income Fund,
Inc., ACM Government Securities Fund, Inc., ACM Government
Spectrum Fund, Inc., ACM Government Opportunity Fund, Inc., ACM
Managed Dollar Income Fund, Inc., ACM Managed Income Fund, Inc.,
ACM Municipal Securities Income Fund, Inc., Alliance All-Market
Advantage Fund, Inc., Alliance Global Environment Fund, Inc.,
Alliance World Dollar Government Fund, Inc., Alliance World
Dollar Government Fund II, Inc., The Austria Fund, Inc., The
Korean Investment Fund, Inc., The Southern Africa Fund, Inc. and
The Spain Fund, Inc., all registered closed-end investment
companies.
Trustees and Officers
The Trustees and principal officers of the Fund, their
ages and their primary occupations during the past five years are
set forth below. Each such Trustee 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 each such persons is 1345 Avenue of the
Americas, New York, New York 10105.
Trustees
JOHN D. CARIFA* - 50, Chairman and President of the
Fund, is the President, Chief Operating Officer and a Director of
ACMC with which he has been associated since prior to 1991.
DAVID H. DIEVLER - 66, is an independent consultant. He
was formerly Chairman of the Board and President of the Fund and
_________________
* An "interested person" of the Fund as defined in the Act.
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Senior Vice President of ACMC, with which he had been associated
since prior to 1991 through 1994. His address is P.O. Box 167.
Spring Lake, New Jersey 07762.
RUTH BLOCK - 65, is a Director of Ecolab Incorporated
(specialty chemicals) and Amoco Corporation (oil and gas).
Previously, she was an Executive Vice President and the Chief
Insurance Officer of Equitable since prior to 1991. Her address
is Box 4653, Stamford, Connecticut 06903.
JAMES R. GREENE - 75, has been an independent financial
consultant since prior to 1991. He is also a Director of ASARCO,
Incorporated (metals smelting and refining), Bank Leumi Trust
Co., Buck Engineering Company (manufacturing), American Reliance
Insurance Co. (insurance) and United Tote (computer software).
His address is 134 Buttonwood Drive, Fair Haven, New Jersey
07701.
DR. JAMES M. HESTER - 71, is President of the Harry
Frank Guggenheim Foundation and a Director of Union Carbide
Corporation. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 45 East 89th Street, New York, New
York 10128.
CLIFFORD L. MICHEL - 56, is a Partner of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1991. He is Chief Executive Officer of Wenonah
Development Company (investments) and a Director of Placer Dome,
Inc. (mining) and Faber-Castell Corporation (writing products).
His address is St. Bernard's Road, Gladstone, New Jersey 07934.
EUGENE F. O'NEIL - 71, is Managing Director of O'Neil
Asset Management (private investments), with which he has been
associated since prior to 1991. His address is 24 Byfield Lane,
Greenwich, Connecticut 06830.
ROBERT C. WHITE - 75, Independent consultant. For nine
years ending in 1994, Mr. White was Vice President and Chief
Financial Officer of Howard Hughes Medical Institute. Prior
thereto, Assistant Treasurer of the Ford Motor Company with
responsibility for the investment administration of the Company's
employee benefit plans. His address is 30835 River Crossing,
Bingham Farms, Michigan 48025.
Officers
JOHN D. CARIFA, Chairman and President, (see biography,
above).
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<PAGE>
SUSAN P. KEENAN 37, Senior Vice President, is a Senior
Vice President of ACMC, with which she has been associated since
prior to 1991.
WILLIAM E. OLIVER 45, Vice President, has been a Vice
President of ACMC, since May 1993. Previously, he was a Vice
President and Director of Investment Grade Municipal Research
with the Prudential Capital Management Group.
DAVID M. DOWDEN 29, Vice President, is an Assistant Vice
President of ACMC, with which he has been associated since 1993.
Previously, he was an analyst in the Municipal Strategy Group at
Merrill Lynch Capital Markets.
EDMUND P. BERGAN JR., 45, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. and Alliance Fund Services, Inc. and Vice President and
Associate General Counsel of ACMC, with which he has been
associated since prior to 1991.
DOMENICK PUGLIESE, Assistant Secretary, 34, is Vice
President and Associate General Counsel of Alliance Fund
Distributors, Inc. with which he has been associated since May
1995. Previously, he was Vice President and Counsel, Concord
Financial Holding Corporation since 1994, Vice President and
Associate General Counsel of Prudential Securities since 1991 and
an associate with Battle Fowler since prior to 1990.
MARK D. GERSTEN 44, Treasurer and Chief Financial
Officer, is a Vice President of Alliance Fund Distributors, Inc.
and Senior Vice President of Alliance Fund Services, Inc., with
which he has been associated since prior to 1991.
JOSEPH J. MANTINEO 36, Controller, has been a Vice
President of Alliance Fund Services, Inc. since July 1989; prior
thereto he was Manager of Fixed Income Mutual Fund Accounting for
Alliance Fund Services, Inc. since prior to 1991.
PATRICK J. FARRELL 35, Assistant Controller, has been a
Vice President of Alliance Fund Services, Inc. since prior to
1991. Prior thereto, he was a Vice President of Drexel, Burnham,
Lambert Fund Services.
PHYLLIS CLARKE 34, Assistant Controller, has been a
Municipal Income Manager, Mutual Funds, of Alliance Fund Services
Inc. since 1994. Previously, she was a Supervisor for Fixed
Income Mutual Fund Accounting for Alliance Fund Services, Inc.
The aggregate compensation paid by the Fund to each of
the Trustees during its fiscal year ended September 30, 1995, the
aggregate compensation paid to each of the Trustees during
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calendar year 1995 by all of the funds to which the Adviser
provides investment advisory services (collectively, the
"Alliance Fund Complex") and the total number of registered
investment companies in the Alliance Fund Complex with respect to
which each of the Trustees serves as a trustee or director, are
set forth below. Neither the Fund nor any other fund in the
Alliance Fund Complex provides compensation in the form of
pension or retirement benefits to any of its trustees or
directors. Each of the Trustees is a trustee of one or more
other registered investment companies in the Alliance Fund
Complex.
Total Total Number of Funds in
Compensation the Alliance Fund Complex,
Aggregate From the Alliance Including the Fund, as to
Name of Director Compensation Fund Complex, which the Director is
of the Fund from the Fund Including the Fund a Trustee or Director
_______________ ____________ __________________ __________________________
John D. Carifa $0 $0 49
David H. Dievler $2,304 $179,200 42
Ruth Block $3,054 $159,000 36
James R. Greene $3,018 $ 65,750 11
Dr. James M. Hester $3,054 $156,000 37
Clifford L. Michel $2,804 $131,500 36
Eugene F. O'Neil $3,018 $ 18,000 5
Robert C. White $3,054 $133,200 36
__________________________
As of January 12, 1996, the Trustees and officers of the Fund
as a group owned less than 1% of the shares of the Fund.
_________________________________________________________________
EXPENSES OF THE FUND
_________________________________________________________________
Distribution Services Agreement
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Fund's principal underwriter (the "Principal
Underwriter"), to permit the Fund directly or indirectly to pay
expenses associated with the distribution of its shares in
accordance with a plan of distribution which is included in the
Agreement and has been duly adopted and approved in accordance
with Rule 12b-1 adopted by the Commission under the Act (the
"Rule 12b-1 Plan").
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<PAGE>
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, in the case of Class C shares, without
the assessment of a contingent deferred 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 charge and distribution services fee on the Class
B shares, and the distribution services fee on the Class C
shares, are the same as those of the initial sales charge (or
contingent deferred sales charge, when applicable) and
distribution services fee with respect to the Class A shares in
that in each case the sales charge and/or distribution services
fee provide for the financing of the distribution of the
Portfolio's shares.
Under the Agreement, the Treasurer of the Fund reports
the amounts expended under the Rule 12b-1 Plan and the purposes
for which such expenditures were made to the Trustees of the Fund
for their review on a quarterly basis. Also, the Agreement
provides that the selection and nomination of Trustees who are
not interested persons of the Fund (as defined in the Act) are
committed to the discretion of such disinterested Trustees then
in office. The Agreement was initially approved by the Trustees
of the Fund at a meeting held on May 12, 1992, and by each
Portfolio's initial shareholder on May 12, 1993.
During the fiscal year ended September 30, 1995, the
Arizona, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
Ohio, Pennsylvania and Virginia Portfolios paid distribution
services fees for expenditures under the Agreement in the case of
the Class A shares in amounts aggregating $5,147, $29,151, $2,731
$9,747, $6,945, $31,122, $9,643, $23,564 and $3,903 which
constituted .30%, .30%, .30%, .30%, .30%, .30%, .30%, .30% and
.30%, respectively, of each Portfolio's average daily net assets
attributable to the Class A shares. In addition, during the
fiscal year ended September 30, 1995, the Adviser made aggregate
payments under the Agreement from its own resources in the case
of the Class A shares as described above of $984,060. Of the
$1,106,013 paid by the Fund and the Adviser under the Agreement
in the case of the Class A shares, $137,217 was spent on
advertising, $25,143 on the printing and mailing of prospectuses
for persons other than current shareholders, $112,818 for
compensation to broker-dealers and other financial intermediaries
(including $19,671 to the Fund's Principal Underwriter), $319,192
for compensation to sales personnel and $511,643 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
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<PAGE>
During the fiscal year September 30, 1995, the Arizona,
Florida, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios paid distribution services
fees for expenditures under the Agreement in the case of the
Class B shares in amounts aggregating $23,308, $191,797, $9,023,
$19,821, $64,331, $311,612, $205,009, $268,526 and $7,553 which
constituted 1.00%, 1.00%, 1.00%, 1.00%, 1.00%, 1.00%, 1.00%,
1.00% and 1.00%, respectively, of each Portfolio's average daily
net assets attributable to the Class B shares. In addition,
during the fiscal year September 30, 1995, the Adviser made
aggregate payments under the Agreement from its own resources in
the case of the Class B shares as described above of $2,249,335.
Of the $3,350,315 paid by the Fund and the Adviser under the
Agreement in the case of the Class B shares, $298,161 was spent
on advertising, $50,241 on the printing and mailing of
prospectuses for persons other than current shareholders,
$1,099,007 for compensation to broker-dealers and other financial
intermediaries (including $32,364 to the Fund's Principal
Underwriter), $598,337 for compensation to sales personnel and
$948,033 was spent on printing of sales literature, travel,
entertainment, due diligence and other promotional expenses and
$356,536 for interest on Class B shares financing. Unreimbursed
distribution expenses incurred during the fiscal year ended
September 30, 1995 and carried over for reimbursement in future
years in respect of the Class B shares amounted to approximately
$202,388 or 6.40% for Arizona Portfolio, $212,959 or 1.03% for
Florida Portfolio, $145,857 or 8.32% for Massachusetts Portfolio,
$139,881 or 5.77% for Michigan Portfolio, $244,665 or 3.35% for
Minnesota Portfolio, $294,706 or .85% for New Jersey Portfolio,
$211,450 or .97% for Ohio Portfolio, $231,889 or .81% for
Pennsylvania Portfolio and $251,040 or 21.04% for Virginia
Portfolio, of the net assets represented by the Class B shares of
each such Portfolio on that date.
During the fiscal year ended September 30, 1995, the
Arizona, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
Ohio, Pennsylvania and Virginia Portfolios paid distribution
services fees for expenditures under the Agreement in the case of
the Class C shares in amounts aggregating $4,344, $343,209,
$15,526, $24,877, $79,009, $224,560, $214,393, $149,397 and $828
which constituted 1.00%, 1.00%, 1.00%, 1.00%, 1.00%, 1.00%, 1.00
%, 1.00% and 1.00%, respectively, of each Portfolio's average
daily net assets attributable to the Class C shares. In
addition, during the fiscal year ended September 30, 1995, the
Adviser made aggregate payments under the Agreement from its own
resources in the case of the Class C shares as described above of
$1,021,666. Of the $2,077,809 paid by the Fund and the Adviser
under the Agreement in the case of the Class C shares, $144,992
was spent on advertising, $30,149 on the printing and mailing of
prospectuses for persons other than current shareholders,
$1,066,095 for compensation to broker-dealers and other financial
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<PAGE>
intermediaries (including $22,960 to the Fund's Principal
Underwriter), $319,295 for compensation to sales personnel and
$517,278 was spent on printing of sales literature, travel,
entertainment, due diligence and other promotional expenses.
Unreimbursed distribution expenses incurred during the Fund's
fiscal year ended September 30, 1995 and carried over for
reimbursement in future years in respect of the Class C shares
amounted to approximately $50,205 or 10.44% for the Arizona
Portfolio, $125,678 or .41% for the Florida Portfolio, $191,080
or 7.48% for the Massachusetts Portfolio, $198,886 or 6.89% for
the Michigan Portfolio, $104,365 or 1.43% for the Minnesota
Portfolio, $85,912 or .40% for the New Jersey Portfolio, $116,661
or .62% for the Ohio Portfolio, $112,973 or .75% for the
Pennsylvania Portfolio and $35,907 or 29.38% for the Virginia
Portfolio of the net assets represented by the Class C shares of
each such Portfolio on that date.
The Adviser will from time to time and from its own
funds or such other resources as may be permitted by rules of the
Commission make 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 until September
30, 1996 and thereafter for successive twelve-month periods
(computed from each October 1) with respect to each class of a
Portfolio, provided, however, that such continuance is
specifically approved at least annually by the Trustees of the
Fund or by vote of the holders of a majority of the outstanding
voting securities (as defined in the Act) of that class, and in
either case, by a majority of the Trustees of the Fund who are
not parties to this agreement or interested persons, as defined
in the Act, of any such party (other than as trustees 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 Trustees approved the continuance of
the Agreement until September 30, 1996 at their meeting on
September 13, 1995.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares of a Portfolio, (i) no distribution services fees
(other than current amounts accrued but not yet paid) would be
owed by the Fund to the Principal Underwriter with respect to
that class, and (ii) the Fund would not be obligated to pay the
Principal Underwriter for any amounts expended under the
Agreement not previously recovered by the Principal Underwriter
from distribution services fees in respect of shares of such
class or through deferred sales charges.
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<PAGE>
All material amendments to the Agreement will become
effective only upon approval as provided in the preceding
paragraph; and the Agreement may not be amended in order to
increase materially the costs that a particular class or
Portfolio may bear pursuant to the Agreement without the approval
of a majority of the holders of the outstanding voting shares of
such class or Portfolio affected. The Agreement may be
terminated (a) by the Fund without penalty at any time by a
majority vote of the holders of the outstanding voting securities
of the Portfolio, voting separately by class, or by a majority
vote of the disinterested Trustees or (b) by the Principal
Underwriter. To terminate the Agreement, any party must give the
other parties 60 days' written notice; to terminate the Rule
12b-1 Plan only, the Fund is not required to give prior notice to
the Principal Underwriter. The Rule 12b-1 Plan will terminate
automatically in the event of its assignment.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser, receives a transfer agency fee per
account holder of the Class A, Class B and Class C 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 is higher than the transfer agency fee with respect to the
Class A shares or the Class C shares reflecting the additional
costs associated with the Class B contingent deferred sales
charge. For the fiscal period year ended September 30, 1995, the
Fund paid Alliance Fund Services, Inc. $334,556 for transfer
agency services and out of pocket expenses.
_________________________________________________________________
PURCHASE OF SHARES
_________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus 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 (the "initial sales charge
alternative"), with a contingent deferred sales charge (the
"deferred sales charge alternative"), or without any initial or
contingent deferred sales charge (the "asset-based sales charge
alternative"), as described below. Shares of each Portfolio are
offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers,
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<PAGE>
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"), or (iii) the
Principal Underwriter. The minimum for initial investments is
$250; subsequent investments (other than reinvestments of
dividends and capital gains distributions in shares) must be in
the minimum amount of $50. As described under "Shareholder
Services," each Portfolio offers an automatic investment program
which permits investments of $25 or more. The subscriber may use
the Subscription Application found in the Prospectus for his or
her initial investment. Sales personnel of selected dealers and
agents distributing a Portfolio's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Portfolio in the
United States either through selected dealers or agents or
directly through the Principal Underwriter. The Fund may refuse
any order for the purchase of shares. The Fund reserves the
right to suspend the sale of each Portfolio's shares to the
public in response to conditions in the securities markets or for
other reasons.
The public offering price of shares of each Portfolio is
their net asset value, plus, in the case of most purchases of
Class A shares, a sales charge which will vary depending on the
purchase alternative chosen by the investor and the amount of the
purchase, as shown in the table below. 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 Agreement and Declaration of Trust 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. The respective
per share net asset values of the Class A, Class B and Class C
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 value of the Class A shares as a result of the daily
expense accruals of the distribution and transfer agency fees
applicable with respect to the Class B and Class C shares. Even
under those circumstances, the per share net asset values of the
three 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. A
Fund business day is any weekday, exclusive of national holidays
on which the Exchange is closed and Good Friday. For purposes of
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<PAGE>
this computation, the securities in a Portfolio are valued at
their current market value determined on the basis of market
quotations or, if such quotations are not readily available, such
other methods as the Trustees believe would accurately reflect
fair market value.
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 or agents, the applicable public
offering price will be the net asset value as so determined, but
only if the selected dealer or agent receives the order prior to
the close of regular trading on the Exchange and transmits it to
the Principal Underwriter prior to its close of business that
same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m.
If the selected dealer or agent fails to do so, the investor's
right to that day's closing price must be settled between the
investor and the selected dealer or agent. If the selected
dealer or agent 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 "Literature" telephone number
shown on the cover of this Statement of Additional Information.
A 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, share certificates representing shares of
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a Portfolio are not issued except upon written request to the
Fund by the shareholder or his or her authorized selected dealer
or agent. This facilitates later redemption and relieves the
shareholder of the responsibility for and inconvenience of lost
or stolen certificates. No certificates are issued for
fractional shares, although such shares remain in the
shareholder's account on the books of the Fund.
In addition to the discount or commission amount paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash bonuses or other incentives to dealers or
agents, including Equico Securities, Inc., an affiliate of the
Principal Underwriter, in connection with the sale of shares of a
Portfolio. Such additional amounts may be utilized in whole or
in part, to provide additional compensation to registered
representatives who sell shares of the Portfolio. On some
occasions, such cash or other incentives may be conditioned upon
the sale of a specified minimum dollar amount of the shares of a
Portfolio and/or other Alliance Mutual Funds, as defined below,
during a specific period of time. On some occasions, such cash
or other incentives may take the form of payment for attendance
at seminars, meals, sporting events or theater performances, or
payment for travel, lodging and entertainment incurred in
connection with travel by persons associated with the dealer or
agent, immediate family members to urban or resort locations
within or outside the United States. Such dealer or agent may
elect to receive cash incentives of equivalent in lieu of such
payments.
Alternative Purchases Arrangements
Each Portfolio issues three classes of shares: Class A
shares are sold to investors choosing the initial sales charge
alternative, Class B shares are sold to investors choosing the
deferred sales charge alternative and Class C shares are sold to
investors choosing the asset-based sales charge alternative. The
three classes of 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 shares bear
the expense of the contingent deferred sales charge, (ii) Class B
shares and Class C shares each bear the expense of a higher
distribution services fee, and in the case of Class B shares,
higher transfer agency costs, (iii) each class has exclusive
voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid which
relates to a specific class and other matters for which separate
class voting is appropriate under applicable law, provided that,
if each Portfolio submits to a vote of both the Class A
shareholders and the Class B shareholders an amendment to the
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Rule 12b-1 Plan that would materially increase the amount to be
paid thereunder with respect to the Class A shares, the Class A
shareholders and the Class B shareholders will vote separately by
Class and (iv) only the Class B shares are subject to a
conversion feature. Each class has different exchange privileges
and certain different shareholder service options available.
The alternative purchase arrangements 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 a Portfolio, the accumulated distribution services
fee and contingent deferred sales charges on Class B shares prior
to conversion, or the accumulated distribution services fee 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 $5,000,000 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, most investors purchasing Class A shares would not
have all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for
an extended period of time might consider purchasing Class A
shares because the accumulated continuing distribution charges on
Class B shares or Class C shares may exceed the initial sales
charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration
against the fact that, because of such initial sales charges, not
all their funds will be invested initially.
