<PAGE>
As filed with the Securities and Exchange
Commission on November 30,1998
File No. 33-60560
811-07618
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 11 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF l940
Amendment No. 11 X
ALLIANCE MUNICIPAL INCOME FUND II
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(800) 221-5672
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York l0105
(Name and address of agent for service)
Copies of communications to:
Thomas G. MacDonald
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
It is proposed that this filing will become effective (check
appropriate box)
immediately upon filing pursuant to paragraph (b)
<PAGE>
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
X on February 1, 1999 pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of rule 485.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
N-1A Item No. Location in
Prospectuses
(Caption)
PART A
Item 1. Front and Back Cover Pages..........Cover Pages
Item 2. Risk/Return Summary:
Investments, Risks, and
Performance.........................Risk/Return
Summary
Item 3. Risk/Return Summary:
Fee Table...........................Risk/Return
Summary
Item 4. Investment Objectives,
Principal Investment Strategies,
And Related Risks...................Other
Information
About the
Fund's
Objectives,
Strategies, and
Risks
Item 5. Management's Discussion of
Fund Performance....................Not Applicable
Item 6. Management, Organization,
And Capital Structure...............Management of
the Fund
Item 7. Shareholder Information.............Purchase and
Sale of Shares
Item 8. Distribution Arrangements...........Distribution
Arrangements
Item 9. Financial Highlights
Information.........................Financial
Highlights
<PAGE>
PART B Location in Statements
Of Additional Information
(Caption)
Item 10. Cover Page and
Table of Contents...................Cover Page
Item 11. Fund History........................Management of
the Fund;
General
Information
Item 12. Description of the Fund and
Its Investments and Risks...........Investment
Policies and
Restrictions
Item 13. Management of the Fund..............Management of
the Fund
Item 14. Control Persons and Principal
Holders of Securities...............Management of
the Fund
Item 15. Investment Advisory and
Other Services......................Management of
the Fund
Item 16. Brokerage Allocation and
Other Practices.....................Brokerage and
Portfolio
Transactions
Item 17. Capital Stock and Other
Securities..........................General
Information
Item 18. Purchase, Redemption and
Pricing of Shares...................Purchase,
Redemption and
Repurchase of
Shares; Net
Asset Value
Item 19. Taxation of the Fund................Dividends,
Distributions
and Taxes
Item 20. Underwriters........................General
Information
<PAGE>
Item 21. Calculation of Performance Data.....General
Information
Item 22. Financial Statements................Financial
Statements;
Report of
Independent
Auditors
<PAGE>
<PAGE>
<PAGE>
ALLIANCE MUNICIPAL
INCOME PORTFOLIOS
PROSPECTUS
FEBRUARY 1, 1999
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
The Alliance Municipal Income Portfolios seek to provide the
highest level of income exempt from federal and state tax that is
available without assuming undue risk.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY..................................
National Portfolios.............................
State Portfolios................................
Other State Portfolios..........................
Summary of Principal Risks......................
Principal Risks by Portfolio....................
EXPENSE INFORMATION..................................
GLOSSARY.............................................
DESCRIPTION OF THE PORTFOLIOS........................
Investment Objectives...........................
Additional Investment Practices.................
Additional Risk Considerations..................
MANAGEMENT OF THE PORTFOLIO..........................
PURCHASE AND SALE OF SHARES..........................
How The Fund Values Its Shares..................
How to Buy Shares...............................
How to Exchange Shares..........................
How To Sell Shares..............................
DIVIDENDS AND DISTRIBUTIONS..........................
TAXES................................................
DISTRIBUTION ARRANGEMENTS............................
GENERAL INFORMATION..................................
FINANCIAL HIGHLIGHTS.................................
<PAGE>
BF=1>
1
<EF=1>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the
Alliance Municipal Income Portfolios. You will find additional
information about each Portfolio including a detailed description
of the risks of an investment in each Portfolio after this
summary.
The Portfolios' investment adviser is Alliance Capital Management
L.P., a global investment manager providing diversified services
to institutions and individuals through a broad line of
investments including more than 100 mutual funds. Since 1971,
Alliance has earned a reputation as a leader in the investment
world with over $___ billion in assets under management as of
December 31, 1998. Alliance provides investment management
services to employee benefit plans for ___ of the FORTUNE 100
companies.
The Risk/Return Summary describes the Portfolios' objectives,
principal investment strategies, risks, and fees. More detailed
descriptions of the Portfolios can be found further back in the
Prospectus. Please be sure to read the more complete
descriptions of the Portfolios following this summary, including
the risks associated with investing in the Portfolios, BEFORE you
invest. Each of the Portfolios also may at times use certain
types of investment derivatives such as options, futures,
forwards, and swaps. The use of these techniques includes
special risks that are discussed in this Prospectus.
The Summary includes a table showing the Portfolio's average
annual returns and a bar chart showing each Portfolio's annual
returns. The table and the bar chart provide an indication of
the historical risk of an investment in each Portfolio by
showing:
-- how the Portfolio's average annual returns for one, five
and 10 years (or life of the Portfolio) compare to those
of a broad based securities market index; and
-- changes in the Portfolio's performance from year to year
over 10 years or, if shorter, the life of the Portfolio.
A Portfolio's past performance, of course, does not necessarily
indicate how it will perform in the future.
<PAGE>
Other important things for you to note:
-- You may gain or lose money by investing in the
Portfolios.
-- An investment in the Portfolios is not a deposit in a
bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio, other than the
Insured California Portfolio, is to earn the highest level of
current income, exempt from Federal and state taxation, that is
available without assuming what Alliance considers to be undue
risk, by investing principally in high-yielding, predominantly
medium-quality municipal securities. The average weighted
maturity of the Portfolios' securities normally will range
between 10 and 25 years.
The investment objective of Insured California Portfolio is to
provide as high a level of current income exempt from Federal
income tax and California personal property tax as is consistent
with preservation of capital.
Under their investment policies, the Portfolios will invest:
-- At least 75% of their total assets in municipal
securities rate BBB or Baa or above (or, if unrated,
determined by Alliance to be of comparable quality);
-- In municipal securities with a remaining average
weighted maturity of 10-30 years;
-- At least 65% of their total assets in income producing
securities.
In addition, under their policies, the Portfolios may invest:
-- More than 25% of their assets in revenue bonds
(generally bonds without the pledge of credit of the
issuer);
-- In zero coupon municipal securities, and in variable,
floating, and inverse floating rate municipal
securities; and
-- In options, futures, forwards, and swaps.
PRINCIPAL INVESTMENT STRATEGIES AND RETURN INFORMATION
NATIONAL PORTFOLIOS
NATIONAL PORTFOLIO
The National Portfolio invests principally in municipal
securities paying interest wholly exempt from federal income
taxes, except the Alternative Minimum Tax ("AMT"). The Portfolio
may invest 25% or more of its total assets in municipal
securities whose issuers are located in the same state.