Other investors might determine, however, that it would
be more advantageous to purchase Class B shares or Class C shares
in order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and,
in the case of Class B shares, being subject to a contingent
deferred sales charge for a three-year period. For example,
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based on current fees and expenses, an investor subject to the
4.25% initial sales charge 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.
The Trustees of the Fund have determined that currently
no conflict of interest exists between or among the Class A,
Class B and Class C shares. On an ongoing basis, the Trustees of
the Fund, pursuant to their fiduciary duties under the Act and
state laws, will seek to ensure that no such conflict arises.
Initial Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for
purchasers choosing the initial sales charge alternative is the
net asset value plus a sales charge, as set forth below.
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Initial 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 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 offering price. In
addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gain distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemptions, and such charge will be applied to
redemptions of shares by shareholders who hold both Class A and
Class B shares, as described below under "Deferred Sales Charge
Alternative--Class B Shares." 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 Agreement
described above, pay such dealers or agents from its own
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<PAGE>
resources a fee of up to .25 of 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, or (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 that were
purchased for cash without the payment of an initial sales charge
and without being subject to a contingent deferred sales charge.
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 elect to
reallow the entire sales charge to selected dealers and agents
for all sales with respect to which orders are placed with the
Principal Underwriter. A selected dealer who receives
reallowance in excess of 90% of such a sales charge may be deemed
to be an "underwriter" under the Securities Act of 1933, as
amended.
During the Fund's fiscal year ended September 30, 1995,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $172,259; the
Minnesota Portfolio were $24,112; the New Jersey Portfolio were
$167,818; the Ohio Portfolio were $98,492; the Pennsylvania
Portfolio were $135,691; the Michigan Portfolio were $30,720; the
Massachusetts Portfolio were $43,577; the Virginia Portfolio were
$31,457; and the Arizona Portfolio were $80,901; of that amount,
the Principal Underwriter, received the amount of $7,186 for the
Florida Portfolio; $1,073 for the Minnesota Portfolio; $6,558 for
the New Jersey Portfolio; $3,299 for the Ohio Portfolio; $4,741
for the Pennsylvania Portfolio; $999 for the Michigan Portfolio;
$1,736 for the Massachusetts Portfolio; $694 for the Virginia
Portfolio and $3,098 for the Arizona Portfolio representing that
portion of the sales charges paid on shares of each Portfolio of
that Fund sold during the year which was not reallowed to
selected dealers (and was, accordingly, retained by the Principal
Underwriter). During the fiscal year ended September 30, 1995,
the Principal Underwriter received in contingent deferred sales
charges with respect to Class B redemptions $59,396 for the
Florida Portfolio; $17,775 for the Minnesota Portfolio; $87,046
for the New Jersey Portfolio; $47,836 for the Ohio Portfolio,
$68,849 for the Pennsylvania Portfolio, $20,509 for the Michigan
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Portfolio, $6,273 for the Massachusetts Portfolio, $240 for the
Virginia Portfolio and $5,862 for the Arizona Portfolio.
During the Fund's fiscal year ended September 30, 1994,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $401,765; the
Minnesota Portfolio were $98,931; the New Jersey Portfolio were
$483,392; the Ohio Portfolio were $204,851; and the Pennsylvania
Portfolio were $290,755; of that amount, the Principal
Underwriter, received the amount of $10,004 for the Florida
Portfolio; $1,577 for the Minnesota Portfolio; $9,734 for the New
Jersey Portfolio; $8,054 for the Ohio Portfolio; and $7,788 for
the Pennsylvania Portfolio; representing that portion of the
sales charges paid on shares of each Portfolio of that Fund sold
during the year which was not reallowed to selected dealers (and
was, accordingly, retained by the Principal Underwriter). During
the fiscal period ended September 30, 1994, the Principal
Underwriter received in contingent deferred sales charges with
respect to Class B redemptions $29,086 for the Florida Portfolio;
$22,023 for the Minnesota Portfolio; $29,864 for the New Jersey
Portfolio; $39,413 for the Ohio Portfolio and $18,210 for the
Pennsylvania Portfolio.
During the Fund's fiscal period from February 25, 1994
(commencement of operations) to September 30, 1994, the aggregate
amount of underwriting commissions payable with respect to shares
of the Michigan Portfolio were $75,159; of that amount, the
Principal Underwriter, received the amount of $4,272 for the
Michigan Portfolio; representing that portion of the sales
charges paid on shares of each Portfolio of that Fund sold during
the year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
same period, the Principal Underwriter received in contingent
deferred sales charges with respect to Class B redemptions $9,488
for the Michigan Portfolio.
During the Fund's fiscal period from March 29, 1994
(commencement of operations) to September 30, 1994, the aggregate
amount of underwriting commissions payable with respect to shares
of the Massachusetts Portfolio were $4,532; of that amount, the
Principal Underwriter, received the amount of $198 for the
Massachusetts Portfolio; representing that portion of the sales
charges paid on shares of each Portfolio of that Fund sold during
the year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
same period, the Principal Underwriter received in contingent
deferred sales charges with respect to Class B redemptions $1,518
for the Massachusetts Portfolio.
During the Fund's fiscal period from April 29, 1994
(commencement of operations) to September 30, 1994, the aggregate
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<PAGE>
amount of underwriting commissions payable with respect to shares
of the Virginia Portfolio were $91,813; of that amount, the
Principal Underwriter, received the amount of $1,794 for the
Virginia Portfolio; representing that portion of the sales
charges paid on shares of each Portfolio of that Fund sold during
the year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
same period, the Principal Underwriter received in contingent
deferred sales charges with respect to Class B redemptions $0 for
the Virginia Portfolio.
During the Fund's fiscal period from June 1, 1994
(commencement of operations) to September 30, 1994, the aggregate
amount of underwriting commissions payable with respect to shares
of the Arizona Portfolio were $61,936; of that amount, the
Principal Underwriter, received the amount of $3,048 for the
Arizona Portfolio; representing that portion of the sales charges
paid on shares of each Portfolio of that Fund sold during the
year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
same period, the Principal Underwriter received in contingent
deferred sales charges with respect to Class B redemptions $1,506
for the Arizona Portfolio.
Set forth below is an example of the method of computing
the offering price of the Class A shares. The example assumes a
purchase of Class A shares of each Portfolio aggregating less
than $100,000 subject to the schedule of sales charges set forth
above for each Portfolio at a price based upon the net asset
value of Class A shares of the Portfolio on September 30, 1995.
Arizona Portfolio
_________________
Net Asset Value per Share
at September 30, 1995 $10.29
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .46
______
Per Share Offering Price to
the Public $10.75
======
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Florida Portfolio
_________________
Net Asset Value per Share at
September 30, 1995 $9.58
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .43
_____
Per Share Offering Price to
the Public $10.01
======
Massachusetts Portfolio
________________________
Net Asset Value per Share
at September 30, 1995 $10.50
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .47
______
Per Share Offering Price to
the Public $10.97
======
Michigan Portfolio
__________________
Net Asset Value per Share
at September 30, 1995 $10.10
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .45
______
Per Share Offering Price to
the Public $10.55
======
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<PAGE>
Minnesota Portfolio
___________________
Net Asset Value per Share at
September 30, 1995 $9.49
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .42
_____
Per Share Offering Price to
the Public $9.91
=====
New Jersey Portfolio
____________________
Net Asset Value per Share at
September 30, 1995 $9.65
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .43
_____
Per Share Offering Price to
the Public $10.08
======
Ohio Portfolio
______________
Net Asset Value per Share at
September 30, 1995 $9.53
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .42
Per Share Offering Price to
the Public $9.95
=====
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Pennsylvania Portfolio
______________________
Net Asset Value per Share at
September 30, 1995 $9.64
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .43
_____
Per Share Offering Price to
the Public $10.07
======
Virginia Portfolio
__________________
Net Asset Value per Share
at September 30, 1995 $10.29
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .46
_____
Per Share Offering Price to
the Public $10.75
======
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but subject in most cases to a contingent deferred
sales charge) or (ii) a reduced initial sales charge. The
circumstances under which an investor may pay a reduced initial
sales charge or no 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"
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<PAGE>
also includes purchases by any "company," as the term is defined
in the 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, Inc.
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Counterpoint Fund
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Mortgage Strategy Trust, 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.
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<PAGE>
Alliance Quasar Fund, Inc.
Alliance Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Strategic Balanced Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "Literature" telephone number shown on
the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An
investor's purchase of additional Class A shares of a Portfolio
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all Class A, Class B and
Class C shares of a Portfolio held by the investor
and (b) all shares of any other Alliance Mutual
Fund held by the investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with that
of the investor into a single "purchase" (see
above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Portfolio worth
an additional $100,000, the sales charge for the $100,000
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Fund, rather than the 3.25%
rate.
To qualify for the Combined Purchase Privilege or to
obtain the Cumulative Quantity Discount on a purchase through a
selected dealer or agent, the investor or selected dealer or
agent must provide the Principal Underwriter with sufficient
information to verify that each purchase qualifies for the
privilege or discount.
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Statement of Intention. Class A investors may also
obtain the reduced initial 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 and/or
Class C shares) of a Portfolio or any other Alliance Mutual Fund.
Each purchase of shares under a Statement of Intention will be
made at the public offering price or prices applicable at the
time of such purchase to a single transaction of the dollar
amount indicated in the Statement of Intention. At the
investor's option, a Statement of Intention may include purchases
of shares of a Portfolio or any other Alliance Mutual Fund made
not more than 90 days prior to the date that the investor signs
the Statement of Intention; however, the 13-month period during
which the Statement of Intention is in effect will begin on the
date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at
least $100,000 in Class A shares of a Portfolio, the investor and
the investor's spouse each purchase shares of a Portfolio worth
$20,000 (for a total of $40,000), it will be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% initial sales charge on the total amount being invested
(the initial 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 initial
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
initial 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 initial sales charge will be used to purchase
additional shares of the Fund subject to the rate of the initial
sales charge applicable to the actual amount of the aggregate
purchases.
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Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
a Portfolio should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the
Portfolios or any other Alliance Mutual Fund at a reduced initial
sales charge on a monthly basis during the 13-month period
following such a plan's initial purchase. The initial sales
charge applicable to such initial purchase of shares of the
Portfolios will be that normally applicable, under the schedule
of the initial 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
current month's purchase multiplied by the number of months
(including the current month) remaining in the 13-month period
and (ii) the total purchase previously made during 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 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 such reinvestment is made within 120 calendar days after the
redemption or repurchase date. 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 tax
purposes except that no loss will be recognized to the extent
that the proceeds are reinvested in shares of a Portfolio. The
reinstatement privilege may be used by the shareholder only once,
irrespective of the number of shares redeemed or repurchased,
except that the privilege may be used without limit in connection
with transactions whose sole purpose is to transfer a
shareholder's interest in a Portfolio to his or her individual
retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written
request sent to the Fund at the address shown on the cover of
this Statement of Additional Information.
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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
advisory clients of the Adviser or its affiliates; (ii) officers
and present or former Trustees of the Fund; present or former
directors and trustees of other investment companies managed by
the Adviser; present or retired full-time employees of the
Adviser, the Principal Underwriter, Alliance Fund Services, Inc.
and their affiliates; officers and directors of ACMC, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; officers, directors and present and full-time
employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives")
of any such person; or any trust, individual retirement account
or retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not
be resold except to the Fund); (iii) certain employee benefit
plans for employees of the Adviser, the Principal Underwriter,
Alliance Fund Services, Inc. and their affiliates; (iv) persons
participating in a fee based program, sponsored and maintained by
a registered broker-dealer and approved by the Principal
Underwriter, pursuant to which such persons pay an asset-based
fee to such broker-dealer or its affiliate or agent, for services
in the nature of investment advisory or administrative services
and (v) persons who establish to the Principal Underwriter's
satisfaction that they are investing in the Fund, within such
time period as my be designated by the Principal Underwriter,
proceeds of their redemption of shares of such other registered
investment companies as may be designated from time to time by
the Principal Underwriter.
Deferred Sales Charge Alternative--Class B Shares
Investors choosing the deferred sales charge alternative
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 are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to a Portfolio
in connection with the sale of the Class B shares, such as the
payment of compensation to selected dealers and agents for
selling Class B shares. The combination of the contingent
deferred sales charge and the distribution services fee enables a
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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 an investor purchased 100 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 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
In determining the contingent deferred sales charge
applicable to a redemption, it will be assumed that the
redemption is first of any shares in the shareholder's Portfolio
account that are not subject to a contingent deferred sales
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charge, second of Class B shares held for over two years and
third of Class A shares that are subject to a contingent deferred
sales charge held shortest during the one-year period during
which such shares are subject to the sales charge. When Class B
shares acquired in an exchange are redeemed, the applicable
contingent deferred sales charge schedule will be the schedule
that applied to Class B shares of the Alliance Mutual Fund
originally purchased by the shareholder at the time of their
purchase. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of
purchase.
The contingent deferred sales charges on Class A and
Class B shares are 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
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. At the end of the period ending 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 be 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.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
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to the effect that (i) the assessment of the higher distribution
services fee and transfer agency costs with respect to Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Code, and (ii)
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.
Asset-Based Sales Charge Alternative--Class C Shares
Investors choosing the asset-based sales charge
alternative 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 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 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. Class C shares do not convert to any other class of
shares of the Portfolio and incur higher distribution services
fees than Class A shares, and will thus have a higher expense
ratio and pay correspondingly lower dividends than Class A
shares.
_________________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_________________________________________________________________
The following information supplements that set
forth in the Fund's Prospectus under the heading "Purchase and
Sale of Share--How to Sell Shares."
Redemption
Subject only to the limitations described below, the
Fund's Agreement and Declaration of Trust requires 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
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redemption in proper form. Except for any contingent deferred
sales charge which may be applicable to Class A shares or Class B
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.
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 Securities and Exchange
Commission determines that trading thereon is restricted, or for
any period during which an emergency (as determined by the
Securities and Exchange 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 Securities and Exchange
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 shares and Class B
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment 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 institution that is an "eligible guarantor" as
defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended.
Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer, once in any 30 day period, of shares for which no
share certificates have been issued can also be made by telephone
at (800) 221-5672 by a shareholder who has completed the
appropriate portion of the Subscription Application or, in the
case of an existing shareholder, an "Autosell" application
obtained from Alliance Fund Services, Inc. A telephone
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redemption request may not exceed $100,000, and must be made by
4:00 p.m. Eastern time on a Fund business day as defined above.
Proceeds of telephone redemptions will be sent by Electronic
Funds Transfer to a shareholder's designated bank account at a
bank selected by the shareholder that is a member of the NACHA.
Telephone Redemption By Check. Except as noted below,
each Fund shareholder is eligible to request redemption by check,
once in any 30-day period, of Portfolio shares for which no stock
certificates have been issued by telephone at (800) 221-5672
before 4:00 p.m. Eastern time on a Fund business day in an amount
not exceeding $50,000. Proceeds of such redemptions are remitted
by check to the shareholder's address of record. Telephone
redemption by check is not available with respect to shares (i)
for which certificates have been issued, (ii) held in nominee or
"street name" accounts, (iii) held by a shareholder who has
changed his or her address of record within the preceding 30
calendar days or (iv) held in any retirement plan account. A
shareholder otherwise eligible for telephone redemption by check
may cancel the privilege by written instruction to Alliance Fund
Services, Inc., or by checking the appropriate box on the
Subscription Application found in the Prospectus.
General. During periods of drastic economic or market
developments, such as the market break of October 1987, it is
possible that shareholders would have difficulty in reaching
Alliance Fund Services, Inc. by telephone (although no such
difficulty was apparent at any time in connection with the 1987
market break). If a shareholder were to experience such
difficulty, the shareholder should issue written instructions to
Alliance Fund Services, Inc. at the address shown on the cover of
this Statement of Additional Information. The Fund reserves the
right to suspend or terminate its telephone redemption service at
any time without notice. Neither the Fund nor the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
redemptions that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for redemptions are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the 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.
To redeem shares of a Portfolio 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
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shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
share certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the share 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.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter 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 shares and
Class B 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
selected dealer or agent is responsible for transmitting the
request to the Principal Underwriter by 5:00 p.m. If the
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
shares and Class B shares). Normally, if shares of a Portfolio
are offered through a 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
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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 under the heading "Purchase and Sale of
Shares--Shareholder Services."
Shareholder Services Applicable to All Three Classes
Automatic Investment Program
Investors may purchase shares of a Portfolio through an
automatic investment program utilizing "pre-authorized check"
drafts drawn on the investor's own bank account. Under such a
program, pre-authorized monthly drafts for a fixed amount (at
least $25) are used to purchase shares through the selected
dealer or selected agent designated by the investor at the public
offering price next determined after the Principal Underwriter
receives the proceeds from the investor's bank. Drafts may be
made in paper form or, if the investor's bank is a member of the
NACHA, in electronic form. If made in paper form, the draft is
normally made on the 20th day of each month, or the next business
day thereafter. If made 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 the Prospectus to establish an automatic investment
program.
Exchange Privilege
Class A shareholders of a Portfolio can exchange their
Class A shares for Class A shares of any other Alliance Mutual
Fund that offers Class A shares for shares of Alliance World
Income Trust, Inc., and without the payment of any sales or
service charges. For purposes of applying any applicable
contingent deferred sales charge upon the newly acquired Class A
shares, the period of time the Class A shares surrendered on the
exchange have been held is added to the period of time the newly
acquired shares have been held. Prospectuses for each Alliance
Mutual Fund may be obtained by contacting Alliance Fund Services,
Inc. at the address shown on the cover of this Statement of
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Additional Information or by telephone at (800) 227-4618 or, in
Illinois, (800) 227-4170.
Class B shareholders of a Portfolio can exchange their
Class B shares ("original Class B shares") for Class B shares of
any other Alliance Mutual Fund that offers Class B shares ("new
Class B shares") without the payment of any contingent deferred
sales or service charges. For purposes of computing both the
time remaining before the new Class B shares convert to Class A
shares of that fund and the contingent deferred sales charge
payable upon disposition of the new Class B shares, the period of
time for which the original Class B shares have been held is
added to the period of time for which the new Class B shares have
been held. After an exchange, new Class B shares will
automatically convert into Class A shares in accordance with the
conversion schedule applicable to the Alliance Mutual Fund Class
B shares originally purchased for cash and when redemption
occurs, the contingent deferred sales charge schedule applicable
to the Class B shares originally purchased for cash is
applicable.
Class C shareholders of a Portfolio can exchange their
Class C shares for Class C shares of the other Alliance Mutual
Funds that offers Class C shares.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for Federal income tax purposes.
Each Portfolio shareholder, and the shareholder's
selected dealer or agent, 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
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accepted with respect to shares then represented by share
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.
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.
Neither the Alliance Funds nor 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 or agents
may charge a commission for handling telephone requests for
exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
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Dividend Direction Plan
A shareholder who already maintains, in addition to his
or her Class A, Class B or Class C Portfolio account, a Class A,
Class B or Class C account(s) with one or more other Alliance
Mutual Funds may direct that income dividends and/or capital
gains paid on his or her Class A, Class B or Class C Fund 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 "Literature" telephone number shown on the cover
of this Statement of Additional Information. Investors wishing
to establish a dividend direction plan in connection with their
initial investment should complete the appropriate section of the
Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of a Portfolio having a current net asset value of at least
$4,000 (for quarterly or less frequent payments), $5,000 (for
bi-monthly payments) or $10,000 (for monthly payments) may
establish a systematic withdrawal plan under which the
shareholder will periodically receive a payment in a stated
amount of not less than $50 on a selected date. Systematic
withdrawal plan participants must elect to have their dividends
and distributions from a Portfolio automatically reinvested in
additional shares of such Portfolio.
Shares of a Portfolio owned by a participant in the
Fund's systematic withdrawal plan will be redeemed as necessary
to meet withdrawal payments and such withdrawal payments will be
subject to any taxes applicable to redemptions and, except as
discussed below, any applicable contingent deferred sales charge.
See "Dividends, Distributions and Taxes -- Sales and
Redemptions." Shares acquired with reinvested dividends and
distributions will be liquidated first to provide such withdrawal
payments and thereafter other shares will be liquidated to the
extent necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
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Repurchase of Shares -- General." Purchases of additional Class
A shares concurrently with withdrawals are undesirable because of
sales charges when purchases are made. While an occasional
lump-sum investment may be made by a shareholder of Class A
shares who is maintaining a systematic withdrawal plan, such
investment should normally be an amount equivalent to three times
the annual withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of a Portfolio should complete the appropriate portion of
the Subscription Application found in the Prospectus, while
current Portfolio shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at
the address or the "Literature" telephone number shown on the
cover of this Statement of Additional Information.
Class B CDSC Waiver for Shares Acquired After
July 1, 1995. 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 shares in a shareholder's account
acquired after July 1, 1995 may be redeemed free of any
contingent deferred sales charge. Class B shares acquired after
July 1, 1995 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 these
limitations. Remaining Class B shares acquired after July 1,
1995 that are held the longest will be redeemed next. Redemptions
of Class B shares acquired after July 1, 1995 in excess of the
foregoing limitations and redemptions of Class B shares acquired
before July 1, 1995 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.
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Shareholder Services Applicable to
Class A and Class C Shareholders Only
Checkwriting
A new Class A or Class C investor may fill out the
Signature Card which is included in the Prospectus to authorize
the Fund to arrange for a checkwriting service through State
Street Bank and Trust Company (the "Bank") to draw against Class
A or Class C shares of a Portfolio redeemed from the investor's
account. Under this service, checks may be made payable to any
payee in any amount not less than $500 and not more than 90% of
the net asset value of the Class A or Class C shares in the
investor's account (excluding for this purpose the current
month's accumulated dividends and shares for which certificates
have been issued). A Class A or Class C shareholder wishing to
establish this checkwriting service subsequent to the opening of
his or her Portfolio account should contact the Fund by telephone
or mail. Corporations, fiduciaries and institutional investors
are required to furnish a certified resolution or other evidence
of authorization. This checkwriting service will be subject to
the Bank's customary rules and regulations governing checking
accounts, and the Fund and the Bank each reserve the right to
change or suspend the checkwriting service. There is no charge
to the shareholder for the initiation and maintenance of this
service or for the clearance of any checks.
When a check is presented to the Bank for payment, the
Bank, as the shareholder's agent, causes the Fund to redeem, at
the net asset value next determined, a sufficient number of full
and fractional shares of a Portfolio in the shareholder's account
to cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various
factors, to market fluctuations, a shareholder should not attempt
to close his or her account by use of a check. In this regard,
the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Cancelled (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 of each Portfolio is
computed in accordance with the Fund's Agreement and Declaration
of Trust and By-Laws as of the next close of trading on the
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Exchange (currently 4:00 p.m.) following receipt of a purchase or
redemption order by the Fund, on each Fund business day on which
such an order is received and trading in the types of securities
in which the Portfolio invests might materially affect the value
of the Portfolio's shares, by dividing the value of the
Portfolio's total assets less its liabilities, by the total
number of its shares then outstanding.
For purposes of this computation, portfolio securities
that are actively traded in the over-the-counter market,
including listed securities for which the primary market is
believed to be over-the-counter, are valued at the mean between
the most recently quoted bid and asked prices provided by the
principal market makers. Any security for which the primary
market is on an exchange is valued at the last sale price on such
exchange on the day of valuation or, if there was no sale on such
day, the last bid price quoted on such day. Options will be
valued at market value or fair value if no market exists.
Futures contracts will be valued in a like manner, except that
open futures contracts sales will be valued using the closing
settlement price or, in the absence of such a price, the most
recent quoted asked price. Securities and assets for which
market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of
the Board of Directors of the Fund. However, readily marketable
fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by
the Fund to reflect the fair market value of such securities. The
prices provided by a pricing service take into account
institutional size trading in similar groups of securities and
any developments related to specific securities. U.S.
Government Securities and other debt instruments having sixty
days or less remaining until maturity are stated at amortized
cost if their original maturity was 60 days or less, or by
amortizing their fair value as of the 61st day prior to maturity
if their original term to maturity exceeded 60 days (unless in
either case the Fund's Board of Directors determines that this
method does not represent fair value).
_________________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_________________________________________________________________
General Each Portfolio of the Fund qualified for the
fiscal year ended September 30, 1995 and intends to qualify in
the future for tax treatment 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
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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 Trustees otherwise determine, each income
dividend and capital gains distribution, if any, declared by the
Fund on the outstanding shares of a Portfolio will, at the
election of each shareholder of the Portfolio, be paid in cash or
reinvested in additional full and fractional shares of the
Portfolio. An election to receive dividends and distributions in
cash or shares is made at the time the shares are initially
purchased and may be changed by written notification to the Fund
at least 30 days prior to the record date for a particular
dividend or distribution. Cash dividends can be paid by check
or, if the shareholder so elects, electronically via the ACH
network. There is no sales or other charge in connection with
the reinvestment of dividends and capital gains distributions.
Capital gains realized by a Portfolio during the Fund's
fiscal year will be distributed; however the Fund may retain any
long-term capital gains realized by the Portfolio if this is
determined by the Trustees 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
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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
intends to meet this requirement. Insurance proceeds received by
a Portfolio under any insurance policies in respect of scheduled
interest payments on defaulted municipal securities, as described
herein, will be excludable from gross income in the same manner
as interest payments from the insured municipal securities, and
consequently such insurance proceeds may be included in
exempt-interest dividends which are designated and paid by the
Fund.
Each Portfolio generally will be required to withhold
tax at the rate of 31% with respect to dividends of net ordinary
income and net realized capital gains payable to a noncorporate
shareholder unless the shareholder certifies on his subscription
application that the social security or taxpayer identification
number provided is correct and that the shareholder has not been
notified by the Internal Revenue Service that he is subject to
backup withholding.
United States Federal Income Taxation of the Portfolios
The following discussion relates to certain significant
United States Federal income tax consequences to the Portfolios
with respect to the determination of their "investment company
taxable income" each year. This discussion assumes that each
Portfolio will be taxed as a regulated investment company for
each of its taxable years.
Options and Futures Contracts. Certain listed options
and regulated futures contracts are considered "section 1256
contracts" for Federal income tax purposes. Section 1256
contracts held by a Portfolio at the end of each taxable year
will be "marked to market" and treated for Federal income tax
purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a
Portfolio on section 1256 contracts will generally be considered
60% long-term and 40% short-term capital gain or loss. A
Portfolio can elect to exempt its section 1256 contracts which
are part of a "mixed straddle" (as described below) from the
application of section 1256.
With respect to over-the-counter options, gain or loss
realized by a Portfolio upon the lapse or sale of such options
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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,
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
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issue price) attributable to such obligation even though the
Portfolio does not receive interest payments in cash on the
security during the year which reflects 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.
________________________________________________________________
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
(15) principal market maker dealers with whom the Adviser
maintains regular contact. Most transactions made by the Fund
will be principal transactions at net prices and the Fund will
incur little or no brokerage costs. Where possible, securities
will be purchased directly from the issuer or from an underwriter
or market maker for the securities unless the Adviser believes a
better price and execution is available elsewhere. Purchases
from underwriters of newly-issued securities for inclusion in a
Portfolio usually will include a concession paid to the
underwriter by the issuer and purchases from dealers serving as
market makers will include the spread between the bid and asked
price.
The Fund has no obligation to enter into transactions in
portfolio securities with any broker, dealer, issuer, underwriter
or other entity. In placing orders, it is the policy of the Fund
to obtain the best price and execution for its transactions.
Where best price and execution may be obtained from more than one
broker or dealer, the Adviser may, in its discretion, purchase
and sell securities through brokers and dealers who provide
research, statistical and other information to the Adviser. Such
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<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 Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to
seeking best price and execution, the Fund may consider sales of
shares of the Fund as a factor in the selection of dealers to
enter into portfolio transactions with the Fund.
No transactions for the Fund's Portfolios are executed
through any broker or dealer affiliated with the Fund's Adviser,
Alliance Capital Management L.P., or with Donaldson, Lufkin &
Jenrette Securities Corporation, an affiliate of the Adviser.
During the fiscal year ended September 30, 1994, the Florida,
Minnesota, New Jersey, Ohio and Pennsylvania Portfolios incurred
no brokerage commissions. During the fiscal period from February
25, 1994 to September 30, 1994, the Michigan Portfolio incurred
no brokerage commissions. During the fiscal period from March
29, 1994 to September 30, 1994, the Massachusetts Portfolio
incurred no brokerage commissions. During the fiscal period from
April 29, 1994 to September 30, 1994, the Virginia Portfolio
incurred no brokerage commissions. During the fiscal period from
June 1, 1994 to September 30, 1994, the Arizona Portfolio
incurred no brokerage commissions. During the fiscal year ended
September 30, 1995, the Arizona, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia
Portfolios incurred no brokerage commissions.
________________________________________________________________
GENERAL INFORMATION
________________________________________________________________
Capitalization
The Fund has an unlimited number of authorized Class A,
Class B and Class C shares of beneficial interest par value $.01
per share. Such shares are currently divided into five series,
one underlying each Portfolio of the Fund. All shares of the
Fund, when issued, are fully paid and non-assessable. The
Trustees are authorized to reclassify and issue any unissued
shares to any number of additional classes or series without
shareholder approval. Accordingly, the Trustees in the future,
for reasons such as the desire to establish one or more
additional portfolios with different investment objectives,
policies or restrictions, may create additional classes or series
of shares. Any issuance of shares of another class would be
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governed by the Act and the law of the Commonwealth of
Massachusetts. Shares of each Portfolio participate equally in
dividends and distributions from that Portfolio, including any
distributions in the event of a liquidation. Shares of each
Portfolio are normally entitled to one vote for all purposes.
Generally, shares of all Portfolios vote as a single series for
the election of Trustees and on any other matter affecting all
Portfolios in substantially the same manner. As to matters
affecting each Portfolio differently, such as approval of the
Advisory Agreement and changes in investment policy, shares of
each Portfolio vote as a separate series. Certain procedures for
the removal by shareholders of Trustees of investment trusts,
such as the Fund, are set forth in Section 16(c) of the Act.
An order has been received from the Commission
permitting the issuance and sale of three classes of shares
representing interests in a Portfolio. The issuance and sale of
any additional classes will require an additional order from the
Commission. There is no assurance that such exemptive relief
would be granted.
Shareholder Liability
Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for the
obligations of the Fund. However, the Agreement and Declaration
of Trust disclaims shareholder liability for acts or obligations
of the Fund and requires that the Trustees use their best efforts
to ensure that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or officers of the Fund. The Agreement
and Declaration of Trust provides for indemnification out of the
property of the Fund for all loss and expense of any shareholder
of the Fund held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. In
the view of the Adviser, such risk is not material.
At January 12, 1996, there were outstanding: 30,939,224
shares of beneficial interest of the Fund, including 269,156
Class A shares of the Arizona Portfolio, 355,580 Class B shares
and 50,197 Class C shares, 1,296,179 Class A shares of the
Florida Portfolio, 2,284,154 Class B shares and 3,031,808 Class C
shares, 178,650 Class A shares of the Massachusetts Portfolio,
193,195 Class B shares and 406,156 Class C shares, 511,945 Class
A shares of the Michigan Portfolio, 279,453 Class B shares and
284,304 Class C shares, 282,950 Class A shares of the Minnesota
Portfolio, 770,279 Class B shares and 747,310 Class C shares,
1,421,572 Class A shares of the New Jersey Portfolio, 3,760,240
Class B shares and 2,368,569 Class C shares, 458,629 Class A
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shares of the Ohio Portfolio, 2,355,369 Class B shares and
1,816,841 Class C shares, 997,080 Class A shares of the
Pennsylvania Portfolio, 5,002,279 Class B shares and 1,448,547
Class C shares, 190,931 Class A shares of the Virginia Portfolio,
133,092 Class B shares and 44,759 Class C shares. The following
is a list of all persons who owned of record or beneficially 5%
or more of each class of shares of each Portfolio at January 12,
1996.
NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
ARIZONA PORTFOLIO
Merrill Lynch 14,495 5.59% -- --
Mutual Fund Operations
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Donaldson Lufkin & 16,752 6.22% -- 7.5%
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
PaineWebber for the 13,974 5.19% -- --
Benefit of
Jewel Lawson 9,883 -- -- 19.69%
7090 E. Mescal Street
Apt 110
Scottsdale, AZ 85254
Paul L. Stanley 2,650 -- -- 5.28%
7408 E. Sand Hills Rd.
Scottsdale, AZ 85255
Hiroshi J. Suda 2,948 -- -- 5.87%
6238 N. 83rd Ave.
Glendale, AZ 85303
Marian T. Jones 15,524 5.77% -- --
Jones Family Trust
26437 S Lakewood Drive
Sun Lake, AZ 85248
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NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
Donaldson Lufkin & 2,713 -- -- 5.40%
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
Walter Fox & 2,828 -- -- 5.65%
Margaret Fox
5813 N 83rd Ave.
Glendale, AZ 85018
Harris Trust Bank of 3,074 -- -- 6.13%
Arizona
Betsey Clarke Tower
6263 N. Scottsdale Road #100
Scottsdale, AZ 85250
Murita Steer 2,987 -- -- 5.95%
Eggleston Trust Agreement
5040 E. Desert Jewel
Paradise Valley, AZ 85253
FLORIDA PORTFOLIO
Merrill Lynch 169,724 13.09% -- --
Mutual Fund Operations
4800 Deer Lake Dr. East 469,683 -- 20.56% --
Jacksonville, FL 32246
1,508,399 -- -- 49.75%
Jack W. Liebbert & 697,342 -- -- 25%
Glenn W. Libbert &
Larry E. Wilson
4602 Oak Leaf Drive
Naples, FL 33999
MASSACHUSETTS PORTFOLIO
Merrill Lynch 16,308 9.13% -- --
Mutual Fund Operations
4800 Deer Lake Dr. East 28,391 -- 14.70% --
Jacksonville, FL 32246
PaineWebber for the 9,156 5.15% -- --
Benefit of
Gerhard Neuman
53 Ocean View Road
Swampscott, MA 01907
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NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
PaineWebber for the 18,903 10.50% -- --
Benefit of
David P. Wilfert
66 Cleveland Street
Arlington, MA 02174
Frances F. Bailey 13,441 7.52% -- --
Executrix for Estate of
Maurice R. Bailey
127 Turnpike Street
North Andover, MA 01865
Prudential Securities 9,018 5.05% -- --
Mr. Leonard Linquata &
Ms. Julia Scandalito
10 Hovey Street
Gloucester, MA 01930
Alliance Capital 39,535 22.13% -- --
Management L.P.
Attn Paul Greenberg
1345 Avenue of Americas
New York, NY 10105
Vincent Dorazio 10,072 -- 5.21% --
95 Gertrude Street
Lynn, MA 01902
Sybil Wetzler & 22,575 -- 11.58% --
Teresa Wetzler
5 Tallyho Lane
Andover, MA 01810
Bruce D. Glabe 38,425 -- -- 9.46%
60 Sherurne Road
Lexington, MA 02173
Richard Snyder 165,048 -- -- 40.64%
195 Parkerville Road
Southborough, MA 01772
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NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
The Edwin F. Lewis Trust 21,018 -- -- 5.17%
87 Harrington Ridge Road
Sherborn, MA 01741
Clyde Kessel 29,362 -- -- 7.23%
385 Curve Street
Carlisle, MA 01741
Smith Barney Inc. 52,147 -- -- 7.91%
388 Greenwich Street
New York, NY 10013
MINNESOTA PORTFOLIO
Paul A. Zoschke 40,705 14.39% -- --
2928 Lake Blvd.
North St. Paul, MN 55109
Donald D. Pasek 20,118 7.11% -- --
2122 Appalachin Street
Duluth, MN 55811
August W. Winkelman 20,553 7.26% -- --
Priscilla A. Williams
216 Lake Avenue
Worthington, MN 56187
Curtis Zupper 18,515 6.54% -- --
Rosemary Zupper
957 Belvista Drive
North Mankato, MN 56003
Merrill Lynch 294,894 -- -- 39.46%
Mutual Fund Operations
4800 Deer Lake Dr. East
Jacksonville. FL 32246
Haldeman Homme Inc. 55,669 -- -- 7.45%
430 Industrial Blvd.
Minneapolis, MN 55413
James Hynes 49,287 -- -- 6.60%
4268 Churchill Circle
Minnetonka, MN 55345
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NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
MICHIGAN PORTFOLIO
Douglas E. Ward 200,859 15.68% -- --
2837 N. Imperial Drive
Hale, MI 48739
Justine Locke 29,590 5.78% -- --
3027 Lakeshore Rd.
Harbor Beach, MI 48441
Gods Blessing 200,859 39.23% -- --
Ken & Jean Assink
13595 Tyler
Holland, MI 69624
Merrill Lynch 106,666 -- 36.17% --
Mutual Fund Operations
4800 Deer Lake Dr. East 98,467 -- -- 34.63%
Jacksonville, FL 32246
NEW JERSEY PORTFOLIO
Merrill Lynch 181,071 10.84% -- --
Mutual Fund Operations
4800 Deer Lake Dr. East 994,863 -- 26.46% --
Jacksonville, FL 32246 1,595,616 -- -- 67.37%
Wheat First FBO 154,112 10.54% -- --
Ira Peterman
35 Morse Street
Crawford, NJ 07016
OHIO PORTFOLIO
Ronald Dolega 25,395 5.56% -- --
6965 North Renwood Dr.
Independent, OH 44131
Merrill Lynch 91,545 19.96% -- --
Mutual Fund Operations
4800 Deer Lake Dr. East 400,826 -- 17.03% --
Jacksonville, FL 32246
1,241,170 -- -- 68.31%
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NO. OF % OF % OF % OF
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
____________________ ______ _______ _______ _______
PENNSYLVANIA PORTFOLIO
Merrill Lynch 65,694 6.57% -- --
Mutual Fund Operations 812,590 -- 27.07% --
4800 Deer Lake Dr. East 1,021,338 -- -- 68.62%
Jacksonville, FL 32246
Dawn E. Gauthier 82,136 8.24% -- --
127 Lucinda Lane
Wyomissing, PA 19610
Smith Barney Shearson 66,188 6.64 -- --
388 Greenwich
New York, NY 10013
VIRGINIA PORTFOLIO
Norma F. Goldberg 13,821 7.24% -- --
14505 Brandermill Wood Tr.
Apt. 315
Midlothian, VA 23112
Alliance Capital Mgmt. 33,142 17.56% -- --
Attn Paul Greenberg
1345 Avenue of Americas
New York, NY 10105
Ralph W. Phillips 11,464 6.00% -- --
1101 S. Arlington Ridge Rd.
Arlington, VA 22202
Prudential Securities 23,482 12.30% -- --
Irwin Bloomberg
3550 Galt Ocean Drive
Apt. 1707
Fort Lauderdale, FL 33308
Merrill Lynch 34,856 -- 26.19% --
Mutual Fund Operations
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Joseph R. Tomarchio 2,892 -- -- 6.46%
7221 Braddock Road
Springfield, VA 22151
Stephens Inc. 28,942 -- -- 64.66%
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P.O. Box 34127
Little Rock, AR 72203
Custodian
Bank of New York, 48 Wall Street, New York, New York 10286,
acts as custodian for the securities and cash of the Fund but
plays no part in deciding the purchase or sale of portfolio
securities.
Principal Underwriter
Alliance Fund Distributors, Inc., 1345 Avenue of the
Americas, New York, New York 10105, serves as the Fund's
Principal Underwriter, and as such may solicit orders from the
public to purchase shares of the Fund. Under the Agreement
between the Fund and the Principal Underwriter, the Fund has
agreed to indemnify the distributors, in the absence of its
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act of
1933, as amended.
Counsel
Legal matters in connection with the issuance of the shares
offered hereby are passed upon by Seward & Kissel, One Battery
Park Plaza, New York, New York 10004. Seward & Kissel has relied
upon the opinion of Sullivan & Worcester, One Post Office Square,
Boston, Massachusetts 02109, for matters relating to
Massachusetts law.
Independent Auditors
Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, have been appointed as independent auditors for the Fund.