<PAGE>
INSURED NATIONAL PORTFOLIO
The Insured National Portfolio invests principally in municipal
securities paying interest wholly exempt from Federal income
taxes, including the AMT. The Portfolio normally invests at
least 65% of its total assets in insured securities. The
Portfolio may invest 25% or more of its total assets in municipal
securities whose issuers are located in the same state.
<PAGE>
PERFORMANCE INFORMATION AND BAR CHART
NATIONAL PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
INSURED NATIONAL PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
<PAGE>
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
STATE PORTFOLIOS
INSURED CALIFORNIA PORTFOLIO
The Insured California Portfolio invests substantially all its
assets in a portfolio of municipal securities paying interest
exempt from federal and California personal income tax. The
Portfolio normally invests at least:
-- 80% of its total assets in municipal securities paying
interest exempt from the AMT;
-- 65% of its total assets in insured securities (and its
current policy is to invest at least 80% in insured
securities; and
-- 65% of its total assets in bonds issued by California or
its political subdivisions.
The Portfolio may invest in municipal securities that are not
issued by California governmental entities if the securities pay
interest exempt from federal and California personal income tax.
While the Portfolio normally invests substantially all of its
total assets in California municipal securities, it may invest in
securities paying interest exempt only from federal income tax if
Alliance believes that California municipal securities meeting
the Portfolio's quality standards are not available.
CALIFORNIA PORTFOLIO
The California Portfolio invests substantially all its assets in
a portfolio of municipal securities paying interest exempt from
federal and California personal income tax. The Portfolio
normally invests at least:
-- 80% of its total assets in municipal securities;
-- 65% of its total assets in municipal securities issued
by California or its political subdivisions; and
-- 65% of its assets in municipal securities subject to the
AMT.
The Portfolio may invest in municipal securities that are not
issued by California governmental entities if the securities pay
interest exempt from federal and California personal income tax.
While the Portfolio normally invests substantially all of its
total assets in California municipal securities, it may invest in
securities paying interest exempt only from federal income tax if
Alliance believes that California municipal securities meeting
the Portfolio's quality standards are not available.
<PAGE>
PERFORMANCE INFORMATION AND BAR CHART
INSURED CALIFORNIA PORTFOLIO
PERFORMANCE TABLE
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
CALIFORNIA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
<PAGE>
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
OTHER STATE PORTFOLIOS
ARIZONA PORTFOLIO NEW JERSEY PORTFOLIO
FLORIDA PORTFOLIO NEW YORK PORTFOLIO
MASSACHUSETTS PORTFOLIO OHIO PORTFOLIO
MICHIGAN PORTFOLIO PENNSYLVANIA PORTFOLIO
MINNESOTA PORTFOLIO VIRGINIA PORTFOLIO
These Portfolios invest substantially all their assets in a
portfolio of municipal securities paying interest exempt from
federal income tax and personal income tax in the named state,
or, for the Florida Portfolio, the Florida intangible tax. The
Portfolios may invest without limit in bonds paying interest
subject to the AMT. The New York Portfolio will invest at least
65% of its assets in bonds paying interest subject to AMT. The
Portfolios normally will invest at least:
-- 65% of their total assets in the municipal securities of
each Portfolio's named state; and
-- 80% of their net assets in municipal securities paying
interest exempt from federal income tax.
A Portfolio may invest in a state's municipal securities that are
not issued by that state's governmental entities if the
securities pay interest exempt from federal and state personal
income tax (or the Florida intangible tax). While a Portfolio
normally invests substantially all of its total assets in the
municipal securities of the Portfolio's state, it may invest in
securities paying interest exempt only from federal income tax if
Alliance believes that state municipal securities meeting the
Portfolio's quality standards are not available.
<PAGE>
PERFORMANCE INFORMATION AND BAR CHARTS FOR
THE OTHER STATE PORTFOLIOS
ARIZONA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
FLORIDA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
<PAGE>
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
MASSACHUSETTS PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
MICHIGAN PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
<PAGE>
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
MINNESOTA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
NEW JERSEY PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
<PAGE>
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
NEW YORK PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
OHIO PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
<PAGE>
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
PENNSYLVANIA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
VIRGINIA PORTFOLIO
PERFORMANCE TABLE
1 YEAR 5 YEARS 10 YEARS
Class A
Class B
Class C
[Relevant Index]
*Since inception.
<PAGE>
BAR CHART
The annual returns in the bar chart are for the Portfolio's Class
A shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Portfolio as a long-term
investment. The Portfolio's returns will, however, fluctuate
over shorter periods. For example, during the period shown in
the bar chart, the Portfolio's:
BEST QUARTER was: up ___%, ________ quarter, 19__
WORST QUARTER was: down ___%, _________ quarter, 19__
SUMMARY OF PRINCIPAL RISKS
The value of an investment in a Portfolio changes with the values
of that Portfolio's investments. Many factors can affect those
values. In this summary, we describe the principal risks that
may affect a particular Portfolio's investments as a whole. All
of the Portfolios are subject to these risks and could be subject
to additional principal risks because the types of investments
made by each Portfolio can change over time. This prospectus has
additional descriptions of investments that appear in bold type
in the discussions under "Additional Investment Practices" or
"Risk Considerations." Those sections also include more
information about the Portfolios, their investments, and related
risks.
-- INTEREST RATE RISK. This is the risk that changes in
interest rates will affect the value of a Portfolio's
investments in fixed-income debt securities such as
bonds and notes. Increases in interest rates may cause
the value of a Portfolio's investments to decline.
The Portfolios may experience increased market risk to
they extent they invest in:
-- lower rated securities or comparable unrated
securities;
-- debt securities with longer maturities;
-- debt securities paying no interest, such as zero
coupon securities; or
-- debt securities paying non-cash interest in the
form of other debt securities (pay-in-kind
securities).
<PAGE>
-- CREDIT RISK. This is the risk that the issuer or the
guarantor of a debt security, or the counterparty to a
derivatives contract, will be unable or unwilling to
make timely principal and/or interest payments, or to
otherwise honor its obligations. The degree of risk for
a particular security may be reflected in its credit
rating. Credit risk is greater for lower-rated
securities. These debt securities and similar non-rated
securities (commonly known as "junk bonds") have
speculative elements or are predominately speculative
credit risks.
-- MUNICIPAL MARKET RISK. This is the risk that special
factors may adversely affect the value of municipal
securities and have a significant effect on the value of
a Portfolio's investments. These factors include
political or legislative changes, uncertainties related
to the tax status of municipal securities, or the rights
of investors in these securities. The Portfolios'
investments in certain municipal securities with
principal and interest payments that are made from the
revenues of a specific project or facility, and not
general tax revenues, may have increased risks. Factors
affecting the project or facility, such as local
business or economic conditions, could have a
significant effect on the project's ability to make
payments of principal and interest on these securities.
-- DIVERSIFICATION RISK. Most analysts believe that
overall risk can be reduced through diversification,
while concentration of investments in a small number of
securities increases risks. The State Portfolios are
not "diversified." This means they can invest in a
relatively small number of issuers with greater
concentration of risk. Factors affecting these issuers
can have a more significant effect on the Portfolio's
net asset value. Similarly, a Portfolio is more
vulnerable to events adversely affecting the Portfolio's
state, including economic, political, or regulatory
occurrences. To the extent that the National Portfolios
invest heavily in a particular state's municipal
securities, the National Portfolios also will be
vulnerable to events adversely affecting that state.
-- LEVERAGING RISK. When a Portfolio borrows money or
otherwise leverages its portfolio, the value of an
investment in that Portfolio will be more volatile and
all other risks will tend to be compounded. Each
Portfolio may create leverage by using reverse
repurchase agreements, inverse floating rate instruments
or derivatives or by borrowing money.
<PAGE>
-- DERIVATIVES RISK. All Portfolios may use derivatives,
which are financial contracts whose value depends on, or
is derived from, the value of an underlying asset,
reference rate, or index. Alliance will sometimes use
derivatives as part of a strategy designed to reduce
other risks. Generally, however, the Portfolios use
derivatives as direct investments to earn income,
enhance yield, and broaden portfolio diversification,
which entail greater risk than if used solely for
hedging purposes. In addition to other risks such as
the credit risk of the counterparty, derivatives involve
the risk of difficulties in pricing and valuation and
the risk that changes in the value of the derivative may
not correlate perfectly with relevant assets, rates, or
indices.
-- LIQUIDITY RISK. Liquidity risk exists when particular
investments are difficult to purchase or sell, possibly
preventing a Portfolio from selling out of these
illiquid securities at an advantageous price. All of the
Portfolios are subject to liquidity risk because
derivatives and securities involving substantial market
and/or credit risk tend to involve greater liquidity
risk. In addition, liquidity risk tends to increase to
the extent a Portfolio invests in debt securities whose
sale may be restricted by law or by contract.
-- MANAGEMENT RISK. Each Portfolio is subject to
management risk because it is an actively managed
investment portfolio. Alliance will apply its
investment techniques and risk analyses in making
investment decisions for the Portfolios, but there can
be no guarantee that they will produce the desired
results.
<PAGE>
EXPENSE INFORMATION
This table describes the fees and expenses that you may pay
if you buy and hold shares of the Portfolios.
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A SHARES CLASS B SHARES CLASS C SHARES
Maximum Sales Charge 4.25% None None
(Load) Imposed on
Purchases (as a
percentage of
offering price)
Maximum Deferred Sales None 3.0% during 1.0% during
Charge (Load) (as a the 1st year, the 1st year,
percentage of original decreasing 0% thereafter
purchase price or 1.0% annually
redemption proceeds, to 0% after
whichever is lower) the 3rd year*
Exchange Fee None None None
* Class B Shares of every Portfolio automatically convert to Class A Shares
after 6 years.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM PORTFOLIO ASSETS) AND EXAMPLE
The example is to help you compare the cost of investing in a
Portfolio with the cost of investing in other Portfolios. It
assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end
of those periods. It also assumes that your investment has a 5%
return each year and that the Fund's operating expenses stay the
same. Your actual costs may be higher or lower.
<PAGE>
<TABLE>
OPERATING EXPENSES EXAMPLES
NATIONAL PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
INSURED NATIONAL
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
</TABLE>
<PAGE>
<TABLE>
OPERATING EXPENSES EXAMPLES
ARIZONA PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
CALIFORNIA
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
INSURED CALIFORNIA
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
FLORIDA PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
<PAGE>
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
MASSACHUSETTS
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
</TABLE>
<PAGE>
<TABLE>
OPERATING EXPENSES EXAMPLES
MICHIGAN PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
NEW JERSEY
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
NEW YORK PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
OHIO PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
<PAGE>
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
PENNSYLVANIA
PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
</TABLE>
<PAGE>
<TABLE>
OPERATING EXPENSES EXAMPLES
VIRGINIA PORTFOLIO CLASS A CLASS B CLASS C CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % .% After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $ $ $ $
After 10 Yrs. $ $(a) $(a) $ $
Total Portfolio % %
Operating Expenses %
Waiver and/or Expense
Reimbursement+++
Net Expenses
<FN>
+ Assumes redemption at end of period.
++ Assumes no redemption at end of period.
+++ Reflects Alliance's waiver of a portion of its advisory fee and/or reimbursement of a portion of the Portfolio's
operating expenses. The level of waiver or reimbursement may be changed upon 60 days notice to the Portfolios.
(a) Assumes Class B shares convert to Class A shares after 6 years.
</TABLE>
<PAGE>
________________________________________________________________
Glossary
_________________________________________________________________
This Prospectus uses the following terms.
TYPES OF SECURITIES
AMT-EXEMPT BONDS are municipal securities the interest on which
is not subject to the AMT.
AMT-SUBJECT BONDS are municipal securities, the interest on which
is an item of "tax preference" and thus subject to the AMT when
received by a person in a tax year during which the person is
subject to the AMT. These securities are primarily private
activity bonds, including revenue bonds.
BONDS are fixed, floating and variable rate debt obligations and
may include zero coupon securities.
HIGH QUALITY COMMERCIAL NOTES are commercial notes rated MIG-2
(or VMIG-2) or higher by Moody's, SP-2 or higher by S&P, D-1 or
higher by Duff & Phelps or FIN-2 or higher by Fitch.
INSURED SECURITIES are municipal securities that are insured as
to the payment of principal and interest.
LOWER-RATED MUNICIPAL SECURITIES are municipal securities rated
Ba or BB or below, or determined by Alliance to be of equivalent
quality, and are commonly referred to as "junk bonds."
MEDIUM-QUALITY MUNICIPAL SECURITIES are municipal securities
rated A or Baa by Moody's, or A or BBB by S&P, Duff & Phelps or
Fitch, or determined by Alliance to be of equivalent quality.
MUNICIPAL SECURITIES are 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 respective political
subdivisions, agencies and instrumentalities. Municipal
securities include municipal bonds, which are intended to meet
longer-term capital needs and municipal notes, which are intended
to fulfill short-term capital needs.
RULE 144A SECURITIES are securities that may be resold under Rule
144A under the Securities Act.