Yield and Total Return Quotations
From time to time a Portfolio states its "yield," "actual
distribution rate" and "total return." Computed separately for
each class, a Portfolio's yield for any 30-day (or one-month)
period is computed by dividing the net investment income per
share earned during such period by the maximum public offering
price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Securities and Exchange 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
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exemptions at the stated income tax rate. For example, under
1995 federal individual income tax rates and assuming that there
are no applicable state income taxes, a tax-exempt yield of 5%
would equal a tax equivalent yield of 6.94% (28% tax bracket),
7.25% (31% tax bracket), 7.81% (36% tax bracket), and 8.28%
(39.6% tax bracket), respectively; 6% would equal 8.33% (28% tax
bracket), 8.70% (31% tax bracket), 9.38% (36% tax bracket) and
9.93% (39.6% tax bracket), respectively; and 7% would equal 9.72%
(28% tax bracket), 10.14% (31% tax bracket), 10.94% (36% tax
bracket), and 11.59% (39.6% tax bracket), respectively. A
Portfolio's "actual distribution rate," which may be stated in
sales literature, is computed in the same manner as yield except
that actual income dividends declared per share during the period
in question are substituted for net investment income per share.
The actual distribution rate is compounded separately for Class
A, Class B and Class C shares. Computed separately for each
class, a Portfolio's "total return" is its average annual
compounded total return for recent one year, five year or ten
year periods (or the period since the Portfolio's inception). A
Portfolio's total return for such a period is computed by
finding, through the use of a formula prescribed by the
Securities and Exchange Commission, the average annual compounded
rate of return over the period that would equate an assumed
initial amount invested to the value of such investment at the
end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares
of a Portfolio are assumed to have been reinvested when paid and
the maximum sales charge applicable to purchases of such
Portfolio's shares is assumed to have been paid.
The yield for the fiscal year ended September 30, 1995 for
the Florida Portfolio was 5.21% for Class A shares, 4.73% for
Class B shares and 4.73% for Class C shares; for the Minnesota
Portfolio, 5.15% for Class A shares, 4.66% for Class B shares and
4.67% for Class C shares; for the New Jersey Portfolio, 5.06% for
Class A shares, 4.57% for Class B shares and 4.58% for Class C
shares; for the Ohio Portfolio, 5.25% for Class A shares, 4.77%
for Class B shares and 4.78% for Class C shares; for the
Pennsylvania Portfolio, 5.08% for Class A shares, 4.59% for Class
B shares and 4.59% for Class C shares; for the Michigan
Portfolio, 4.53% for Class A shares, 4.03% for Class B shares and
4.02% for Class C shares; for the Massachusetts Portfolio, 5.12%
for Class A shares, 4.63% for Class B shares and 4.65% for Class
C shares; for the Virginia Portfolio, 5.02% for Class A shares,
4.54% for Class B shares and 4.54% for Class C shares; and for
the Arizona Portfolio, 5.00% for Class A shares, 4.52% for Class
B shares and 4.50% for Class C shares. The tax equivalent yield
for such period for the Florida Portfolio was 8.42% for Class A
shares, 7.64% for Class B shares and 7.64% for Class C shares;
for the Minnesota Portfolio, 9.29% for Class A shares, 8.41% for
Class B shares and 8.43% for Class C shares; for the New Jersey
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Portfolio, 8.95% for Class A shares, 8.08% for Class B shares and
8.10% for Class C shares; for the Ohio Portfolio, 9.37% for Class
A shares, 8.51% for Class B shares and 8.53% for Class C shares;
for the Pennsylvania Portfolio, 8.64% for Class A shares, 7.80%
for Class B shares and 7.80% for Class C shares; for the Michigan
Portfolio, 7.55% for Class A shares, 6.71% for Class B shares and
6.89% for Class C shares; for the Massachusetts Portfolio, 9.61%
for Class A shares, 8.68% for Class B shares and 8.69% for Class
C shares; for the Virginia Portfolio, 8.80% for Class A shares,
7.96% for Class B shares and 7.96% for Class C shares; and for
the Arizona Portfolio, 8.75% for Class A shares, 7.90% for Class
B shares and 7.87% for Class C shares. The tax equivalent yield
calculations assume that the taxpayer is an individual in the
highest federal and state income tax bracket, who is not subject
to federal or state alternative minimum taxes and who is able to
fully deduct state taxes in computing federal taxable income.
The tax rates used in these calculations were: federal--39.6%,
Florida--0%, Minnesota-- 8.50%, New Jersey-- 6.58%, Ohio-- 7.50%,
Pennsylvania-- 2.80%, Michigan-- 4.40%, Massachusetts-- 12.00%,
Virginia-- 5.75% and Arizona-- 5.60%. 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 rates and adding the quotient to that portion, if any, of the
yield of the Portfolio that is not tax-exempt. The actual
distribution rate for the Florida Portfolio was 5.47% for Class A
shares, 4.97% for Class B shares and 4.97% for Class C shares;
for the Minnesota Portfolio, 5.58% for Class A shares, 5.07% for
Class B shares and 5.07% for Class C shares; for the New Jersey
Portfolio, 5.46% for Class A shares, 4.94% for Class B shares and
4.94% for Class C shares; for the Ohio Portfolio, 5.51% for Class
A shares, 4.99% for Class B shares and 4.99% for Class C shares;
for the Pennsylvania Portfolio, 5.55% for Class A shares, 5.05%
for Class B shares and 5.05% for Class C shares; for the Michigan
Portfolio, 5.23% for Class A shares, 4.78% for Class B shares and
4.78% for Class C shares; for the Massachusetts Portfolio, 5.58%
for Class A shares, 5.15% for Class B shares and 5.15% for Class
C shares; for the Virginia Portfolio, 5.29% for Class A shares,
4.85% for Class B shares and 4.85% for Class C shares; and for
the Arizona Portfolio, 5.34% for Class A shares, 4.90% for Class
B shares and 4.89% for Class C shares. The average annual total
return for the period since inception to September 30, 1995 for
the Florida Portfolio was 4.11% for Class A shares, 3.33% for
Class B shares and 3.33% for Class C shares; for the Minnesota
Portfolio, 3.56% for Class A shares, 2.80% for Class B shares and
2.84% for Class C shares; for the New Jersey Portfolio, 4.31% for
Class A shares, 3.58% for Class B shares and 3.58% for Class C
shares; for the Ohio Portfolio, 3.78% for Class A shares, 3.05%
for Class B shares and 3.05% for Class C shares; for the
Pennsylvania Portfolio, 4.41% for Class A shares; 3.68% for Class
B shares and 3.68% for Class C shares; for the Michigan
Portfolio, 6.56% for Class A shares, 5.79% for Class B shares and
122
<PAGE>
5.79% for Class C shares; for the Massachusetts Portfolio, 9.54%
for Class A shares, 8.71% for Class B shares and 8.71% for Class
C shares; for the Virginia Portfolio, 8.07% for Class A shares,
7.32% for Class B shares and 7.32% for Class C shares and for the
Arizona Portfolio 8.29% for Class A shares; 7.53% for the Class B
shares and 7.60% for Class C shares.
A Portfolio's yield and total return are not fixed and will
fluctuate in response to prevailing market conditions or as a
function of the type and quality of the securities held by such
Portfolio, its average portfolio maturity and its expenses.
Yield and total return information is useful in reviewing a
Portfolio's performance but such information may not provide a
basis for comparison with bank deposits or other investments
which pay a fixed yield for a stated period of time. An
investor's principal invested in a Portfolio is not fixed and
will fluctuate in response to prevailing market conditions.
Advertisements quoting performance ratings of the Portfolios
as measured by financial publications or by independent
organizations such as Lipper Analytical Services, Inc. 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
and 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.
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
Securities and Exchange Commission under the Securities Act of
1933. Copies of the Registration Statement may be obtained at a
reasonable charge from the Securities and Exchange Commission or
may be examined, without charge, at the offices of the Securities
and Exchange Commission in Washington, D. C.
00250151.AQ7
123
<PAGE>
ARIZONA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
ARIZONA MUNICIPAL BONDS-97.3%
AAA Maricopa Cnty IDR
(Citizens Utilities) AMT
6.20%, 5/01/30 $265 $268,994
AAA Maricopa Cnty Sch
Dist #28 GO (Kyrene Elementary)
FGIC Ser 95B
6.00%, 7/01/14 285 290,201
AAA Maricopa Cnty
Sch Dist #80 GO (Chandler) FGIC Ser 95
6.00%, 7/01/13 265 272,166
AAA Maricopa Cnty IDR
Hlth Fac (Samaritan Hlth) MBIA Ser 90A
7.00%, 12/01/13 555 599,761
AA- Mohave Cnty IDR
(Cargill) Ser 95A AMT
6.70%, 3/01/20 600 619,320
BBB Navajo Cnty PCR
(Arizona Public Service) Ser 93A
5.875%, 8/15/28 310 291,375
AAA Phoenix Arpt Rev
Arpt Improvement MBIA Ser 94D AMT
6.40%, 7/01/12 550 572,918
AA+ Phoenix Civic Plaza Bldg Corp
Ser 94
6.00%, 7/01/12 295 302,959
AA Phoenix IDR
MFHR (Woodstone & Silver Springs)
6.25%, 4/01/23 265 266,126
AAA Pima Cnty IDR
Hosp Rev (Tucson Med Ctr) MBIA Ser 93A
5.00%, 4/01/15 315 282,416
AAA Pima Cnty IDR
(Tucson Elec Pwr) FSA
Ser 88A
7.25%, 7/15/10 535 589,773
AA Salt River Proj Agriculture
Imp & Pwr Dist Elec Sys
5.75%, 1/01/19 300 295,059
AAA Tempe IDR
(Quadrangles) FHA
6.25%, 6/01/26 300 300,183
AAA Yavapai Cnty Sch
District #22 GO (Humboldt) FGIC
5.95%, 7/01/14 290 295,119
AAA Yuma IDR
(Alexandrite Sands Apt)
MFHR FHA Ser 90 AMT
7.70%, 12/01/29 595 615,284
TOTAL INVESTMENTS-97.3%
(cost $5,696,095) 5,861,654
Other assets less liabilities-2.7% 164,565
NET ASSETS-100% $6,026,219
+ Unaudited.
See Glossary of Terms on page 17.
See notes to financial statements.
8
FLORIDA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- -----------------------------------------------------------------------
MUNICIPAL BONDS-98.6%
FLORIDA-90.4%
Aaa* Brevard Cnty Hsg Fin Agy
SFMR FHA/VA Ser 94 AMT
6.70%, 9/01/27 $5,000 $ 5,076,850
AAA Brevard Cnty IDR
(NUI Corp Project) AMBAC
6.40%, 10/01/24 2,975 3,094,030
BBB+ Collier Cnty Hlth Fac
(The Moorings Proj) Ser 94
7.00%, 12/01/19 2,000 2,054,280
AAA Dade Cnty Arpt Rev
(Miami Int'l Arpt) MBIA Ser 95B AMT
6.00%, 10/01/24 4,500 4,475,430
A* Dade Cnty Spec Obl
(Courthouse Ctr Proj) Ser 95
6.10%, 4/01/20 5,000 4,993,650
BBB Escambia Cnty PCR
(Champion Int'l Corp) Ser 94 AMT
6.90%, 8/01/22 2,980 3,113,653
AAA Florida Hsg Fin Agy
Home Mtg SFMR Ser 95A AMT
6.65%, 1/01/24 5,200 5,378,256
AAA Florida St Turnpike
Auth Rev FGIC Ser 95A
5.625%, 7/01/25 3,200 3,068,320
AAA Hillsborough Cnty Aviation
Auth (Tampa Int'l Arpt) FGIC Ser 93D AMT
5.40%, 10/01/13 4,800 4,546,224
AAA Jacksonville Wtr & Swr
(United Waterworks) AMBAC Ser 95 AMT
6.35%, 8/01/25 1,500 1,545,120
BBB+ Lake Cnty Res Rec
(NRG Rec Group) Ser 93A AMT
5.95%, 10/01/13 $3,250 $3,058,672
BBB- Martin Cnty IDR
(Indiantown Co-Generation Proj) Ser 94A AMT
7.875%, 12/15/25 4,000 4,390,840
AA- Orlando Util Comm
Wtr & Elec Sub Rev
5.60%, 10/06/17 3,200 3,117,120
AAA Pinellas Cnty Hlth Fac
(Morton Plant Hlth) MBIA
5.50%, 11/15/18 3,300 3,134,373
Aaa* Pinellas Cnty Hsg Fin Auth
SFMR Ser A AMT
6.55%, 8/01/27 2,500 2,534,500
A* Venice Hlth Fac
(Venice Hosp) Ser 94
6.00%, 12/01/04 1,650 1,803,698
AAA Volusia Cnty (Daytona
Beach Int'l) MBIA Ser 93 AMT
5.625%, 10/01/21 2,000 1,927,320
57,312,336
WASHINGTON-4.9%
BBB Pilchuck Wtr Dev Pub Corp
Spec Fac Arpt (BF Goodrich)
Ser 93 AMT
6.00%, 8/01/23 3,350 3,131,312
ALASKA-3.3%
A+ Alaska Hsg Fin Corp
SFMR Ser 93I
5.90%, 12/01/33 2,200 2,079,220
TOTAL INVESTMENTS-98.6%
(cost $60,792,693) 62,522,868
Other assets less liabilities-1.4% 879,881
NET ASSETS-100% $63,402,749
+ Unaudited.
* Moody's Rating.
See Glossary of Terms on page 17.
See notes to financial statements.
9
MASSACHUSETTS PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
MASSACHUSETTS MUNICIPAL BONDS-97.5%
AAA Chelsea GO AMBAC
6.00%, 6/15/14 $250 $ 252,725
AAA Essex Cnty
So Essex Sew Dist MBIA Ser 94B
7.00%, 6/01/24 565 616,658
AAA Lowell GO
FSA Ser 93A
5.50%, 1/15/10 265 261,113
AAA Massachusetts Ed Fin Auth
Educational Loan Rev AMBAC Ser 94E AMT
6.00%, 1/01/12 270 268,034
AAA Massachusetts GO
MBIA Ser 95A
5.75%, 2/01/15 285 283,002
A- Massachusetts Hlth & Ed
Fac Auth Hosp Rev (Jordan Hosp) Ser 92B
6.875%, 10/01/15 215 221,897
Baal* Massachusetts Hlth & Ed
Fac Auth Hosp Rev
(Metro West Hlth) Ser 92C
6.50%, 11/15/18 520 509,007
AAA Massachusetts Hlth & Ed
Fac Auth Hosp Rev (New England Med Ctr.)
MBIA Ser 94
5.38%, 7/01/18 230 214,482
AAA Massachusetts Hsg Fin Auth
MFHR Residential Dev AMBAC Ser 93A
6.15%, 10/01/15 280 278,088
AAA Massachusetts Hsg Fin Auth
MFHR Residential Dev FNMA Ser 92F
6.25%, 11/15/12 245 249,748
A+ Massachusetts Hsg Fin Auth
SFMR Ser 40 AMT
6.65%, 12/01/27 830 836,590
AAA Massachusetts Muni
Wholesale Elec Pwr Supply Sys MBIA Ser 92A
6.00%, 7/01/18 265 266,572
A Massachusetts Wtr Res Auth
Ser 92B
5.50%, 11/01/15 290 273,838
AA- Massachusetts Wtr Pollution
Abatement (So Essex Prog) Ser 94A
6.375%, 2/01/15 265 275,224
A1* New England Ed Loan Mktg
(Student Loan Rev) Ser 92H AMT
6.90%, 11/01/09 645 695,774
TOTAL INVESTMENTS-97.5%
(cost $5,388,233) 5,502,752
Other assets less liabilities-2.5% 143,804
NET ASSETS-100% $5,646,556
+ Unaudited.
* Moody's Rating.
See Glossary of Terms on page 17.
See notes to financial statements.
10
MICHIGAN PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- -----------------------------------------------------------------------
MICHIGAN MUNICIPAL BONDS-100.7%
BBB+ Battle Creek
Downtown Dev Auth Ser 94
7.65%, 5/01/22 $ 430 $ 475,443
AAA Brighton Area School Dist
GO AMBAC Ser 92 II
Zero coupon, 5/01/20 2,130 498,228
BBB Detroit GO Ser 93
6.35%, 4/01/14 400 392,328
AAA Detroit Econ Dev Corp
Res Rec Rev FSA Ser 91A AMT
6.875%, 5/01/09 1,055 1,126,761
AAA Detroit Sewage Disposal
Sys Rev FGIC Ser 93A
5.70%, 7/01/23 400 387,932
AAA Grand Ledge
Sch Dist GO MBIA Ser 94
7.875%, 5/01/11 300 354,663
AAA Grand Rapids Swr Sys
Rev MBIA
6.00%, 1/01/22 505 503,616
AAA Kalamazoo Hosp Fin Auth
(Borgess Med Ctr) FGIC
5.244%, 6/01/11 410 393,969
AAA Kent Cnty Arpt Fac
Rev Ser 95 AMT
6.10%, 1/01/25 450 451,035
AAA Lowell Area School Dist GO FGIC
Zero coupon, 5/01/19 2,000 491,780
AAA Michigan Hosp Fin Auth
Hosp Rev (St Johns Hosp) AMBAC Ser 92A
6.00%, 5/15/13 450 455,202
AA+ Michigan Hsg Dev Auth
Mtg Rev SFMR Ser 95B AMT
7.05%, 6/01/26 935 973,363
BBB+ Michigan Strategic Fund
PCR (General Motors)
6.20%, 9/01/20 1,100 1,110,989
AAA Monroe Cnty PCR
(Detroit Edison) MBIA Ser I-B AMT
6.55%, 9/01/24 1,000 1,033,770
AA Troy MI Downtown Dev Auth
Asset Gty Ser 95A
6.375%, 11/01/18 470 471,340
AAA Wayne Charter Cnty Arpt
Rev (Detroit Metro Arpt) MBIA Ser 91B AMT
6.75%, 12/01/21 905 944,630
AAA Yale Pub Sch Dist GO AMBAC
5.50%, 5/01/23 500 470,950
TOTAL INVESTMENTS-100.7%
(cost $10,198,487) 10,535,999
Other assets less liabilities-(0.7%) (68,176)
NET ASSETS-100% $10,467,823
+ Unaudited.
See Glossary of Terms on page 17.
See notes to financial statements.
11
MINNESOTA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
MINNESOTA MUNICIPAL BONDS-97.5%
A- Bass Brook PCR
(Minn Power & Light)
6.00%, 7/01/22 $600 $ 584,358
AAA Burnsville Eagan Savage
Ind Sch Dist #191 GO CGIC Ser 95A
6.20%, 2/01/17 600 623,604
AA+ Duluth Arpt Lease Rev St
Secured GO Ser 95C AMT
6.25%, 8/01/14 800 821,168
Aa* Fairbault Ind Sch Dist #656 GO
6.20%, 6/01/12 600 619,806
AAA Lakeville Ind
Sch Dist #194 GO FGIC
5.60%, 2/01/18 800 784,944
BBB+ Minneapolis Community Dev
Agy Supported Ser 95-2 AMT
6.625%, 12/01/15 1,245 1,249,868
AAA Minneapolis GO SFMR
Homeownership Renov Stage III
Ser 93 AMT
5.70%, 12/01/23 650 604,467
AA+ Minnesota Hsg Fin Agy
SFMR Ser 89A AMT
7.90%, 7/01/19 1,945 2,020,369
AAA Minnesota Pub Fac Auth
Wtr Pol Ctl Rev Ser 95A
6.25%, 3/01/16 610 640,927
AAA Northern MN Muni Pwr Agy
AMBAC Ser 92B
5.50%, 1/01/18 800 772,072
AAA Northern St Paul Maplewood
Ind Sch Dist #622 GO MBIA Ser 94A
6.875%, 2/01/15 2,000 2,202,920
AAA Pierz Ind Sch Dist #484 GO AMBAC
5.375%, 6/01/15 650 625,157
AAA Robbinsdale Hosp Rev
(No. Memorial Med Ctr) AMBAC Ser 93A
5.45%, 5/15/13 600 576,336
AA+ Rochester Hosp Rev
(Mayo Med Ctr) Ser 92F
6.25%, 11/15/21 700 717,521
BBB- South St. Paul Hsg & Redev
(Health East Proj) Ser 94
6.75%, 11/01/09 2,100 2,154,180
AAA St Francis Ind
Sch Dist # 15 GO CGIC Ser 95A
6.375%, 2/01/16 800 841,624
A Western MN Muni Pwr Ser 87A
5.50%, 1/01/15 800 752,016
TOTAL INVESTMENTS-97.5%
(cost $15,717,752) 16,591,337
Other assets less liabilities-2.5% 426,264
NET ASSETS-100% $17,017,601
+ Unaudited.