<PAGE>
ZERO COUPON SECURITIES are bonds, notes and other debt securities
issued without interest coupons.
COMPANIES AND RATING AGENCIES
ACA is American Capital Access Corporation.
AGI is Asset Guaranty Insurance Company.
AMBAC is AMBAC Indemnity Corporation.
DUFF & PHELPS is Duff & Phelps Credit Rating Co.
FITCH is Fitch IBCA, Inc.
FGIC is Financial Guaranty Insurance Company.
FSA is Financial Security Assurance Inc.
MBIA is Municipal Bond Investors Assurance Corporation.
MOODY'S is Moody's Investors Service, Inc.
S&P is Standard & Poor's Ratings Services.
OTHER
AMT is the federal alternative minimum tax.
CODE is the Internal Revenue Code of 1986, as amended.
COMMISSION is the Securities and Exchange Commission.
EXCHANGE is the New York Stock Exchange.
1940 ACT is the Investment Company Act of 1940, as amended.
SECURITIES ACT is the Securities Act of 1933, as amended.
________________________________________________________________
DESCRIPTION OF THE PORTFOLIOS
________________________________________________________________
This section of the Prospectus provides a more complete
description of the principal investment objectives, strategies,
and risks of the Alliance Municipal Income Portfolios. Of
course, there can be no assurance that any Portfolio will achieve
its investment objective.
<PAGE>
Please note:
- -- Additional discussion of the Portfolios' investments,
including the risks of the investments that appear in bold
type can be found in the discussion under ADDITIONAL
INVESTMENT PRACTICES following this section.
- -- The description of a Portfolio's risks may include risks
defined in the SUMMARY OF RISKS above. Additional
Information about risks of investing in a Portfolio can be
found in the discussions under ADDITIONAL RISK
CONSIDERATIONS.
- -- Additional descriptions of each Portfolio's strategies and
investments, as well as other strategies and investments not
described below, may be found in the Portfolio's Statement of
Additional Information or SAI.
- -- Except as noted, (i) the Portfolio's investment objectives
are "fundamental" and cannot be changed without a shareholder
vote and (ii) the Portfolio's investment policies are not
fundamental and thus can be changed without a shareholder
vote.
INVESTMENT OBJECTIVES
The investment objective of each Portfolio (other than the
Insured California Portfolio) is to earn the highest level of
current income, by investing principally in tax-exempt, high-
yielding, predominantly medium-quality, municipal securities. The
investment objective of the Insured California Portfolio is to
provide as high a level of current income, exempt from federal
and state tax, as is consistent with preservation of capital.
HOW THE PORTFOLIOS PURSUE THEIR OBJECTIVES
NATIONAL AND INSURED NATIONAL PORTFOLIOS. 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 is subject
to the AMT. The Insured National Portfolio invests principally in
a diversified portfolio of AMT-Exempt bonds that are also insured
securities. 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.
The investment policies of the Insured National Portfolio differ
from those of the National Portfolio in two respects:
- -- the National Portfolio invests principally (and is permitted
to invest without limit) in AMT-Subject bonds and the Insured
National Portfolio invests principally in AMT-Exempt bonds;
and
<PAGE>
- -- as a matter of fundamental policy, the Insured National
Portfolio, under normal market conditions, invests at least
65% of its total assets in insured securities.
STATE PORTFOLIOS. Each of the twelve State Portfolios invests in
a non-diversified portfolio of municipal securities.
Substantially all the interest from these securities is exempt
from federal and state personal income tax, or in the case of
Florida, the Florida intangible personal property tax. Florida
currently imposes no income tax on individuals. Normally,
substantially all of the total assets of each State Portfolio
will be invested in municipal securities of the indicated state.
Each State Portfolio other than the Insured California Portfolio
may invest without limit in AMT-Subject bonds.
CALIFORNIA AND INSURED CALIFORNIA PORTFOLIOS. As a matter of
fundamental policy, at least 80% of the California Portfolio's
total assets normally will be invested in municipal securities
and at least 65% of its total assets normally will be invested in
AMT-Subject bonds. Additionally under normal circumstances, the
California Portfolio will also invest at least 65% of its total
assets in securities issued by California or it its political
subdivisions.
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 bonds issued by California or
its political subdivisions, at least 80% of its total assets in
insured securities, and not to invest in AMT-Subject bonds. The
remainder of the Insured California Portfolio's total assets may
be invested in uninsured securities.
NEW YORK PORTFOLIO. As a matter of fundamental policy, at least
65% of the New York Portfolio's total assets normally will be
invested in AMT-Subject bonds issued by New York State and its
political subdivisions. 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.
ARIZONA, FLORIDA, MASSACHUSETTS, MICHIGAN, MINNESOTA, NEW JERSEY,
OHIO, PENNSYLVANIA AND VIRGINIA PORTFOLIOS. As a matter of
fundamental policy, each of these Portfolios normally will 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. Each State Portfolio also may invest in municipal
securities issued by governmental entities (for example, U.S.
territories) outside the named state if such municipal securities
<PAGE>
generate interest exempt from federal income tax and personal
income tax (or the Florida intangible personal property 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. The two principal classifications of
municipal securities are bonds and notes. Municipal bonds are
intended to meet longer-term capital needs while municipal notes
are intended to fulfill short-term capital needs. Municipal
notes generally have original maturities not exceeding one year.
Municipal notes include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, variable rate demand
obligations and tax-exempt commercial paper. The average weighted
maturity of the securities in each Portfolio will normally range
between 10 and 30 years.
Municipal securities are typically classified as either "general
obligation" or "revenue" (or "special tax") securities. 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 net assets in revenue
bonds, which generally do not have the pledge of the credit of
the issuer. The payment of the principal and interest on such
revenue 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
financed as security for such payment. Each Portfolio may invest
more than 25% of its total assets in securities or obligations
that 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).
Current federal tax law distinguishes between municipal
securities issued to finance certain private activities ("private
activity bonds") and other municipal securities. Private activity
bonds, most of which are AMT-Subject bonds and are also revenue
bonds, include bonds issued to finance such projects as airports,
housing projects, resource recovery programs, solid waste
disposal facilities, and student loan programs. Interest on AMT-
Subject bonds is an item of "tax preference" and thus subject to
the 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
<PAGE>
generally will provide somewhat higher yields than AMT-Exempt
bonds of comparable quality and maturity.
The yields of municipal securities depend on, among other
factors, conditions in the municipal bond market and fixed-income
markets generally, the size of a particular offering, the
maturity of the obligations, and the rating of the issue.
Normally, lower-rated municipal securities provide higher yields
than 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, or A or BBB by S&P, Duff & Phelps or Fitch. 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
or, if unrated, as determined by Alliance to be of comparable
quality. 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 their fiscal years ended in 1998, 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' fiscal years
ended in 1998, on a weighted average basis, the percentages of
the Portfolios' total 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, and the percentage of the Portfolios' net assets
invested in AMT-Subject bonds, were as follows:
<PAGE>
A AND AMT-SUBJECT
PORTFOLIO ABOVE BBB BB B BONDS
National
Arizona
California
Florida
Massachusetts
Michigan
Minnesota
New Jersey
New York
Ohio
Pennsylvania
Virginia
Each Portfolio may invest up to 35% of its total assets in zero
coupon municipal securities. Each Portfolio also may invest in
municipal securities that have fixed, variable, floating, or
inverse floating rates of interest. Each Portfolio normally will
invest at least 65% of its total assets in income-producing
securities (including zero coupon securities).
INSURANCE FEATURE OF THE INSURED NATIONAL AND INSURED CALIFORNIA
PORTFOLIOS. The INSURED NATIONAL and INSURED CALIFORNIA
PORTFOLIOS normally will invest at least 65% and 80%,
respectively, of their total assets in insured securities. Based
upon the expected composition of each of the INSURED NATIONAL and
<PAGE>
INSURED CALIFORNIA PORTFOLIOS, Alliance estimates that the annual
premiums for insurance 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
insurance, which are paid from each of the INSURED NATIONAL and
INSURED CALIFORNIA PORTFOLIO'S assets, will reduce those
Portfolios' current yields. Insurance is not a substitute for the
basic credit of an issuer, but supplements the existing credit
and provides additional credit support. While insurance for
municipal securities held by the INSURED NATIONAL 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 securities or purchase insured
municipal securities covered by policies issued by any insurer
having a claims-paying ability rated A or higher by Moody's, S&P,
Duff & Phelps or Fitch. No more than 25% of each Portfolio's
total assets may be invested in insured municipal securities
covered by policies issued by insurers having a claims-paying
ability rated below AA by Moody's, S&P, Duff & Phelps or Fitch.
Alliance is familiar with six such insurers, MBIA, FGIC, AMBAC,
FSA, AGI and ACA. MBIA, FGIC, AMBAC, FSA have been rated AAA,
with respect to their claims paying ability, AGI has been rated
AA and ACA has been rated A. Further information with respect to
MBIA, FGIC, AMBAC, FSA, AGI and ACA is provided in the Statement
of Additional Information of Alliance Municipal Income Fund, Inc.
ADDITIONAL INVESTMENT PRACTICES
This section describes the investment practices of the Portfolios
and risks associated with these practices. Unless otherwise
noted, a Portfolio's use of any of these practices was noted in
the previous section.
DERIVATIVES. The Portfolios may use derivatives to achieve their
investment objectives. Derivatives are financial contracts whose
value depend 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.
<PAGE>
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 to replace 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, which entail greater risk than
if used solely for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit
to Portfolio shareholders. A Portfolio may take a significant
position in those derivatives that are within its investment
policies if, in Alliance's judgement, this represents the most
effective response to current or anticipated market conditions.
Derivatives may be (i) standardized, exchange-traded contracts or
(ii) customized, privately negotiated contracts. Exchange-traded
derivatives tend to be more liquid and subject to less credit
risk than those that are privately negotiated.
There are four principal types of derivative instruments-
- -options, futures, forwards and swaps--from which virtually any
type of derivative transaction can be created.
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, and a put option entitles the holder to sell, the
underlying asset (or settle for cash an amount based on an
underlying asset, rate or index). Likewise, when an option is
exercised, the writer of the option is obligated to sell (in
the case of a call option) or to purchase (in the case of a
put option) the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index).
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
<PAGE>
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 these
securities are 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 involve risks different from, and, in certain cases,
greater than, the risks presented by more traditional
investments. The 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
<PAGE>
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 an investment 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
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
<PAGE>
be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio's investment
objective.
DERIVATIVES USED BY THE PORTFOLIOS. The following describes
specific derivatives that one or more of the Portfolios may use.
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
<PAGE>
obligated to acquire the underlying security at its current price
and sell it at a lower price. The risk of loss from writing an
uncovered put option is limited to the exercise price of the
option, whereas the risk of loss from writing an uncovered call
option is potentially unlimited.
A Portfolio may write a call option on a security that it does
not own in order to hedge against a decline in the value of a
security that it owns or has the right to acquire, a technique
referred to as "cross-hedging." A Portfolio would write a call
option for cross-hedging purposes, instead of writing a covered
call option, when the premium to be received from the cross-hedge
transaction exceeds that to be received from writing a covered
call option, while at the same time achieving the desired hedge.
The correlation risk involved in cross-hedging may be greater
than the correlation risk involved from other hedging strategies.
The Portfolios may purchase or write privately negotiated options
on securities. A Portfolio that purchases or writes privately
negotiated options on securities will effect such transactions
only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions)
deemed creditworthy by Alliance. Alliance has adopted procedures
for monitoring the creditworthiness of such counterparties.
Privately negotiated options purchased or written by a Portfolio
may be illiquid, and it may not be possible for the Portfolio to
effect a closing transaction at an advantageous time.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures
contracts that a Portfolio may buy and sell may include futures
contracts on municipal securities or U.S. Government securities
and contracts based on any index of municipal securities or U.S.
Government securities.
Options on futures contracts are options that call for the
delivery of futures contracts upon exercise. Options on futures
contracts written or purchased by a Portfolio will be traded on
U.S. exchanges and will be used only for hedging purposes. A
Portfolio will not enter into a futures contract or option on a
futures contract if immediately thereafter the market values of
the outstanding futures contracts of the Portfolio and the
futures contracts subject to outstanding options written by the
Portfolio would exceed 50% of its total assets.
FORWARD COMMITMENTS. Each Portfolio may purchase or sell
municipal securities on a forward commitment basis. Forward
commitments are forward contracts for the purchase or sale of
securities, including purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. In some cases,
a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger,
<PAGE>
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.
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 realize a gain or incur a 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
<PAGE>
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.
<PAGE>
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.
Each Portfolio may invest in Variable Rate Demand Notes (VRDN)
which are instruments whose interest rates change on a specific
date (such as coupon date or interest payment date) or whose
interest rates vary with changes in a designated base rate (such
as prime interest rate). This instrument is payable on demand and
is secured by letters of credit or other credit support
agreements from major banks.
A Portfolio may invest in fixed-income securities that pay
interest at a coupon rate equal to a base rate, plus additional
interest for a certain period of time if short-term interest
rates rise above a predetermined level or "cap." The amount of
such an additional interest payment typically is calculated under
a formula based on a short-term interest rate index multiplied by
a designated factor.