* Moody's Rating.
See Glossary of Terms on page 17.
See notes to financial statements.
12
NEW JERSEY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
NEW JERSEY MUNICIPAL BONDS-98.5%
AAA Burlington Cnty
(Evesham Muni Util Auth) MBIA Ser A
5.60%, 7/01/15 $1,500 $ 1,468,290
AAA Camden Cnty Muni Util
Sewer Rev FGIC Ser 90A
Zero coupon, 9/01/17 5,000 1,437,950
BBB+ Camden Cnty Pol Ctl Fin
Solid Waste Resource Recovery
Ser 91B AMT
7.50%, 12/01/09 2,100 2,149,728
AAA Cape May Cnty Util Auth
Sewer Rev MBIA Ser A
5.75%, 1/01/16 3,000 3,006,060
AAA Cape May Cnty Pol Ctl
PCR (Atlantic City Elec Co)
MBIA Ser 94A AMT
7.20%, 11/01/29 5,000 5,646,350
AAA Essex Cnty Imp Auth Util
Rev (Orange Twp) Ser 93 MBIA
6.00%, 12/01/17 2,510 2,557,539
AA Gloucester Cnty PCR
(Mobil Oil Refining) Ser 93
5.625%, 12/01/28 3,000 2,859,300
AAA New Jersey Eco Dev Auth
(Hackensack Wtr Co) MBIA Ser 94B AMT
5.90%, 3/01/24 3,600 3,605,292
BB+ New Jersey Eco Dev Auth
Spec Fac (American Airlines) AMT
7.10%, 11/01/31 4,500 4,684,410
AAA New Jersey Eco Dev Auth
Wtr Fac (NJ American Wtr Co) FGIC AMT
6.875%, 11/01/34 5,000 5,362,500
BBB- New Jersey Hlth Care Fac
Hlth Fac (Franciscan Sisters,
St. Mary's Hosp) Ser 93
5.875%, 7/01/12 2,755 2,591,243
AAA New Jersey Hlth Care Fac
Fin Hlth Fac (Monmouth Med Ctr)
CGIC Ser 93
6.25%, 7/01/24 2,750 2,856,508
BBB New Jersey Hlth Care Fac
(Englewood Hosp & Med Ctr) Ser 94
6.75%, 7/01/24 3,230 3,283,812
AA- New Jersey Hwy Auth
Garden State Parkway
6.25%, 1/01/14 1,250 1,283,000
AAA New Jersey Hsg & Mtg Fin Agy AMT
6.35%, 10/01/27 3,000 3,017,460
A+ New Jersey Hsg & Mtg Fin
Agy MFHR (Sect 8) Ser 1
6.70%, 11/01/28 5,450 5,644,238
AA- Port Auth of NY & NJ Cons
Rev 95th Ser AMT
6.125%, 7/15/29 3,000 2,980,560
AA Salem Cnty NJ Auth
Waste Disposal Rev (E. I. Dupont)
6.125%, 7/15/22 3,500 3,526,740
A- Union Cnty Util Auth Solid
Waste Rev Ser 91A AMT
7.15%, 6/15/09 5,000 5,266,900
AAA Vineland Swr Rev
(Landis Sewerage Auth)
Reg linked Stars & Cars FGIC
5.65%, 9/19/19 3,400 3,350,972
TOTAL INVESTMENTS-98.5%
(cost $63,952,197) 66,578,852
Other assets less liabilities-1.5% 983,141
NET ASSETS-100% $67,561,993
+ Unaudited.
See Glossary of Terms on page 17.
See notes to financial statements.
13
OHIO PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
OHIO MUNICIPAL BONDS-100.7%
BBB- Butler Cnty Hosp Rev
(Fort Hamilton Hughes)
7.50%, 1/01/10 $1,400 $ 1,445,178
A1* Cincinnati Student Loan
Funding Corp AMT Ser 93A
6.15%, 8/01/10 2,000 2,003,460
AAA Clermont Cnty Wtr Sys Rev
(Clermont Cnty Swr) AMBAC Ser 93
5.70%, 12/01/13 2,250 2,234,723
AAA Cleveland Arpt Rev
(Cleveland Int'l Arpt) FGIC Ser A AMT
6.25%, 1/01/20 2,000 2,039,140
A Cuyahoga Cnty Hosp Rev
(Meridia Health Sys)
6.25%, 8/15/24 2,500 2,548,025
BBB Hamilton Cnty Hlth Sys
(Hlth Fac & Franciscan
Sisters Providence Hosp)
6.875%, 7/01/15 2,500 2,524,950
Aaa* Kent Ohio
(Silver Meadows Apt Proj)
Ser 95 MFHR AMT
7.15%, 12/20/26 2,000 2,088,320
AAA Lucas Cnty Hosp Rev
(St. Vincent Med Ctr) MBIA
5.45%, 8/15/14 1,575 1,494,848
NR Mahoning Valley Sanitary
Dist (Wtr Rev) Ser 94
7.75%, 5/15/14 2,500 2,642,350
Baa2* Ohio Air Quality Dev Auth
(Columbus Southern Pwr) PCR Ser 85B
6.25%, 12/01/20 3,000 2,980,860
AAA Ohio Air Quality Dev Auth
(JMG Funding/Ohio Pwr) AMBAC AMT
6.375%, 4/01/29 2,000 2,051,620
AA- Ohio Air Quality Dev Auth
PCR (Dayton Pwr & Light) Ser 92B
6.40%, 8/15/27 $2,500 $2,588,575
AAA Ohio Capital Corp
Sect 8 Assist MBIA
6.35%, 1/01/22 1,965 1,976,377
AAA Ohio Higher Ed Fac
Ohio Northern Univ Proj
5.60%, 5/01/13 2,100 2,069,886
Aa* Ohio Hsg Fin Agy Mtg
FHA (Insured Bridgeview Villas II)
MFHR AMT
6.45%, 12/01/33 1,965 1,978,794
AAA Ohio Hsg Fin Agy
Residential Mtg SFMR GNMA Coll Ser B2 AMT
6.70%, 3/01/25 3,890 3,980,287
AAA Ohio Muni Elec
Generation Agy (Belleville Hydroelec)
AMBAC
5.375%, 2/15/13 2,500 2,410,975
AA- Ohio Turnpike Commission
Turnpike Rev Ser 94A
5.75%, 2/15/24 1,750 1,713,898
AAA Ohio Wtr Dev Auth Rev
Ref-Coll (Cincinnati G&E) MBIA
5.45%, 1/01/24 2,000 1,871,580
A Ohio Wtr Dev Auth
(North Star BHP) AMT
6.45%, 9/01/20 2,500 2,524,625
TOTAL INVESTMENTS-100.7%
(cost $43,021,896) 45,168,471
Other assets less liabilities-(0.7%) (303,665)
NET ASSETS-100% $44,864,806
+ Unaudited.
* Moody's Rating.
See Glossary of Terms on page 17.
See notes to financial statements.
14
PENNSYLVANIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
PENNSYLVANIA MUNICIPAL BONDS-98.5%
AAA Allegheny Cnty Arpt Rev
(Pittsburgh Int'l) FSA Ser 92B AMT
6.625%, 1/01/22 $5,000 $ 5,173,950
AAA Allegheny Cnty
(Elizabeth Forward) MBIA-Ser 95B
Zero Coupon, 9/01/16 2,170 634,291
Zero Coupon, 9/01/17 2,170 591,715
AAA Berks Cnty Sewer Rev
(Exeter Twp) MBIA
6.20%, 7/15/22 2,905 2,957,668
A- Bradford Cnty IDA
Solid Waste Disposal (Int'l Paper)
95A AMT
6.60%, 3/01/19 2,500 2,533,775
AAA Butler Cnty Hospital Auth
(Butler Mem Hosp) FSA Ser A,
5.25%, 7/01/12 2,500 2,328,375
AAA Delaware County IDA
Higher Ed (Villanova University) MBIA
5.50%, 8/01/23 2,500 2,363,875
A New Morgan IDA Solid
Waste (Browning Ferris) Ser 94 AMT
6.50%, 4/01/19 2,500 2,561,050
BBB- Pennsylvania Convention Ctr
Auth Ref Rev Ser 94A
6.75%, 9/01/19 2,500 2,631,950
BBB- Pennsylvania Econ Dev
Fin Auth (Macmillan Bloedel Clarion Proj)
95 AMT
7.60%, 12/01/20 3,000 3,271,170
BBB+ Pennsylvania Econ Dev
Auth Wastewater Rev
(Sun Company) Ser 94A AMT
7.60%, 12/01/24 3,000 3,273,330
AA Pennsylvania Hsg Fin Agy
7.604%, 4/01/25(a) 4,500 4,435,965
AAA Pennsylvania Higher Ed
Student Loan AMBAC Ser 88D AMT
6.05%, 1/01/19 700 704,011
AAA Pennsylvania Intergov Coop
Auth (Special Tax Rev) FGIC Ser 94
7.00%, 6/15/14 4,425 4,841,570
AAA Pennsylvania Turnpike
Commission Oil Franchise
Tax Rev Ser 94A AMBAC
6.00%, 12/01/19 2,400 2,411,376
AAA Philadelphia Airport System
Rev Ser 95A AMBAC AMT
6.10%, 6/15/25 2,600 2,571,556
A- Philadelphia Hosp
Rev (Temple Univ) Ser 93A
6.625%, 11/15/23 2,000 1,983,420
AAA Philadelphia Muni Auth
(Criminal Justice Proj) Ser 93A FGIC
5.625%, 11/15/18 2,000 1,923,620
A Pittsburgh Urban Redev
Mtg Rev Ser 95A AMT
7.15%, 10/01/27 2,000 2,076,180
BBB+ Warren Cnty Hosp Rev
(Warren Gen Hosp Proj) Ser 94B
7.00%, 4/01/19 2,200 2,260,808
TOTAL INVESTMENTS-98.5%
(cost $49,322,240) 51,529,655
Other assets less liabilities-1.5% 802,302
NET ASSETS-100% $52,331,957
+ Unaudited
* Moody's Rating.
(a) Inverse floater security-the interest rate is subject to change
periodically.
See Glossary of Terms on page 17.
See notes to financial statements.
15
VIRGINIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS+ (000) VALUE
- ----------------------------------------------------------------------
VIRGINIA MUNICIPAL BONDS-97.7%
AAA Chesapeake Bay MBIA
(Bridge & Tunnel Auth)
5.75%, 7/01/25 $ 155 $ 150,474
A+ Fairfax Cnty Econ Dev Auth
Res Rec (Ogden Martin System) Ser 88A AMT
7.75%, 2/01/11 135 147,959
A- Hampton Museum Rev Ref Ser 94
5.25%, 1/01/14 160 148,966
AA Henrico Cnty IDR
(Henrico Cnty Reg Jail)
7.125%, 8/01/21 270 306,987
A- Isle of Wight Cnty IDA
Solid Waste (Union Camp Corp) Ser 94 AMT
6.55%, 4/01/24 110 112,002
AAA Washington Metro Airport
Auth Airport Rev Ser 94A MBIA AMT
5.75%, 10/01/20 140 134,621
BBB+ Peninsula Port Auth Hlth
Fac (Mary Immaculate Proj) Ser 94
7.00%, 8/01/17 150 156,101
A* Prince William Cnty
Hosp Rev IDA (Potomac Hosp Group)
6.75%, 10/01/15 190 203,066
AAA Richmond Metro Auth
Expwy Rev Ser B FGIC
6.25%, 7/15/22 145 147,826
AAA Richmond Redev & Hsg Auth
Mtg Rev (Ref-Multi-Jefferson-A) FHA
6.50%, 4/01/27 250 252,455
AA Richmond GO Pub Impt Ser 91A
6.25%, 1/15/21 290 293,341
AA Virginia Beach Hlth Care
Hosp Rev (Sentara Bayside)
6.30%, 11/01/21 120 122,424
AA Virginia College Bldg Auth
Ed Fac Rev (Washington & Lee)
5.80%, 1/01/24 190 190,560
A* Virginia Ed Loan Auth
Student Loan Program Ser 93G AMT
6.15%, 9/01/09 160 159,397
AA+ Virginia Hsg Dev Auth
(Commonwealth Mtg) SFMR Ser 94G AMT
7.125%, 7/01/22 430 452,541
AA Virginia Resources Auth Swr
Rev (Hopewell Regl Waste Wtr)
Ser 95A AMT
6.00%, 10/01/25 120 118,194
TOTAL INVESTMENTS-97.7%
(cost $3,006,168) 3,096,914
Other assets less liabilities-2.3% 73,525
NET ASSETS-100% $3,170,439
+ Unaudited.
* Moody's Rating.
See Glossary of Terms on page 17.
See notes to financial statements.
16
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
GLOSSARY OF TERMS
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax - Subject to
CGIC Capital Guaranty Insurance Company
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Administration
FNMA Federal National Mortgage Association
FSA Financial Security Assurance, Inc.
GNMA Government National Mortgage Association
GO General Obligation
IDA Industrial Development Authority
IDR Industrial Development Revenue
MBIA Municipal Bond Investors Assurance
MFHR Multi-Family Housing Revenue
PCR Pollution Control Revenue
SFMR Single Family Mortgage Revenue
VA Veterans Administration
17
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
ARIZONA FLORIDA MASSACHUSETTS
------------ ------------ -------------
ASSETS
Investment in securities, at value
(cost $5,696,095, $60,792,693,
$5,388,233, $10,198,487, $15,717,752,
$63,952,197, $43,021,896,$49,322,240,
$3,006,168,respectively) $5,861,654 $62,522,868 $5,502,752
Interest receivable 113,800 1,207,232 127,681
Receivable due from Adviser 73,562 -0- 93,484
Receivable for shares of beneficial
interest sold 27,004 158,128 40,611
Receivable for investment securities
sold -0- -0- -0-
Other assets 32,714 40,044 24,906
Total assets 6,108,734 63,928,272 5,789,434
LIABILITIES
Due to custodian 37,259 327,483 31,394
Dividends payable 8,600 88,898 8,163
Distribution fee payable 3,487 45,178 3,778
Advisory fee payable -0- 5,380 -0-
Payable for investment securities
purchased -0- -0- -0-
Payable for shares of beneficial
interest redeemed -0- 13,365 61,000
Accrued expenses and other liabilities 33,169 45,219 38,543
Total liabilities 82,515 525,523 142,878
NETASSETS $6,026,219 $63,402,749 $5,646,556
CLASS A SHARES
Net assets $2,378,902 $11,955,489 $1,336,932
Shares of beneficial interest
outstanding 231,097 1,248,497 127,383
CLASS B SHARES
Net assets $3,166,496 $20,659,780 $1,753,755
Shares of beneficial interest
outstanding 307,652 2,156,648 167,145
CLASS C SHARES
Net assets $ 480,821 $30,787,480 $2,555,869
Shares of beneficial interest
outstanding 46,698 3,213,407 243,574
COMPOSITION OF NET ASSETS
Shares of beneficial interest, at par $ 5,855 $ 66,186 $ 5,381
Additional paid-in capital 5,854,199 69,702,675 5,499,233
Distributions in excess of
net investment income (4,704) (21,287) (10,073)
Accumulated net realized gain (loss) 5,310 (8,075,000) 37,496
Net unrealized appreciation of
investments 165,559 1,730,175 114,519
----------- ------------ ------------
$6,026,219 $63,402,749 $5,646,556
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price
per share $10.29 $ 9.58 $10.50
Sales charge-4.25% of public
offering price .46 .43 .47
Maximum offering price $10.75 $10.01 $10.97
CLASS B SHARES
Net asset value and offering price
per share $10.29 $ 9.58 $10.49
CLASS C SHARES
Net asset value, redemption and
offering price per share $10.30 $ 9.58 $10.49
See notes to financial statements.
18
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$10,535,999 $16,591,337 $66,578,852 $45,168,471 $51,529,655 $3,096,914
178,317 296,002 1,197,300 668,735 1,066,968 58,408
29,292 79,301 -0- 18,505 -0- 82,065
89,577 9,859 268,947 92,967 297,067 20,792
750,547 154,734 -0- 2,221,517 -0- -0-
18,988 37,755 37,755 39,475 51,233 20,911
11,602,720 17,168,988 68,082,854 48,209,670 52,944,923 3,279,090
56,944 27,835 305,103 3,174,513 165,336 73,872
14,588 24,647 94,816 62,860 74,586 4,503
5,495 12,639 48,560 35,030 37,956 1,484
-0- -0- 11,689 -0- 8,499 -0-
1,030,655 -0- -0- -0- 99,999 -0-
-0- 44,423 29,284 26,929 185,954 -0-
27,215 41,843 31,409 45,532 40,636 28,792
1,134,897 151,387 520,861 3,344,864 612,966 108,651
$10,467,823 $17,017,601 $67,561,993 $44,864,806 $52,331,957 $3,170,439
$ 5,157,780 $2,413,420 $11,611,727 $ 4,169,466 $ 8,721,280 $1,855,165
510,755 254,269 1,203,112 437,391 904,319 180,265
$ 2,424,459 $7,299,371 $34,695,571 $21,821,426 $28,558,363 $1,193,045
240,155 768,809 3,593,479 2,287,840 2,960,544 115,917
$ 2,885,584 $7,304,810 $21,254,695 $18,873,914 $15,052,314 $ 122,229
285,821 769,089 2,201,042 1,978,893 1,560,259 11,877
$ 10,367 $ 17,922 $ 69,976 $ 47,041 $ 54,251 $ 3,081
10,135,256 18,407,896 71,502,123 48,339,314 54,829,271 3,067,888
(11,930) (22,551) (81,399) (39,696) (60,987) (3,234)
(3,382) (2,259,251) (6,555,362) (5,628,428) (4,697,993) 11,958
337,512 873,585 2,626,655 2,146,575 2,207,415 90,746
$10,467,823 $17,017,601 $67,561,993 $44,864,806 $52,331,957 $3,170,439
$10.10 $ 9.49 $ 9.65 $ 9.53 $ 9.64 $10.29
.45 .42 .43 .42 .43 .46
$10.55 $ 9.91 $10.08 $ 9.95 $10.07 $10.75
$10.10 $ 9.49 $ 9.66 $ 9.54 $ 9.65 $10.29
$10.10 $ 9.50 $ 9.66 $ 9.54 $ 9.65 $10.29
19
FOR THE YEAR ENDED SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
ARIZONA FLORIDA MASSACHUSETTS
---------- ----------- ----------
INVESTMENT INCOME
Interest $ 285,013 $4,216,537 $ 208,617
EXPENSES
Advisory fee 28,005 395,106 21,032
Distribution fee - Class A 5,147 29,151 2,731
Distribution fee - Class B 23,308 191,797 9,023
Distribution fee - Class C 4,344 343,209 15,526
Administrative 82,000 82,000 82,000
Audit & legal 26,499 45,582 26,904
Transfer agency 21,680 44,128 19,506
Custodian 18,497 42,343 21,815
Amortization of organizational expenses 8,463 14,662 6,458
Printing 2,662 4,974 6,854
Trustees' fees 2,411 2,936 3,022
Registration 1,673 1,073 3,245
Taxes 690 1,112 687
Miscellaneous 12,495 17,106 15,088
Total expenses 237,874 1,215,179 233,891
Less: expenses waived and assumed by
Adviser (see Note B) (183,567) (382,350) (196,516)
Net expenses 54,307 832,829 37,375
Net investment income 230,706 3,383,708 171,242
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on investments 37,377 (1,403,139) 42,515
Net change in unrealized depreciation
of investments 209,846 5,767,509 130,631
Net gain on investments 247,223 4,364,370 173,146
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 477,929 $7,748,078 $ 344,388
See notes to financial statements.