Each Portfolio may invest in "inverse floaters," which are
securities with two variable components that, when combined,
result in a fixed interest rate. The "auction component"
typically pays an interest rate that is reset periodically
through an auction process, while the "residual component" pays a
current residual interest rate based on the difference between
the total interest paid on the securities and the auction rate
paid on the auction component. A Portfolio may purchase both
auction and residual components. When an inverse floater is in
the residual mode (leveraged), the interest rate typically resets
in the opposite direction from the variable or floating market
rate of interest on which the floater is based. The degree of
leverage inherent in inverse floaters is associated with a
greater degree of volatility of market value, such that the
market values of inverse floaters tend to decrease more rapidly
during periods of rising interest rates, and increase more
rapidly during periods of falling interest rates, than those of
fixed-rate securities.
REPURCHASE AGREEMENTS. A Portfolio may seek additional income by
investing in repurchase agreements pertaining only to U.S.
Government securities. A repurchase agreement arises when a buyer
purchases a security and simultaneously agrees to resell it to
the vendor at an agreed-upon future date, normally a day or a few
days later. The resale price is greater than the purchase price,
reflecting an agreed-upon interest rate for the period the
<PAGE>
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. None of the Portfolios will maintain more
than 15% (10% for NATIONAL, INSURED NATIONAL, NEW YORK,
CALIFORNIA and INSURED CALIFORNIA) of its net assets in illiquid
securities. Illiquid securities generally include, (i) direct
placements or other securities for which there is no readily
available market (e.g. when market makers do not exist or will
not entertain bids or offers), (ii) over-the-counter options and
assets used to cover over-the-counter options, and (iii)
repurchase agreements not terminable within seven days. Rule 144A
securities that have legal or contractual restrictions on resale
but have a readily available market are not deemed illiquid.
Alliance will monitor the liquidity of each Portfolio's Rule 144A
portfolio securities under the supervision of the Directors or
Trustees of that Portfolio. A Portfolio that invests in illiquid
securities may not be able to sell such securities and may not be
able to realize their full value upon sale.
TEMPORARY DEFENSIVE POSITION. For temporary defensive purposes
when business or financial conditions warrant, each Portfolio may
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 also
may invest without limit in high-quality municipal notes or
variable rate demand obligations, 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. The portfolio turnover rate for each
Portfolio is included in the FINANCIAL HIGHLIGHTS section. 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.
<PAGE>
A higher rate of portfolio turnover involves correspondingly
greater expenses than a lower rate and these expenses must be
borne by a Portfolio and its shareholders. The execution costs
for municipal securities, however, are substantially less than
those for equivalent dollar values of equity securities.
ADDITIONAL 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.
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 also are generally considered to be
subject to greater market risk than higher-rated securities. 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.
<PAGE>
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. There can, however,
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. In considering investments for a Portfolio, Alliance
will attempt to identify issuers of lower-rated securities whose
financial condition are adequate to meet future obligations, has
improved, or is expected to improve in the future.
NON-RATED SECURITIES. Alliance also will consider investments in
non-rated securities for a Portfolio when Alliance believes that
the financial condition of the issuers of the securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Portfolio to a degree comparable to rated
securities that 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 to local
risk factors than a geographically diversified municipal
securities portfolio. 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.
Each Portfolio's SAI provides certain information about the state
in which a Portfolio invests.
YEAR 2000. Many computer systems and applications in use today
process transactions using two-digit date fields for the year of
the transaction, rather than the full four digits. If these
systems are not modified or replaced, transactions occurring
after 1999 could be processed as year "1900", which could result
in processing inaccuracies and computer system failures. This is
commonly known as the Year 2000 problem. Should any of the
computer systems employed by the Portfolios' major service
providers fail to process Year 2000 related information properly,
that could have a significant negative impact on the Portfolios'
operations and the services that are provided to the Portfolios'
shareholders. In addition, to the extent that the operations of
issuers of securities held by the Portfolios are impaired by the
<PAGE>
Year 2000 problem, or prices of securities held by the Portfolios
decline as a result of real or perceived problems relating to the
Year 2000, the value of the Portfolios' shares may be materially
affected.
With respect to the Year 2000, the Portfolios have been advised
that Alliance, each Portfolio's investment adviser, Alliance Fund
Distributors, Inc, ("AFD"), each Portfolio's principal
underwriter, and Alliance Fund Services, Inc. ("AFS"), each
Portfolio's registrar, transfer agent and dividend disbursing
agent (collectively, "Alliance") began to address the Year 2000
issue several years ago in connection with the replacement or
upgrading of certain computer systems and applications. During
1997, Alliance began a formal Year 2000 initiative, which
established a structured and coordinated process to deal with the
Year 2000 issue. Alliance reports that it has completed its
assessment of the Year 2000 issues on its domestic and
international computer systems and applications. Currently,
management of Alliance expects that the required modifications
for the majority of its significant systems and applications that
will be in use on January 1, 2000, will be completed and tested
by the end of 1998. Full integration testing of these systems and
testing of interfaces with third-party suppliers will continue
through 1999. At this time, management of Alliance believes that
the costs associated with resolving this issue will not have a
material adverse effect on its operations or on its ability to
provide the level of services it currently provides to the
Portfolios.
The Portfolios and Alliance have been advised by the Portfolios'
Custodians that they are also in the process of reviewing their
systems with the same goals. As of the date of this prospectus,
the Portfolios and Alliance have no reason to believe that the
Custodians will be unable to achieve these goals.
______________________________________________________________
MANAGEMENT OF THE PORTFOLIOS
______________________________________________________________
INVESTMENT ADVISER AND PORTFOLIO MANAGER
Each Portfolio's Adviser is Alliance Capital Management, L.P.
("Alliance"), 1345 Avenue of the Americas, New York, New York
10105. Alliance is a leading international adviser supervising
client accounts with assets as of December 31, 1998 totaling more
than $___ billion (of which approximately $____ billion
represented assets of investment companies). Alliance's clients
are primarily major corporate employee benefit plans, public
employee retirement systems, investment companies, foundations,
and endowment funds. The ___ registered investment companies,
<PAGE>
with more than ___ separate portfolios, managed by Alliance
currently have over two million shareholders. As of December 31,
1998, Alliance was retained as investment manager for over ___ of
the FORTUNE 100 Companies.
Alliance provides investment advisory services and order
placement facilities for the Portfolios. For these advisory
services, each Portfolio paid Alliance as a percentage of net
assets:
PORTFOLIO FEE AS A PERCENTAGE FISCAL YEAR
OF NET ASSETS* ENDING
National Portfolio
Insured National Portfolio
California Portfolio
Insured California
Portfolio
Arizona Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
New York Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
*Fees are stated net of waivers and/or reimbursements. See the
"Fee Table" at the beginning of the Prospectus for more
information about fee waivers.
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 a 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 is a Vice President of ACMC with which he has been
associated since 1995. Previously he was an associate and trader
in the Municipal Derivative Products department at Merrill Lynch
Capital Markets.
<PAGE>
The Portfolios' Statements of Additional Information have more
detailed information about Alliance and other Portfolio service
providers.
________________________________________________________________
PURCHASE AND SALE OF SHARES
_________________________________________________________________
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolios' net asset value or NAV is calculated at 4 p.m.
Eastern time each day the Exchange is open for business. To
calculate NAV, each Portfolio's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets,
is divided by the number of shares outstanding. The Portfolios
value their securities 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 Portfolios'
directors believe accurately reflect fair market value.
Your order for the purchase, sale, or exchange of shares is
priced at the next NAV calculated after your order is accepted by
the Portfolio. Your purchase of Portfolio shares may be subject
to an initial sales charge. Sales of Portfolio shares may be
subject to a contingent deferred sales charge or CDSC. See the
section of the Prospectus under DISTRIBUTION ARRANGEMENTS for
details.
HOW TO BUY SHARES
You may purchase shares of any of the Portfolios through broker-
dealers, banks, or other financial intermediaries. You also may
purchase shares directly from the Portfolios' principal
underwriter, Alliance Fund Distributors, Inc., or AFD.
Minimum investment amounts are:
- Initial: $ 250
- Subsequent: $ 50
- Automatic Investment Program: $ 25
If you are an existing portfolio shareholder, you may purchase
shares by electronic funds transfer in amounts not exceeding
$500,000 if you have completed the appropriate section of the
Subscription Application or the Shareholder Options form. Call
(800) 221-5672 to arrange a transfer from your bank account.
Each Portfolio is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to shareholders
who have not provided the Portfolio with their certified taxpayer
<PAGE>
identification number. To avoid this, you must provide your
correct Tax Identification Number (Social Security Number for
most investors) on your account application.
Each Portfolio may refuse any order to purchase shares. In this
regard, the Portfolios reserve the right to restrict purchases of
shares (including through exchanges) when they appear to evidence
a pattern of frequent purchases and sales made in response to
short-term considerations.
HOW TO EXCHANGE SHARES
You may exchange your Portfolio shares for shares of the same
class of other Alliance Mutual Funds (including AFD Exchange
Reserves, a money market fund managed by Alliance). Exchanges of
shares are made at the next determined NAV, without sales or
service charges. You may request an exchange by mail or
telephone. You must call by 4:00 p.m. Eastern time to receive
that day's NAV. The Portfolios may change, suspend, or terminate
the exchange service on 60 days' written notice.
HOW TO SELL SHARES
You may "redeem" your shares (i.e., sell your shares to a
Portfolio) on any day the Exchange is open, either directly or
through your financial intermediary. Your sales price will be the
next-determined NAV, less any applicable CDSC, after the
Portfolio receives your sales request in proper form. Normally,
proceeds will be sent to you within 7 days. However, if you
recently purchased your shares by check or electronic funds
transfer, you cannot redeem any portion of it until the Portfolio
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 submit it to the Portfolio by 5:00 p.m. Eastern time,
for you to receive that day's NAV, less any applicable CDSC. Your
broker is responsible for furnishing all necessary documentation
to the Portfolios, and may charge you for this service.
- -- SELLING SHARES DIRECTLY TO A PORTFOLIO
BY MAIL:
- Send a signed letter of instruction or stock power form,
along with your certificates, to:
<PAGE>
Alliance Fund Services
P.O. Box 1520
Secaucus, NJ 07096-1520
1-800-221-5672
- For your protection, a bank, a member firm of a national
stock exchange or other eligible guarantor institution,
must guarantee signature. 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.
If you have any questions about these procedures,
contact AFS.
BY TELEPHONE:
- You may redeem your shares for which no stock
certificates have been issued by telephone request.
Call AFS at 800-221-5672 with instructions on how you
wish to receive your sale proceeds.
- A telephone request must be made by 4:00 p.m. Eastern
time for you to receive that day's NAV, less any
applicable CDSC.
- If you have selected electronic funds transfer in your
Shareholder Application, the redemption proceeds may be
sent directly to your bank. Otherwise, the proceeds
will be mailed to you.
- Redemption requests by electronic funds transfer may not
exceed $100,000 per day and redemption requests by check
cannot exceed $50,000 per day.
- 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.
<PAGE>
________________________________________________________________
DIVIDENDS, DISTRIBUTIONS
AND TAXES
_________________________________________________________________
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of a Portfolio will be declared on each
Portfolio 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 Portfolios 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
Distributions to shareholders out of tax-exempt interest income
earned by a Portfolio are not subject to federal income tax.
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
<PAGE>
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. Since a
Portfolio's investment income is derived from interest rather
than dividends, no portion of its distributions is eligible for
the dividends-received deduction available to corporations.
Interest on indebtedness incurred by shareholders to purchase or
carry shares of a Portfolio is not deductible for federal income
tax purposes. Further, persons who are "substantial users" (or
related persons) of facilities financed by AMT-Subject bonds
should consult their tax advisers before purchasing shares of a
Portfolio.
Any capital gains distributions may be taxable to you as capital
gains. A capital gains distribution received by a shareholder on
shares of a Portfolio will have the effect of reducing the net
asset value of such shares by the amount of such distribution.
Furthermore, a distribution made shortly after the purchase of
such shares by a shareholder, although in effect a return of
capital to that particular shareholder, would be taxable to him
or her as described above.
The sale or exchange of Fund shares is a taxable transaction for
federal income tax purposes. If a shareholder holds shares for
six months or less and during that time receives a distribution
of net capital gains, 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 that are
exempt from federal income taxes. The Portfolios will report
annually to shareholders the percentage and source of interest
earned by a Portfolio that 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 that is exempt from Florida
intangible personal property 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.
<PAGE>
ARIZONA PORTFOLIO. It is anticipated that substantially all of
the dividends paid by the Portfolio will be exempt from Arizona
individual, corporate and fiduciary income taxes. Distributions
of capital gains will be subject to Arizona income taxes.
Interest on indebtedness incurred to purchase or carry shares of
the Portfolio generally will not be deductible for purposes of
the Arizona income tax.
CALIFORNIA AND INSURED CALIFORNIA PORTFOLIOS. It is anticipated
that substantially all of the dividends paid by these Portfolios
will be exempt from California personal income tax.
FLORIDA PORTFOLIO. It is anticipated that Portfolio shares will
be exempt from the Florida intangible personal property tax.