20
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
---------- ----------- ----------- ----------- ----------- -----------
$514,675 $1,070,043 $4,209,725 $2,960,264 $3,372,661 $133,158
48,242 104,056 399,945 282,217 310,293 13,370
9,747 6,945 31,122 9,643 23,564 3,903
19,821 64,331 311,612 205,009 268,526 7,553
24,877 79,009 224,560 214,393 149,397 828
82,000 82,000 82,000 82,000 82,000 82,000
30,080 50,254 49,382 45,164 42,385 24,334
28,305 30,096 64,899 42,905 62,657 20,380
22,930 30,711 37,789 48,048 37,864 22,026
5,120 13,823 13,823 14,450 18,750 5,237
5,173 4,475 8,623 5,752 3,518 479
2,193 2,157 2,335 3,349 2,676 2,525
3,575 1,211 872 844 3,032 1,667
576 706 1,482 1,499 1,523 730
13,188 14,773 16,504 17,834 15,423 12,602
295,827 484,547 1,244,948 973,107 1,021,608 197,634
(159,534) (265,357) (341,783) (341,072) (229,907) (177,435)
136,293 219,190 903,165 632,035 791,701 20,199
378,382 850,853 3,306,560 2,328,229 2,580,960 112,959
126,954 (1,158,947) (1,275,992) (2,332,469) (1,548,029) 17,096
489,511 1,686,335 5,130,792 4,348,549 3,927,440 132,592
616,465 527,388 3,854,800 2,016,080 2,379,411 149,688
$994,847 $1,378,241 $7,161,360 $4,344,309 $4,960,371 $262,647
21
STATEMENTS OF CHANGES IN NET ASSETS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSETTS
------------------------- -------------------------- ---------------------------
JUNE 1,1994* MARCH 29,1994*
YEAR ENDED TO YEAR ENDED YEAR ENDED YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994 1995 1994
----------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 230,706 $ 41,493 $ 3,383,708 $ 3,638,255 $ 171,242 $ 34,380
Net realized gain (loss) on investments 37,377 (32,067) (1,403,139) (6,668,189) 42,515 (5,019)
Net change in unrealized appreciation
(depreciation) of investments 209,846 (44,287) 5,767,509 (4,555,788) 130,631 (16,112)
Net increase (decrease) in net
assets from operations 477,929 (34,861) 7,748,078 (7,585,722) 344,388 13,249
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (95,444) (12,405) (574,240) (408,558) (51,642) (14,562)
Class B (113,965) (21,771) (1,000,470) (761,434) (44,254) (14,649)
Class C (21,297) (6,184) (1,808,998) (2,469,612) (75,346) (3,825)
Distributions in excess of net
investment income
Class A (2,415) -0- (3,384) -0- (3,443) -0-
Class B (2,883) -0- (5,895) -0- (2,950) -0-
Class C (539) -0- (10,659) -0- (5,024) -0-
Net realized gain on investments
Class A -0- -0- -0- (6,309) -0- -0-
Class B -0- -0- -0- (12,873) -0- -0-
Class C -0- -0- -0- (45,607) -0- -0-
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Net increase (decrease) 2,692,697 3,167,057 (9,621,625) 37,987,116 3,420,458 2,083,856
Total increase (decrease) 2,934,083 3,091,836 (5,277,193) 26,697,001 3,582,187 2,064,069
NET ASSETS
Beginning of period 3,092,136 300 68,679,942 41,982,941 2,064,369 300
End of period** $6,026,219 $3,092,136 $63,402,749 $68,679,942 $5,646,556 $2,064,369
</TABLE>
* Commencement of operations.
** Including undistributed net investment income of $1,133 and $1,344 for
Arizona and Massachusetts portfolios as of September 30, 1994, respectively.
See notes to financial statements.
22
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY
------------------------- -------------------------- --------------------------
FEBRUARY 25,
YEAR ENDED 1994* TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994 1995 1994
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 378,382 $ 142,170 $ 850,853 $ 849,761 $ 3,306,560 $ 3,157,064
Net realized gain (loss) on investments 126,954 (111,432) (1,158,947) (1,100,304) (1,275,992) (5,289,187)
Net change in unrealized appreciation
(depreciation) of investments 489,511 (151,999) 1,686,335 (971,979) 5,130,792 (3,271,420
Net increase (decrease) in net
assets from operations 994,847 (121,261) 1,378,241 (1,222,522) 7,161,360 (5,403,543)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income
Class A (171,195) (43,193) (132,290) (96,139) (594,213) (511,479)
Class B (90,481) (37,028) (319,841) (249,268) (1,568,929) (1,260,934)
Class C (116,706) (61,696) (398,722) (504,760) (1,143,418) (1,382,836)
Distributions in excess of net
investment income
Class A (14,065) -0- (5,501) -0- (14,954) -0-
Class B (7,434) -0- (13,299) -0- (39,484) -0-
Class C (9,588) -0- (16,579) -0- (28,776) -0-
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Net increase (decrease) 2,909,212 7,236,111 (1,238,319) 9,480,689 (2,398,032) 31,237,763
Total increase (decrease) 3,494,590 6,972,933 (746,310) 7,408,000 1,373,554 22,678,971
NETASSETS
Beginning of period 6,973,233 300 17,763,911 10,355,911 66,188,439 43,509,468
End of period** $10,467,823 $6,973,233 $17,017,601 $17,763,911 $67,561,993 $66,188,439
</TABLE>
* Commencement of operations.
** Including undistributed net investment income of $253 and $1,815 for the
Michigan and New Jersey portfolios as of September 30, 1994, respectively.
See notes to financial statements.
23
STATEMENTS OF CHANGES IN NET ASSETS (CONT.) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA VIRGINIA
-------------------------- -------------------------- -------------------------
APRIL 29,1994*
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994 1995 1994
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 2,328,229 $ 2,234,378 $ 2,580,960 $ 2,357,547 $ 112,959 $ 26,804
Net realized gain (loss) on investments (2,332,469) (3,280,561) (1,548,029) (3,140,943) 17,096 (5,138)
Net change in unrealized appreciation
(depreciation) of investments 4,348,549 (2,669,693) 3,927,440 (2,204,273) 132,592 (41,846)
Net increase (decrease) in net
assets from operations 4,344,309 (3,715,876) 4,960,371 (2,987,669) 262,647 (20,180)
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (184,425) (116,690) (465,490) (341,767) (72,700) (22,567)
Class B (1,041,482) (802,092) (1,330,120) (1,028,876) (36,282) (3,681)
Class C (1,102,322) (1,314,567) (785,350) (990,266) (3,977) (427)
Distributions in excess of net
investment income
Class A (3,226) -0- (16,051) -0- (2,164) -0-
Class B (18,217) -0- (45,868) -0- (1,080) -0-
Class C (19,282) -0- (27,082) -0- (119) -0-
Net realized gain on investments
Class A -0- (1,496) -0- (4,917) -0- -0-
Class B -0- (12,611) -0- (16,713) -0- -0-
Class C -0- (26,124) -0- (18,485) -0- -0-
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Net increase (decrease) (6,481,382) 25,463,451 (941,588) 26,487,307 1,509,328 1,561,341
Total increase (decrease) (4,506,027) 19,473,995 1,348,822 21,098,614 1,655,653 1,514,486
NET ASSETS
Beginning of period 49,370,833 29,896,838 50,983,135 29,884,521 1,514,786 300
End of period** $44,864,806 $49,370,833 $52,331,957 $50,983,135 $3,170,439 $1,514,786
</TABLE>
* Commencement of operations.
** Including undistributed net investment income of $1,029 and $129 for the
Ohio and Virginia portfolios as of September 30, 1994, respectively.
See notes to financial statements.
24
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Municipal Income Fund II (the 'Fund') which was organized as a
Massachusetts Business Trust on April 2, 1993 is registered under the
Investment Company Act of 1940 as a non-diversified open-end management
investment company. The Fund operates as a series company currently comprised
of nine portfolios: Arizona Portfolio, Florida Portfolio, Massachusetts
Portfolio, Michigan Portfolio, Minnesota Portfolio, New Jersey Portfolio, Ohio
Portfolio, Pennsylvania Portfolio and Virginia Portfolio (the 'Portfolios'). On
February 25, March 29, April 29, and June 1, 1994, the Michigan, Massachusetts,
Virginia and Arizona Portfolios, respectively, all new Portfolios of the series
company, were added to the Fund. These portfolios commenced operations by the
sale to Alliance Capital Management L.P. (the 'Adviser'), of 10 shares of Class
A, Class B and Class C shares, respectively, in the aggregate amount of $300.
Each series is considered to be a separate entity for financial reporting and
tax purposes. Each portfolio offers Class A, Class B and Class C shares. Class
A shares are sold with a front-end sales charge of up to 4.25%. Class B shares
are sold with a contingent deferred sales charge which declines from 3% to zero
depending on the period of time the shares are held. Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month of purchase. Class C shares are sold without an initial or contingent
deferred sales charge. All three classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that each class bears different distribution expenses and has exclusive
voting rights with respect to its distribution plan. The following is a summary
of the significant accounting policies followed by the Fund.
1. SECURITY VALUATION
The Fund values municipal securities at fair value based on prices provided by
a recognized pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values.
If market quotations are not readily available from such pricing service, a
municipal security is valued by appraisal at its fair value as determined in
good faith by the Fund's Adviser under procedures established by the Fund's
Board of Trustees. Short-term securities which mature in 60 days or less are
valued at amortized cost, which approximates market value.
2. ORGANIZATION EXPENSES
Organization expenses of approximately $68,000 for the Minnesota, $68,000 for
the New Jersey, $87,200 for the Pennsylvania, $71,000 for the Ohio, and $72,000
for the Florida Portfolios have been deferred and are being amortized on a
straight-line basis through June, 1998. Organization expenses of approximately
$41,750 for the Arizona, $25,550 for the Michigan, $31,450 for the
Massachusetts, and $27,200 for the Virginia Portfolios have been deferred and
are being amortized on a straight-line basis through February, March, April and
June, 1999, respectively.
3. TAXES
It is the intention of each Portfolio to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its investment company taxable income and net realized gains, if applicable,
to its shareholders. Therefore, no provisions for federal income or excise
taxes are required.
4. INVESTMENT INCOME AND SECURITY TRANSACTIONS
Interest income is accrued daily. Security transactions are accounted for on
the date the securities are purchased or sold. Security gains and losses are
determined on the identified cost basis. The Fund amortizes premium and accrues
original issue discount and market discount as adjustments to interest income.
The 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.
5. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date and are determined in accordance with income tax regulations.
6. RECLASSIFICATION OF NET ASSETS
As a result of book to tax differences in the classification
25
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
of short-term capital gain distributions and other items, the Fund has
reclassified certain components of net assets. The reclassifications resulted
in a net decrease to distributions in excess of net investment income and a
corresponding decrease to additional paid-in capital for the Minnesota and
Pennsylvania Portfolios of $13,234 and $31,376, respectively. Net investment
income, net realized gains and net assets were not affected by these
reclassifications.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the Fund pays the Adviser
an advisory fee at an annual rate of .625 of 1% of each Portfolio's average
daily net assets. Such fees are accrued daily and paid monthly. The Adviser has
agreed, under the terms of the investment advisory agreement, to reimburse the
Fund to the extent that the expenses of each of its Portfolios (exclusive of
interest, taxes, brokerage, distribution fees, and extraordinary expenses)
exceed the limits prescribed by any state in which that Portfolio's shares are
qualified for sale. No such reimbursement was required for the year ended
September 30, 1995. For the period ended September 30, 1995 the Adviser
voluntarily agreed to waive all or a portion of its advisory fees. The
aggregate amounts of such fee waivers were: Arizona Portfolio, $28,005; Florida
Portfolio, $300,350; Massachusetts Portfolio, $21,032; Michigan Portfolio,
$48,242; Minnesota Portfolio, $104,056; New Jersey Portfolio, $259,783; Ohio
Portfolio, $259,072; Pennsylvania Portfolio, $147,907; and Virginia Portfolio
$13,370.
Pursuant to the advisory agreement, the Adviser provides to each Portfolio
certain legal and accounting services. For the year ended September 30, 1995,
the Adviser voluntarily agreed to waive its fees for such services. In
addition, the Adviser agreed to reimburse each Portfolio for certain operating
expenses. Such expenses amounted to $73,562 for the Arizona Portfolio, $93,484
for the Massachusetts Portfolio, $29,292 for the Michigan Portfolio, $79,301
for the Minnesota Portfolio and $82,065 for the Virginia Portfolio. There was
no such reimbursement for the Florida Portfolio, the New Jersey Portfolio, the
Ohio Portfolio and the Pennsylvania Portfolio.
Each Portfolio compensates Alliance Fund Services, Inc. (a wholly-owned
subsidiary of the Adviser) under a Services Agreement for providing personnel
and facilities to perform transfer agency services for each Portfolio. Such
compensation amounted to $14,093 for the Arizona Portfolio, $21,939 for the
Florida Portfolio, $13,836 for the Massachusetts Portfolio, $14,432 for the
Michigan Portfolio, $16,680 for the Minnesota Portfolio, $32,067 for the New
Jersey Portfolio, $21,854 for the Ohio Portfolio, $32,346 for the Pennsylvania
Portfolio and $13,847 for the Virginia Portfolio.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The amount of front-end sales
charges received by the Distributor from sales of each respective Portfolio's
Class A shares for the year ended September 30, 1995 were: Arizona Portfolio,
$3,098; Florida Portfolio, $7,186; Massachusetts Portfolio, $1,736; Michigan
Portfolio, $999; Minnesota Portfolio, $1,073; New Jersey Portfolio, $6,558;
Ohio Portfolio, $3,299; Pennsylvania Portfolio, $4,741; and Virginia Portfolio,
$694. The amount of contingent deferred sales charge imposed upon redemptions
by shareholders of Class B shares for the same period were: Arizona Portfolio,
$5,862; Florida Portfolio, $59,396; Massachusetts Portfolio, $6,273; Michigan
Portfolio, $20,509; Minnesota Portfolio, $17,775; New Jersey Portfolio,
$87,046; Ohio Portfolio, $47,836; Pennsylvania Portfolio, $68,849; and Virginia
Portfolio, $240.
26
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
NOTE C: DISTRIBUTION SERVICES AGREEMENT
Each Portfolio has adopted a Distribution Services Agreement (the 'Agreement')
pursuant to Rule 12b-1 under the Investment Company Act of 1940 for Class A,
Class B and Class C shares. Under the Agreement, each Portfolio pays a
distribution fee to the Distributor at an annual rate of up to .30 of 1% of
each Portfolio's average daily net assets attributable to the Class A shares
and 1% of each Portfolio's average daily net assets attributable to the Class B
and Class C shares, respectively. Such fee is accrued daily and paid monthly.
The Agreement provides that the Distributor will use such payments in their
entirety for distribution assistance and promotional activities. Since the
commencement of operations of each Portfolio the Distributor has incurred
expenses in excess of the distribution costs reimbursed by each Portfolio as
follows:
PORTFOLIO CLASS B CLASS C
- ---------------- ---------- --------
Arizona $ 333,848 $ 82,644
Florida 756,410 689,466
Massachusetts 293,674 250,539
Michigan 272,393 326,746
Minnesota 582,028 437,224
New Jersey 1,390,839 426,141
Ohio 939,849 518,440
Pennsylvania 1,088,987 430,536
Virginia 276,543 35,816
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)
for the year ended September 30, 1995 were as follows:
PORTFOLIO PURCHASES SALES
- --------------- ----------- ------------
Arizona $ 6,373,810 $ 3,811,785
Florida 93,414,385 107,718,835
Massachusetts 8,442,115 5,136,423
Michigan 15,270,377 12,299,070
Minnesota 19,819,027 21,139,563
New Jersey 55,775,712 57,700,250
Ohio 50,050,331 60,323,413
Pennsylvania 58,254,765 57,093,687
Virginia 4,219,549 2,750,256
NOTE E: TAXES
For Federal income tax purposes at September 30, 1995, the Series had capital
loss carryforwards for the following Portfolios: $7,678 expiring in 2002,
$5,261,151 expiring in 2003, for New Jersey Portfolio; $7,571,805 expiring in
2003, for Florida Portfolio; $3,714,202 expiring in 2003, for Ohio Portfolio;
$3,137,952 expiring in 2003, for Pennsylvania Portfolio; and $1,185,373
expiring in 2003 for Minnesota Portfolio. Any net capital losses incurred after
October 31 ('Post October losses') within the taxable year are deemed to arise
on the first business day of each Portfolio's next taxable year. Pursuant to
Federal income tax regulations, the Series had net capital losses of $499,523
for Florida Portfolio, $3,382 for the Michigan Portfolio, $1,074,383 for the
Minnesota Portfolio, $1,296,350 for New Jersey Portfolio, $1,898,828 for Ohio
Portfolio and $1,551,030 for the Pennsylvania Portfolio which will be deferred
to fiscal year 1996. These capital losses will be available in fiscal 1996 to
offset capital gains and reduce amounts distributable to shareholders.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
At September 30, 1995, the cost of securities for federal income tax purposes,
gross unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation of investments for each Portfolio were as follows:
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
PORTFOLIO TAX COST APPRECIATION (DEPRECIATION) APPRECIATION
- ---------------- ----------- ------------ -------------- ------------
Arizona $ 5,696,095 $ 165,559 $ -0- $ 165,559
Florida 60,792,693 1,902,389 (172,214) 1,730,175
Massachusetts 5,388,233 117,228 (2,709) 114,519
Michigan 10,198,487 337,512 -0- 337,512
Minnesota 15,717,752 907,791 (34,206) 873,585
New Jersey 63,952,197 2,930,912 (304,257) 2,626,655
Ohio 43,021,896 2,159,237 (12,662) 2,146,575
Pennsylvania 49,322,240 2,276,610 (69,195) 2,207,415
Virginia 3,006,168 90,746 -0- 90,746
NOTE F: SHARES OF BENEFICIAL INTEREST
There is an unlimited number of $.01 par value shares of beneficial interest
authorized for Class A, Class B and Class C shares.
Transactions in shares of beneficial interest in each Portfolio were as follows:
SHARES AMOUNT
------------------------- -------------------------
YEAR ENDED JUNE 1,1994* YEAR ENDED JUNE 1,1994*
SEP. 30, TO SEP. 30, TO
ARIZONA PORTFOLIO 1995 SEP. 30,1994 1995 SEP. 30,1994
- ------------------------ ---------- ------------ ----------- ------------
CLASS A
Shares sold 179,031 130,890 $1,777,357 $1,312,170
Shares issued in
reinvestment of
dividends 4,255 556 42,481 5,581
Shares redeemed (47,391) (36,254) (477,515) (364,123)
Net increase 135,895 95,192 $1,342,323 $ 953,628
CLASS B
Shares sold 161,670 204,005 $1,621,211 $2,041,252
Shares issued in
reinvestment of
dividends 5,382 620 53,513 6,222
Shares redeemed (31,136) (32,899) (312,965) (329,620)
Net increase 135,916 171,726 $1,361,759 $1,717,854
CLASS C
Shares sold 70,824 84,517 $ 699,946 $ 846,679
Shares issued in
reinvestment of
dividends 2,011 358 19,819 3,604
Shares redeemed (75,752) (35,270) (731,150) (354,708)
Net increase (decrease) (2,917) 49,605 $ (11,385) $ 495,575
28
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
FLORIDA PORTFOLIO 1995 1994 1995 1994
- ---------------------- ----------- ------------ ------------ ------------
CLASS A
Shares sold 509,383 728,668 $ 4,618,993 $ 7,094,881
Shares issued in
reinvestment of
dividends and
distributions 28,075 19,095 254,915 147,498
Shares redeemed (214,506) (226,673) (1,942,117) (2,100,318)
Net increase 322,952 521,090 $ 2,931,791 $ 5,142,061
CLASS B
Shares sold 692,583 1,294,343 $ 6,210,101 $12,618,465
Shares issued in
reinvestment of
dividends and
distributions 52,413 41,340 473,711 359,693
Shares redeemed (618,576) (241,025) (5,601,581) (2,271,231)
Net increase 126,420 1,094,658 $ 1,082,231 $10,706,927
CLASS C
Shares sold 602,179 5,942,160 $ 5,420,341 $60,522,877
Shares issued in
reinvestment of
dividends and
distributions 89,459 252,842 826,873 1,666,591
Shares redeemed (2,248,394) (4,180,826) (19,882,861) (40,051,340)
Net increase (decrease) (1,556,756) 2,014,176 $(13,635,647) $22,138,128
SHARES AMOUNT
------------------------ --------------------------
MARCH 29, MARCH 29,
YEAR ENDED 1994* YEAR ENDED 1994*
SEP. 30, TO SEP. 30, TO
MASSACHUSETTS PORTFOLIO 1995 SEP. 30,1994 1995 SEP. 30,1994
- ------------------------- ---------- ------------- ----------- ------------
CLASS A
Shares sold 84,385 55,665 $ 846,860 $ 563,448
Shares issued in
reinvestment of
dividends 1,677 237 16,995 2,437
Shares redeemed (14,517) (74) (147,082) (750)
Net increase 71,545 55,828 $ 716,773 $ 565,135
CLASS B
Shares sold 134,315 91,592 $1,379,176 $ 928,527
Shares issued in
reinvestment of
dividends 1,760 266 17,847 2,733
Shares redeemed (40,636) (20,162) (402,150) (203,542)
Net increase 95,439 71,696 $ 994,873 $ 727,718
CLASS C
Shares sold 212,201 80,734 $2,178,365 $ 834,017
Shares issued in
reinvestment of
dividends 7,004 140 71,499 1,438
Shares redeemed (52,122) (4,393) (541,052) (44,452)
Net increase 167,083 76,481 $1,708,812 $ 791,003
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
------------------------ --------------------------
FEB. 25, FEB. 25,
YEAR ENDED 1994* YEAR ENDED 1994*
SEP. 30, TO SEP. 30, TO
MICHIGAN PORTFOLIO 1995 SEP. 30,1994 1995 SEP. 30,1994
- ------------------------ ---------- ------------ ----------- ------------
CLASS A
Shares sold 276,931 273,212 $2,738,565 $2,629,744
Shares issued in
reinvestment of
dividends 11,339 1,548 109,493 14,906
Shares redeemed (41,977) (10,308) (385,329) (98,466)
Net increase 246,293 264,452 $2,462,729 $2,546,184
CLASS B
Shares sold 156,377 216,322 $1,459,362 $2,110,827
Shares issued in
reinvestment of
dividends 5,917 1,705 56,625 16,370
Shares redeemed (106,263) (33,913) (978,875) (334,671)
Net increase 56,031 184,114 $ 537,112 $1,792,526
CLASS C
Shares sold 248,250 337,346 $2,360,494 $3,285,316
Shares issued in
reinvestment of
dividends 10,635 4,444 101,189 42,627
Shares redeemed (270,068) (44,796) (2,552,312) (430,542)
Net increase (decrease) (11,183) 296,994 $ (90,629) $2,897,401
SHARES AMOUNT
------------------------ --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
MINNESOTA PORTFOLIO 1995 1994 1995 1994
- ----------------------- ----------- ----------- ------------ ------------
CLASS A
Shares sold 59,025 162,212 $ 535,578 $ 1,578,544
Shares issued in
reinvestment of
dividends 11,459 7,074 105,730 68,488
Shares redeemed (47,539) (34,667) (447,134) (332,104)
Net increase 22,945 134,619 $ 194,174 $ 1,314,928
CLASS B
Shares sold 216,010 473,120 $ 1,983,579 $ 4,695,988
Shares issued in
reinvestment of
dividends 26,096 16,160 240,734 155,405
Shares redeemed (142,922) (78,972) (1,290,257) (779,794)
Net increase 99,184 410,308 $ 934,056 $ 4,071,599
CLASS C
Shares sold 72,048 1,013,568 $ 667,481 $10,150,228
Shares issued in
reinvestment of
dividends 37,923 42,210 348,475 409,762
Shares redeemed (373,870) (674,735) (3,382,505) (6,465,828)
Net increase (decrease) (263,899) 381,043 $(2,366,549) $4,094,162
30
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
------------------------ --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
NEW JERSEY PORTFOLIO 1995 1994 1995 1994
- ------------------------ ---------- ----------- ------------ ------------
CLASS A
Shares sold 426,481 659,128 $ 3,927,489 $ 6,489,472
Shares issued in
reinvestment of
dividends 44,652 35,695 411,328 345,613
Shares redeemed (288,408) (323,450) (2,664,713) (2,983,190)
Net increase 182,725 371,373 $ 1,674,104 $ 3,851,895
CLASS B
Shares sold 921,717 1,982,961 $ 8,533,273 $19,529,992
Shares issued in
reinvestment of
dividends 109,495 75,083 1,007,537 720,377
Shares redeemed (795,035) (221,220) (7,215,765) (2,079,652)
Net increase 236,177 1,836,824 $ 2,325,045 $18,170,717
CLASS C
Shares sold 260,713 2,378,869 $ 2,395,820 $23,979,897
Shares issued in
reinvestment of
dividends 96,647 99,593 885,664 958,885
Shares redeemed (1,074,250) (1,621,204) (9,678,665) (15,723,631)
Net increase (decrease) (716,890) 857,258 $(6,397,181) $ 9,215,151
SHARES AMOUNT
------------------------ --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
OHIO PORTFOLIO 1995 1994 1995 1994
- ----------------------- ---------- ----------- ------------ ------------
CLASS A
Shares sold 187,714 272,769 $ 1,745,161 $ 2,671,686
Shares issued in
reinvestment of
dividends and
distributions 14,798 13,279 136,073 133,480
Shares redeemed (75,120) (78,425) (655,825) (773,132)
Net increase 127,392 207,623 $ 1,225,409 $ 2,032,034
CLASS B
Shares sold 418,493 1,569,467 $ 3,836,071 $15,405,470
Shares issued in
reinvestment of
dividends and
distributions 88,923 54,953 811,788 528,310
Shares redeemed (455,507) (261,093) (4,110,296) (2,508,640)
Net increase 51,909 1,363,327 $ 537,563 $13,425,140
CLASS C
Shares sold 184,387 2,571,690 $ 1,674,321 $25,742,850
Shares issued in
reinvestment of
dividends and
distributions 83,246 93,045 763,381 897,192
Shares redeemed (1,189,899) (1,702,639) (10,682,056) (16,633,765)
Net increase (decrease) (922,266) 962,096 $(8,244,354) $10,006,277
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
------------------------ --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
PENNSYLVANIA PORTFOLIO 1995 1994 1995 1994
- ------------------------ ---------- ----------- ------------ ------------
CLASS A
Shares sold 300,278 451,850 $ 2,762,892 $ 4,391,724
Shares issued in
reinvestment of
dividends and
distributions 29,254 20,521 269,638 198,538
Shares redeemed (203,919) (100,517) (1,876,487) (951,523)
Net increase 125,613 371,854 $ 1,156,043 $ 3,638,739
CLASS B
Shares sold 680,168 1,747,883 $ 6,247,762 $17,173,230
Shares issued in
reinvestment of
dividends and
distributions 91,028 55,570 839,841 537,680
Shares redeemed (603,060) (198,944) (5,537,065) (1,919,722)
Net increase 168,136 1,604,509 $ 1,550,538 $15,791,188
CLASS C
Shares sold 395,768 1,946,256 $ 3,738,239 $19,563,260
Shares issued in
reinvestment of
dividends and
distributions 56,156 72,010 512,839 699,308
Shares redeemed (873,994) (1,357,821) (7,899,247) (13,205,188)
Net increase (decrease) (422,070) 660,445 $(3,648,169) $ 7,057,380
SHARES AMOUNT
------------------------ --------------------------
APRIL 29, APRIL 29,
YEAR ENDED 1994* YEAR ENDED 1994*
SEP. 30, TO SEP. 30, TO
VIRGINIA PORTFOLIO 1995 SEP. 30,1994 1995 SEP. 30,1994
- ----------------------- ---------- ------------ ----------- ------------
CLASS A
Shares sold 78,719 127,630 $791,882 $1,274,133
Shares issued in
reinvestment of
dividends 6,335 1,375 62,455 13,695
Shares redeemed (33,609) (195) (331,886) (1,892)
Net increase 51,445 128,810 $522,451 $1,285,936
CLASS B
Shares sold 96,151 22,803 $942,868 $ 229,130
Shares issued in
reinvestment of
dividends 2,972 248 29,586 2,472
Shares redeemed (6,267) -0- (58,483) -0-
Net increase 92,856 23,051 $913,971 $ 231,602
CLASS C
Shares sold 10,903 4,367 $105,949 $ 43,576
Shares issued in
reinvestment of
dividends 306 23 3,042 227
Shares redeemed (3,732) -0- (36,085) -0-
Net increase 7,477 4,390 $ 72,906 $ 43,803
* Commencement of operations
32
FINANCIAL HIGHLIGHTS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
ARIZONA PORTFOLIO
CLASS A CLASS B
------------------- --------------------
JUNE 1, JUNE 1
1994* 1994*
YEAR ENDED TO YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994
Net asset value, beginning of period $ 9.77 $10.00 $ 9.77 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .56** .20** .49** .18**
Net realized and unrealized gain (loss)
on investments .53 (.23) .53 (.24)
Net increase (decrease) in net asset
value from operations 1.09 (.03) 1.02 (.06)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.56) (.20) (.49) (.17)
Distributions in excess of
net investment income (.01) -0- (.01) -0-
Total dividends and distributions (.57) (.20) (.50) (.17)
Net asset value, end of period $10.29 $9.77 $10.29 $9.77
TOTAL RETURN
Total investment return based on
net asset value (b) 11.56% (.35)% 10.78% (.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $2,379 $930 $3,166 $1,677
Ratio to average net assets of:
Expenses, net of waivers/reimbursement .78% .78%(a) 1.48% 1.48%(a)
Expenses, before waivers/reimbursements 4.88% 7.71%(a) 5.58% 8.41%(a)
Net investment income, net of
waivers/reimbursements 5.56% 5.82%(a) 4.89% 5.13%(a)
Portfolio turnover rate 85% 81% 85% 81%
CLASS C
----------------------
JUNE 1,1994*
YEAR ENDED TO
SEP. 30, SEP. 30,
1995 1994
---------- ----------
Net asset value, beginning of period $9.77 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .49** .17**
Net realized and unrealized gain (loss) on investments .54 (.23)
Net increase (decrease) in net asset value from operations 1.03 (.06)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.17)
Distributions in excess of net investment income (.01) -0-
Total dividends and distributions (.50) (.17)
Net asset value, end of period $10.30 $9.77
TOTAL RETURN
Total investment return based on net asset value (b) 10.89% (.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $481 $485
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.48% 1.48%(a)
Expenses, before waivers/reimbursements 5.58% 8.41%(a)
Net investment income, net of waivers/reimbursements 4.90% 4.70%(a)
Portfolio turnover rate 85% 81%
See footnote summary on page 42.
33
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
FLORIDA PORTFOLIO
------------------------------------------------------------------------
CLASS A CLASS B
---------------------------------- ------------------------------------
JUNE 25,1993* JUNE 25,1993*
YEAR ENDED SEP. 30, TO YEAR ENDED SEP. 30, TO
-------------------- SEP. 30, ----------------------- SEP. 30,
1995 1994 1993 1995 1994 1993
--------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.89 $10.25 $10.00 $8.89 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .55** .55** .16** .47** .48** .14**
Net realized and unrealized gain (loss) on investments .69 (1.35) .25 .70 (1.35) .25
Net increase (decrease) in net asset value from operations 1.24 (.80) .41 1.17 (.87) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.55) (.55) (.16) (.47) (.48) (.14)
Distributions in excess of net investment income -0- -0- -0- (.01) -0- -0-
Distributions from net realized gains -0- (.01) -0- -0- (.01) -0-
Total dividends and distributions (.55) (.56) (.16) (.48) (.49) (.14)
Net asset value, end of period $9.58 $8.89 $10.25 $9.58 $8.89 $10.25
TOTAL RETURN
Total investment return based on net asset value (b) 14.44% (8.03)% 4.10% 13.56% (8.72)% 3.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $11,956 $8,227 $4,145 $20,660 $18,048 $9,588
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .73% .38% -0-%(a) 1.42% 1.08% .61%(a)
Expenses, before waivers/reimbursements 1.33% 1.27% 1.30%(a) 2.03% 1.98% 2.00%(a)
Net investment income, net of waivers/reimbursements 5.91% 5.70% 5.44%(a) 5.22% 4.99% 4.74%(a)
Portfolio turnover rate 146% 185% 82% 146% 185% 82%
</TABLE>
CLASS C
--------------------------------
JUNE 25,1993*
YEAR ENDED SEP. 30, TO
------------------- SEP. 30,
1995 1994 1993
-------- --------- -----------
Net asset value, beginning of period $8.89 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47** .48** .14**
Net realized and unrealized gain (loss)
on investments .70 (1.35) .25
Net increase (decrease) in net asset value
from operations 1.17 (.87) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.48) (.14)
Distributions in excess of net
investment income (.01) -0- -0-
Distributions from net realized gains -0- (.01) -0-
Total dividends and distributions (.48) (.49) (.14)
Net asset value, end of period $9.58 $ 8.89 $10.25
TOTAL RETURN
Total investment return based on
net asset value (b) 13.56% (8.72)% 3.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $30,787 $42,405 $28,249
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.42% 1.08% .61%(a)
Expenses, before waivers/reimbursements 2.03% 1.97% 2.00%(a)
Net investment income, net of waivers/
reimbursements 5.27% 4.97% 4.74%(a)
Portfolio turnover rate 146% 185% 82%
See footnote summary on page 42.
34
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MASSACHUSETTS PORTFOLIO
CLASS A CLASS B
----------------------- --------------------
MARCH 29, MARCH 29,
1994* 1994*
YEAR ENDED TO YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994
---------- ----------- --------- ----------
Net asset value, beginning of
period $10.12 $10.00 $10.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .58** .31** .52** .27**
Net realized and unrealized gain
on investments .41 .11 .39 .11
Net increase in net asset value
from operations .99 .42 .91 .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.30) (.52) (.26)
Distributions in excess of net
investment income (.03) -0- (.02) -0-
Total dividends and distributions (.61) (.30) (.54) (.26)
Net asset value, end of period $10.50 $10.12 $10.49 $10.12
TOTAL RETURN
Total investment return based on
net asset value (b) 10.19% 4.14% 9.32% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $1,337 $565 $1,754 $725
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .60% .60%(a) 1.30% 1.30%(a)
Expenses, before waivers/
reimbursements 6.44% 13.20%(a) 7.14% 13.90%(a)
Net investment income, net of
waivers/reimbursements 5.67% 5.98%(a) 4.90% 5.13%(a)
Portfolio turnover rate 155% 146% 155% 146%
CLASS C
---------------------
MARCH 29,
1994*
YEAR ENDED TO
SEP. 30, SEP. 30,
1995 1994
--------- ----------
Net asset value, beginning of period $10.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .52** .25**
Net realized and unrealized gain on investments .39 .13
Net increase in net asset value from operations .91 .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.52) (.26)
Distributions in excess of net investment income (.02) -0-
Total dividends and distributions (.54) (.26)
Net asset value, end of period $10.49 $10.12
TOTAL RETURN
Total investment return based on net asset value (b) 9.32% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $2,556 $774
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.30% 1.30%(a)
Expenses, before waivers/reimbursements 7.14% 13.90%(a)
Net investment income, net of waivers/reimbursements 4.85% 4.00%(a)
Portfolio turnover rate 155% 146%
See footnote summary on page 42.
35
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MICHIGAN PORTFOLIO
CLASS A CLASS B
----------------------- --------------------
FEB. 25, FEB. 25,
1994* 1994*
YEAR ENDED TO YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994
--------- ----------- -------- ----------
Net asset value, beginning of
period $ 9.35 $10.00 $ 9.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .52** .33** .45** .29**
Net realized and unrealized gain
(loss) on investments .78 (.65) .78 (.65)
Net increase (decrease) in net
asset value from operations 1.30 (.32) 1.23 (.36)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.52) (.33) (.45) (.29)
Distributions in excess of net
investment income (.03) -0- (.03) -0-
Total dividends and distributions (.55) (.33) (.48) (.29)
Net asset value, end of period $10.10 $9.35 $10.10 $9.35
TOTAL RETURN
Total investment return based on
net asset value (b) 14.40% (3.24)% 13.58% (3.65)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $5,158 $2,473 $2,424 $1,722
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.36% .93%(a) 2.06% 1.63%(a)
Expenses, before waivers/
reimbursements 3.43% 3.97%(a) 4.12% 4.67%(a)
Net investment income, net of
waivers/reimbursements 5.27% 5.83%(a) 4.57% 4.93%(a)
Portfolio turnover rate 151% 222% 151% 222%
CLASS C
---------------------
FEB. 25,
1994*
YEAR ENDED TO
SEP. 30, SEP. 30,
1995 1994
--------- ----------
Net asset value, beginning of period $9.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .45** .29**
Net realized and unrealized gain (loss) on investments .78 (.65)
Net increase (decrease) in net asset value from operations 1.23 (.36)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.45) (.29)
Distributions in excess of net investment income (.03) -0-
Total dividends and distributions (.48) (.29)
Net asset value, end of period $10.10 $9.35
TOTAL RETURN
Total investment return based on net asset value (b) 13.58% (3.65)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $2,886 $2,778
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 2.06% 1.63%(a)
Expenses, before waivers/reimbursements 4.13% 4.67%(a)
Net investment income, net of waivers/reimbursements 4.69% 4.92%(a)
Portfolio turnover rate 151% 222%
See footnote summary on page 42.
36
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
MINNESOTA PORTFOLIO
--------------------------------------------------------------------
CLASS A CLASS B
--------------------------------- ---------------------------------
JUNE 25,1993* JUNE 25,1993*
YEAR ENDED SEP. 30, TO YEAR ENDED SEP. 30, TO
------------------- SEP. 30, -------------------- SEP. 30,
1995 1994 1993 1995 1994 1993
--------- --------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.19 $10.28 $10.00 $ 9.18 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .53** .55** .15** .46** .48** .13**
Net realized and unrealized gain (loss) on investments .32 (1.09) .28 .33 (1.10) .28
Net increase (decrease) in net asset value from
operations .85 (.54) .43 .79 (.62) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.53) (.55) (.15) (.46) (.48) (.13)
Distributions in excess of net investment income (.02) -0- -0- (.02) -0- -0-
Total dividends and distributions (.55) (.55) (.15) (.48) (.48) (.13)
Net asset value, end of period $9.49 $ 9.19 $10.28 $ 9.49 $ 9.18 $10.28
TOTAL RETURN
Total investment return based on net asset value (b) 9.63% (5.35)% 4.34% 8.90% (6.15)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $2,414 $2,125 $994 $7,299 $6,150 $2,665
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .71% .09% -0-%(a) 1.42% .80% .43%(a)
Expenses, before waivers/reimbursements 2.30% 2.12% 1.89%(a) 3.02% 2.83% 2.59%(a)
Net investment income, net of waivers/reimbursements 5.71% 5.71% 5.20%(a) 4.97% 5.00% 4.50%(a)
Portfolio turnover rate 117% 143% 61% 117% 143% 61%
</TABLE>
CLASS C
---------------------------------
JUNE 25,1993*
YEAR ENDED SEP. 30, TO
-------------------- SEP. 30,
1995 1994 1993
--------- --------- -----------
Net asset value, beginning of period $ 9.19 $10.27 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .46** .48** .13**
Net realized and unrealized gain (loss)
on investments .33 (1.08) .27
Net increase (decrease) in net asset value
from operations .79 (.60) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.48) (.13)
Distributions in excess of net investment
income (.02) -0- -0-
Total dividends and distributions (.48) (.48) (.13)
Net asset value, end of period $ 9.50 $ 9.19 $10.27
TOTAL RETURN
Total investment return based on
net asset value (b) 8.89% (5.95)% 4.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $7,305 $9,489 $6,697
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.41% .79% .43%(a)
Expenses, before waivers/reimbursements 3.00% 2.82% 2.59%(a)
Net investment income, net of waivers/
reimbursements 5.05% 4.90% 4.50%(a)
Portfolio turnover rate 117% 143% 61%
See footnote summary on page 42.
37
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
--------------------------------------------------------------------
CLASS A CLASS B
--------------------------------- ---------------------------------
JUNE 25,1993* JUNE 25,1993*
YEAR ENDED SEP. 30, TO YEAR ENDED SEP. 30, TO
------------------- SEP. 30, -------------------- SEP. 30,
1995 1994 1993 1995 1994 1993
--------- --------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.07 $10.29 $10.00 $ 9.07 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54** .55** .15** .47** .48** .13**
Net realized and unrealized gain (loss) on investments .59 (1.22) .29 .60 (1.21) .28
Net increase (decrease) in net asset value from
operations 1.13 (.67) .44 1.07 (.73) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.55) (.15) (.47) (.48) (.13)
Distributions in excess of net investment income (.01) -0- -0- (.01) -0- -0-
Total dividends and distributions (.55) (.55) (.15) (.48) (.48) (.13)
Net asset value, end of period $ 9.65 $ 9.07 $10.29 $ 9.66 $ 9.07 $10.28
TOTAL RETURN
Total investment return based on net asset value (b) 12.91% (6.67)% 4.44% 12.15% (7.28)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $11,612 $9,257 $6,679 $34,695 $30,459 $15,637
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .82% .20% -0-%(a) 1.53% .91% .63%(a)
Expenses, before waivers/reimbursements 1.35% 1.33% 1.29%(a) 2.06% 2.03% 1.99%(a)
Net investment income, net of waivers/reimbursements 5.73% 5.65% 5.37%(a) 5.03% 4.96% 4.67%(a)
Portfolio turnover rate 86% 171% 47% 86% 171% 47%
</TABLE>
CLASS C
---------------------------------
JUNE 25,1993*
YEAR ENDED SEP. 30, TO
-------------------- SEP. 30,
1995 1994 1993
--------- --------- -----------
Net asset value, beginning of period $ 9.07 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47** .48** .13**
Net realized and unrealized gain (loss)
on investments .60 (1.21) .28
Net increase (decrease) in net asset value
from operations 1.07 (.73) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.48) (.13)
Distributions in excess of net
investment income (.01) -0- -0-
Total dividends and distributions (.48) (.48) (.13)
Net asset value, end of period $ 9.66 $ 9.07 $10.28
TOTAL RETURN
Total investment return based on net
asset value (b) 12.14% (7.28)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $21,255 $26,472 $21,193
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.52% .90% .63%(a)
Expenses, before waivers/reimbursements 2.06% 2.02% 1.99%(a)
Net investment income, net of waivers/
reimbursements 5.09% 4.93% 4.67%(a)
Portfolio turnover rate 86% 171% 47%
See footnote summary on page 42.
38
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
OHIO PORTFOLIO
--------------------------------------------------------------------
CLASS A CLASS B
--------------------------------- ---------------------------------
JUNE 25,1993* JUNE 25,1993*
YEAR ENDED SEP. 30, TO YEAR ENDED SEP. 30, TO
------------------- SEP. 30, -------------------- SEP. 30,
1995 1994 1993 1995 1994 1993
-------- --------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.06 $10.26 $10.00 $ 9.06 $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54** .55** .15** .47** .48** .13**
Net realized and unrealized gain (loss) on investments .48 (1.19) .26 .49 (1.19) .26
Net increase (decrease) in net asset value from
operations 1.02 (.64) .41 .96 (.71) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.55) (.15) (.47) (.48) (.13)
Distributions in excess of net investment income (.01) -0- -0- (.01) -0- -0-
Distributions from net realized gains -0- (.01) -0- -0- (.01) -0-
Total dividends and distributions (.55) (.56) (.15) (.48) (.49) (.13)
Net asset value, end of period $ 9.53 $ 9.06 $10.26 $ 9.54 $ 9.06 $10.26
TOTAL RETURN
Total investment return based on net asset value (b) 11.63% (6.44)% 4.15% 10.88% (7.13)% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $4,170 $2,810 $1,050 $21,821 $20,267 $8,952
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .75% .04% -0-%(a) 1.46% .74% .17%(a)
Expenses, before waivers/reimbursements 1.51% 1.42% 1.32%(a) 2.21% 2.13% 2.02%(a)
Net investment income, net of waivers/reimbursements 5.74% 5.67% 5.30%(a) 5.08% 4.95% 4.60%(a)
Portfolio turnover rate 108% 161% 55% 108% 161% 55%
</TABLE>
CLASS C
--------------------------------
JUNE 25,1993*
YEAR ENDED SEP. 30, TO
------------------- SEP. 30,
1995 1994 1993
-------- --------- -----------
Net asset value, beginning of period $ 9.06 $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47** .48** .13**
Net realized and unrealized gain (loss)
on investments .49 (1.19) .26
Net increase (decrease) in net asset value
from operations .96 (.71) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.48) (.13)
Distributions in excess of net investment
income (.01) -0- -0-
Distributions from net realized gains -0- (.01) -0-
Total dividends and distributions (.48) (.49) (.13)
Net asset value, end of period $ 9.54 $ 9.06 $10.26
TOTAL RETURN
Total investment return based on net asset value (b)10.88% (7.13)% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $18,874 $26,294 $19,894
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.45% .74% .17%(a)
Expenses, before waivers/reimbursements 2.20% 2.12% 2.02%(a)
Net investment income, net of waivers/
reimbursements 5.14% 4.89% 4.60%(a)
Portfolio turnover rate 108% 161% 55%
See footnote summary on page 42.
39
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
PENNSYLVANIA PORTFOLIO
--------------------------------------------------------------------
CLASS A CLASS B
--------------------------------- ---------------------------------
JUNE 25,1993* JUNE 25,1993*
YEAR ENDED SEP. 30, TO YEAR ENDED SEP. 30, TO
------------------- SEP. 30, ------------------- SEP. 30,
1995 1994 1993 1995 1994 1993
-------- --------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.18 $10.25 $10.00 $9.18 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54** .56** .16** .47** .49** .14**
Net realized and unrealized gain (loss) on investments .48 (1.06) .25 .49 (1.06) .25
Net increase (decrease) in net asset value from
operations 1.02 (.50) .41 .96 (.57) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.56) (.16) (.47) (.49) (.14)
Distributions in excess of net investment income (.02) -0- -0- (.02) -0- -0-
Distributions from net realized gains -0- (.01) -0- -0- (.01) -0-
Total dividends and distributions (.56) (.57) (.16) (.49) (.50) (.14)
Net asset value, end of period $9.64 $9.18 $10.25 $9.65 $9.18 $10.25
TOTAL RETURN
Total investment return based on net asset value (b) 11.53% (5.02)% 4.12% 10.78% (5.72)% 3.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $8,721 $7,149 $4,170 $28,559 $25,637 $12,173
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.00% .45% -0-%(a) 1.71% 1.16% .40%(a)
Expenses, before waivers/reimbursements 1.47% 1.46% 1.31%(a) 2.17% 2.16% 2.01%(a)
Net investment income, net of waivers/reimbursements 5.78% 5.73% 5.67%(a) 5.09% 5.01% 4.97%(a)
Portfolio turnover rate 114% 156% 75% 114% 156% 75%
</TABLE>
CLASS C
--------------------------------
JUNE 25,1993*
YEAR ENDED SEP. 30, TO
------------------- SEP. 30,
1995 1994 1993
-------- --------- -----------
Net asset value, beginning of period $ 9.18 $10.24 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47** .49** .14**
Net realized and unrealized gain (loss)
on investments .49 (1.05) .24
Net increase (decrease) in net asset value
from operations .96 (.56) .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.49) (.14)
Distributions in excess of net investment
income (.02) -0- -0-
Distributions from net realized gains -0- (.01) -0-
Total dividends and distributions (.49) (.50) (.14)
Net asset value, end of period $ 9.65 $ 9.18 $10.24
TOTAL RETURN
Total investment return based on
net asset value (b) 10.78% (5.63)% 3.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $15,052 $18,198 $13,541
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.70% 1.15% .40%(a)
Expenses, before waivers/reimbursements 2.17% 2.15% 2.01%(a)
Net investment income, net of waivers/
reimbursements 5.09% 4.99% 4.97%(a)
Portfolio turnover rate 114% 156% 75%
See footnote summary on page 42.
40
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
VIRGINIA PORTFOLIO
-----------------------------------------------
CLASS A CLASS B
----------------------- ----------------------
APRIL 29,1994* APRIL 29,1994*
YEAR ENDED TO YEAR ENDED TO
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
1995 1994 1995 1994
-------- ----------- --------- -----------
Net asset value, beginning of
period $9.69 $10.00 $9.69 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .56** .24** .49** .22**
Net realized and unrealized gain
(loss) on investments .61 (.31) .61 (.32)
Net increase (decrease) in net
asset value from operations 1.17 (.07) 1.10 (.10)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment
income (.56) (.24) (.49) (.21)
Distributions in excess of
net investment income (.01) -0- (.01) -0-
Total dividends and distributions (.57) (.24) (.50) (.21)
Net asset value, end of period $10.29 $9.69 $10.29 $9.69
TOTAL RETURN
Total investment return based
on net asset value (b) 12.46% (.71)% 11.67% (1.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $1,855 $1,249 $1,193 $224
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .67% .57%(a) 1.37% 1.27%(a)
Expenses, before waivers/
reimbursements 8.96% 12.29%(a) 9.66% 12.99%(a)
Net investment income, net
of waivers/reimbursements 5.59% 5.62%(a) 4.80% 4.97%(a)
Portfolio turnover rate 128% 65% 128% 65%
CLASS C
-----------------------
APRIL 29,1994*
YEAR ENDED TO
SEP. 30, SEP. 30,
1995 1994
-------- -----------
Net asset value, beginning of period $9.70 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .49** .21**
Net realized and unrealized gain (loss) on investments .60 (.30)
Net increase(decrease) in net asset value from operations. 1.09 (.09)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.21)
Distributions in excess of net investment income (.01) -0-
Total dividends and distributions (.50) (.21)
Net asset value, end of period $10.29 $9.70
TOTAL RETURN
Total investment return based on net asset value (b) 11.56% (.91)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $122 $43
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.37% 1.27%(a)
Expenses, before waivers/reimbursements 9.66% 12.99%(a)
Net investment income, net of waivers/reimbursements 4.81% 4.67%(a)
Portfolio turnover rate 128% 65%
See footnote summary on page 42.
41
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
FOOTNOTE SUMMARY
* Commencement of operations.
** Net of fee waived and expenses reimbursed by the Adviser.
(a) Annualized.
(b) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charge or contingent
deferred sales charge is not reflected in the calculation of total investment
return. Total investment return calculated for a period less than one year is
not annualized.
42
REPORT OF ERNST &YOUNG LLP,
INDEPENDENT AUDITORS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES ALLIANCE MUNICIPAL INCOME FUND II
We have audited the accompanying statement of assets and liabilities, including
the portfolios of investments, of Alliance Municipal Income Fund II
(comprising, respectively, the Arizona, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, Ohio, Pennsylvania and Virginia Portfolios), as of
September 30, 1995, and the related statement of operations for the year then
ended and the statement of changes in net assets and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1995, 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 II
at September 30, 1995, the results of their operations for the year then ended
and the changes in their net assets and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
Ernst &Young LLP
New York, New York
November 8, 1995
FEDERAL TAX INFORMATION (UNAUDITED)
In accordance with the Federal Requirements, the Fund designates substantially
all the dividends paid from investment income-net during the fiscal year ended
September 30, 1995 as 'exempt-interest dividends.' As required by Federal
regulations, shareholders will receive notification of their portion of the
Fund's taxable ordinary dividends and capital gains distributions paid (if any)
for the 1995 calendar year early in 1996.
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APPENDIX A: BOND AND COMMERCIAL PAPER RATINGS
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Standard & Poor's Bond Ratings
A Standard & Poor's municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to
a specific obligation. Debt rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt
rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
a debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest
and to repay principal for debt in this category than for higher
rated categories.
Debt rated "BB," "B," "CCC" or "CC" is regarded, on balance,
as predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal are in
arrears.
The ratings from "AAA" to "B" may be modified by the addition
of a plus or minus sign to show relative standing within the
major rating categories.
Moody's Bond Ratings
Excerpts from Moody's description of its municipal bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations; Baa
- - considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C - protection of
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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-l/VMIG-1 group.
S&P's highest rating for short-term municipal loans is SP-1.
S&P states that short-term municipal securities bearing the SP-1
designation have very strong or strong capacity to pay principal
and interest. Those issues rated SP-1 which are determined to
possess overwhelming safety characteristics will be given a plus
(+) designation. Issues rated SP-2 have satisfactory capacity to
pay principal and interest.
Other Municipal Securities
and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for other
short-term municipal securities and commercial paper, and A-1+"
and "A-1" are the two highest ratings for commercial paper
assigned by S&P (S&P does not rate short-term tax-free
obligations). Moody's uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of "Prime,"
while S&P uses the number 1+, 1, 2 and 3 to denote relative
strength within its highest classification of "A." Issuers rated
"Prime" by Moody's have the following characteristics: their
short-term debt obligations carry the smallest degree of
investment risk, margins of support for current indebtedness are
large or stable with cash flow and asset protection well assured,
current liquidity provides ample coverage of near-term
liabilities and unused alternative financing arrangements are
generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term
obligations. Commercial paper issuers rated "A" by S&P have the
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following characteristics: liquidity ratios are better than
industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow are in an upward
trend. Typically, the issuer is a strong company in a
well-established industry and has superior management.
Fitch Investors Service Bond Ratings
AAA. Securities of this rating are regarded as strictly
high-grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other than through changes in the money rate.
The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public
utility fields, though some industrial obligations have this
rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with
such stability of applicable earnings that safety is beyond
reasonable question whatever changes occur in conditions. Other
features may enter in, such as a wide margin of protection
through collateral security or direct lien on specific property
as in the case of high class equipment certificates or bonds that
are first mortgages on valuable real estate. Sinking funds or
voluntary reduction of the debt by call or purchase are often
factors, while guarantee or assumption by parties other than the
original debtor may also influence the rating.
AA. Securities in this group are of safety virtually beyond
question, and as a class are readily salable while many are
highly active. Their merits are not greatly unlike those of the
AAA class, but a security so rated may be of junior though strong
lien--in many cases directly following an AAA security--or the
margin of safety is less strikingly broad. The issue may be the
obligation of a small company, strongly secured but influenced as
to ratings by the lesser financial power of the enterprise and
more local type of market.
A. A securities are strong investments and in many cases of
highly active market, but are not so heavily protected as the two
upper classes or possibly are of similar security but less
quickly salable. As a class they are more sensitive in standing
and market to material changes in current earnings of the
company. With favoring conditions such securities are likely to
work into a high rating, but in occasional instances changes
cause the rating to be lowered.
BBB. BBB rated bonds are considered to be investment grade
and of satisfactory quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
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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 judgement, changing circumstances warrant such
action.
Fitch Certificate of Deposit ratings are assigned at the
request of the issuer to deposits with maturities of up to three
years. Ratings apply to uninsured principal and interest and
reflect only those credit characteristics inherent in
certificates of deposit. Such ratings should be considered only
in the context of ratings assigned to certificates of deposit and
not to ratings which may be assigned to non-deposit liabilities.
Ratings for CDs with maturities over 3 years will be assigned
bond rating symbols. For definitions refer to page 1 of the
Rating Register.
Fitch commercial paper ratings are grouped into four
categories, two of which are defined below:
Fitch-1 (Highest Grade) Commercial paper assigned this
rating is regarded as having the strongest
degree of assurance for timely payment.
Fitch-2 (Very Good Grade) issues assigned this rating
reflect an assurance of timely payment only
slightly less in degree than the strongest
issues.
Fitch Investment Note Ratings
Fitch investment Note Ratings are grouped into four
categories with the indicated symbols. The ratings on notes with
maturities generally up to three years reflect Fitch's current
appraisal of the degree of assurance of timely payment, whatever
the source.
FIN-1 -- Notes assigned this rating are regarded as
having the strongest degree of assurance for
timely payment.
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FIN-2 -- Notes assigned this rating reflect a degree of
assurance for timely payment only slightly
less in degree than the highest category.
A plus symbol may be used in the three highest
categories to indicate relative standing. The Note Ratings will
usually correspond with Bond Ratings, although certain security
enhancements or market access may mean that notes will not track
bond.
Further Rating Distinctions
While ratings provide an assessment of the obligor's
capacity to pay debt service, it should be noted that the
definition of obligor expands as layers of security are added. If
municipal securities are guaranteed by third parties then the
"underlying" issuers as well as the "primary" issuer will be
evaluated during the rating process. In some cases, depending on
the scope of the guaranty, such as bond insurance, bank letters
of credit or collateral, the credit enhancement will provide the
sole basis for the rating given.
Minimum Rating(s) Requirements
For minimum rating(s) requirements for the Portfolios'
securities, please refer to "Description of Portfolio(s):
Municipal Securities - Further Information" in the Prospectuses.
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APPENDIX B: FUTURES CONTRACTS AND RELATED OPTIONS
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Futures Contracts
Each Portfolio may enter into contracts for the purchase
or sale for future delivery of municipal securities or U.S.
Government Securities, or contracts based on financial indices
including any index of municipal securities or U.S. Government
Securities. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, a Portfolio must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1/2% to 5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Portfolio would provide or receive cash that reflects any decline
or increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
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Interest Rate Futures
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as the Portfolios of
the Fund, which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from
fluctuations in interest rates without actually buying or selling
fixed-income securities. For example, if interest rates were
expected to increase, the Portfolio might enter into futures
contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the
debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt securities in the Portfolio would
decline, but the value of the futures contracts to the Portfolio
would increase at approximately the same rate, thereby keeping
the net asset value of the Portfolio from declining as much as it
otherwise would have. The Portfolio could accomplish similar
results by selling debt securities and investing in bonds with
short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique
allows the Portfolio to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, a Portfolio could
take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could then buy debt securities on
the cash market. To the extent the Portfolio enters into futures
contracts for this purpose, the assets in the segregated account
maintained to cover the Portfolio's obligations with respect to
such futures contracts will consist of cash, cash equivalents or
high-quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the
initial and variation margin payments made by the Portfolio with
respect to such futures contracts.
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
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liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
each Portfolio believes that use of such contracts will benefit
the Portfolio, if the Adviser's investment judgment about the
general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged
against the possibility of an increase in interest rates which
would adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Portfolio will
lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but
will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Futures Contracts
Each Portfolio intends to purchase and write options on
futures contracts for hedging purposes. The Portfolios are not
commodity pools and all transactions in futures contracts and
options on futures contracts engaged in by the Portfolios must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates.
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The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security which is deliverable upon exercise of the futures
contract or securities comprising an index. If the futures price
at expiration of the option is below the exercise price, a
Portfolio that has written a call will retain the full amount of
the option premium which provides a partial hedge against any
decline that may have occurred in its portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security which is
deliverable upon the exercise of futures contract or securities
comprising an index. If the futures price at the expiration of
the option is higher than the exercise price, a Portfolio that
has written a put will retain the full amount of the option
premium which provides a partial hedge against any increase in
the price of securities which it intends to purchase. If a put
or call option a Portfolio has written is exercised, that
Portfolio will incur a loss which will be reduced by the amount
of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may
purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases
an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
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APPENDIX C: OPTIONS ON MUNICIPAL AND U.S. GOVERNMENT SECURITIES
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Options on Municipal and U.S. Government Securities
Each Portfolio will only write "covered" put and call
options on municipal securities and U.S. Government Securities,
unless such options are written for cross-hedging purposes. The
manner in which such options will be deemed "covered" is
described in the Prospectus under the heading "Investment
Policies and Restrictions--Additional Investment Policies--
Options on Municipal and U.S. Government Securities."
The writer of an option may have no control when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent
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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 Exchange (or in that class or
series of options) would cease to exist, although outstanding
options on that National Exchange that had been issued by the
Options Clearing Corporation as a result of trades on that
National Exchange would continue to be exercisable in accordance
with their terms.
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Each Portfolio may write options in connection with
buy-and-write transactions; that is, a Portfolio may purchase a
security and then write a call option against that security. The
exercise price of the call a Portfolio determines to write will
depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security
at the time the option is written. Buy-and-write transactions
using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write
transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain
fixed or advance moderately during the option period.
Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from
writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such
transactions, a Portfolio's maximum gain will be the premium
received by it for writing the option, adjusted upwards or
downwards by the difference between the Portfolio's purchase
price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely,
by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, a Portfolio may elect to
close the position or take delivery of the security at the
exercise price and a Portfolio's return will be the premium
received from the put options minus the amount by which the
market price of the security is below the exercise price.
Out-of-the-money, at-the-money, and in-the-money put options may
be used by the Fund in the same market environments that call
options are used in equivalent buy-and-write transactions.
Each Portfolio may purchase put options to hedge against
a decline in the value of its portfolio. By using put options in
this way, a Portfolio will reduce any profit it might otherwise
have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
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Each Portfolio may purchase call options to hedge
against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Portfolio.
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