Florida does not impose an individual income tax. 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 and fiduciary income taxes. Distributions
designated as attributable to capital gains, other than gains on
certain Massachusetts municipal securities, are subject to the
state personal and fiduciary income taxes at capital gains tax
rates. Distributions paid to corporate shareholders are subject
to the 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, intangible and single business taxes and from the uniform
city income tax imposed by certain Michigan cities. Capital gain
distributions attributable to the sale of non-Michigan municipal
securities are subject to Michigan income and single business
taxes but are exempt from the intangibles tax to the extent
reinvested in portfolio shares.
MINNESOTA PORTFOLIO. It is anticipated that substantially all of
the dividends paid by the Portfolio will be exempt from Minnesota
personal and fiduciary income taxes. Certain individuals may be
subject to the Minnesota alternative minimum tax on distributions
attributable to Portfolio income from AMT-Subject bonds.
Distributions to corporate shareholders are subject to the
Minnesota franchise tax.
NEW JERSEY PORTFOLIO. It is anticipated that substantially all of
the income dividends and capital gains distributions paid by the
Portfolio to individuals and fiduciaries will be exempt from the
New Jersey personal income tax. Exempt interest-dividends paid to
a corporate shareholder will be subject to the New Jersey
corporation business (franchise) and corporation income taxes.
<PAGE>
NEW YORK PORTFOLIO. It is anticipated that substantially all of
the dividends paid by the Portfolio will be exempt from New York
State and New York City personal and fiduciary income taxes.
Distributions of capital gains will be subject to these taxes.
Interest on indebtedness incurred to buy or carry shares of the
Portfolio generally will not be deductible for New York income
tax purposes. Distributions paid to corporate shareholders will
be included in New York entire net income for purposes of the
franchise tax.
OHIO PORTFOLIO. It is anticipated that substantially all
distributions of income and capital gains paid by the Portfolio
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 tax base of the Ohio
franchise tax. 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. It is anticipated that substantially all
of the dividends paid by the Portfolio will be exempt from
Pennsylvania personal and fiduciary income taxes, the
Philadelphia School District investment net income tax and
Pennsylvania corporate net income tax, and that shares of the
Portfolio will be exempt from Pennsylvania county personal
property taxes. Distributions of capital gains will be subject to
Pennsylvania individual, fiduciary and corporate income taxes but
will not be taxable for purposes of the Philadelphia School
District Income tax. Portfolio shares are included for purposes
of determining a corporation's capital stock value subject to the
Pennsylvania capital stock/franchise tax.
VIRGINIA PORTFOLIO. It is anticipated that substantially all of
the dividends paid by the Portfolio will be exempt from Virginia
individual income, estate, trust, and corporate income taxes.
Distributions attributable to capital gains 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 to
purchase or carry shares of the Portfolio generally will not be
deductible for Virginia income tax purposes.
<PAGE>
_________________________________________________________________
DISTRIBUTION ARRANGEMENTS
_________________________________________________________________
The Portfolios offer three classes of shares.
CLASS A SHARES -- INITIAL SALES CHARGE ALTERNATIVE
You can purchase Class A shares at NAV with an initial sales
charge, as follows:
INITIAL SALES CHARGE
AS % OF COMMISSION
AMOUNT PURCHASED NET AS % OF TO
AMOUNT OFFERING DEALER/AGENT
INVESTED PRICE AS % OF
OFFERING
PRICE
_________________________________________________________________
Up to $100,000 4.44% 4.25% 4.00%
$100,000 up to $250,000 3.36 3.25 3.00
$250,000 up to $500,000 2.30 2.25 2.00
$500,000 to $1,000,000 1.78 1.75 1.50
You pay no initial sales charge on purchases of Class A Shares in
the amount of $1,000,000 or more, but may you pay a 1% CDSC if
you redeem your shares within 1 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 Portfolio'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 about these options.
CLASS B SHARES -- DEFERRED SALES CHARGE ALTERNATIVE
You can purchase Class B shares at NAV without an initial sales
charge. A Portfolio will thus receive the full amount of your
purchase. Your investment, however, will be subject to a CDSC if
you redeem shares within 3 years of purchase. The CDSC varies
depending on the number of years that you hold the shares. The
CDSC amounts are:
<PAGE>
YEAR SINCE PURCHASE CDSC
First 3%
Second 2%
Third 1%
Fourth None
If you exchange your shares for the Class B shares of another
Alliance Fund, the CDSC also will apply to those Class B shares.
The CDSC period begins with the date of your original purchase,
not the date of exchange for the other Class B shares.
Class B shares purchased for cash automatically convert to Class
A shares six years after the end of the month of your purchase,
If you purchase shares by exchange for the Class B shares of
another Alliance Fund, the conversion period runs from the date
of your purchase.
CLASS C SHARES -- ASSET-BASED SALES CHARGE ALTERNATIVE
You can purchase Class C shares at NAV without any initial sales
charge. The Portfolio will thus receive the full amount of your
purchase. Your investment, however, will be subject to a 1% CDSC
if you redeem your shares within 1 year. If you exchange your
shares for the Class C shares of another Alliance Fund, the 1%
CDSC also will apply to those Class C shares. The 1-year period
for the CDSC begins with the date of your original purchase, not
the date of the exchange for the other Class C shares.
Class C shares do not convert to any other class of shares of the
Portfolio.
ASSET-BASED SALES CHARGE OR RULE 12B-1 FEES
Each Portfolio has adopted as plan under Commission Rule 12b-1
that allows the Portfolio to pay asset-based sales charges or
distribution and service fees for the distribution and sale of
its shares. The amount of these fees for each class of the
Portfolio's shares is:
Rule 12b-1 Fee (as a percent of Aggregate average net assets)
Class A .30%
Class B 1.00%
Class C 1.00%
Because these fees are paid out of the Portfolio's assets on an
on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of
sales fees. Class B and Class C shares are subject to higher
distribution fees than Class A shares (Class B shares are subject
<PAGE>
to these higher fees for a period of six years, after which they
convert to Class A shares). The higher fees mean a higher expense
ratio, so Class B and Class C shares pay correspondingly lower
dividends and may have a lower net asset value than Class A
shares.
CHOOSING A CLASS OF SHARES
The decision as to which class is more beneficial to you depends
on the amount and intended length of your investment. If you are
making a large investment, thus qualifying for a reduced sales
charge, you might consider Class A shares. If you are making a
smaller investment, you might consider Class B shares because
100% of your purchase is invested immediately. If you are unsure
of the length of your investment, you might consider Class C
shares because there is no initial sales charge and, as long as
the shares are held for one year or more. 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 $1,000,000.
APPLICATION OF THE CDSC
The CDSC is applied to the lesser of the original cost of shares
being redeemed or NAV at the time of redemption (or, as to
Portfolio shares acquired through an exchange, the cost of the
Alliance Fund shares originally purchased for cash). Shares
obtained from dividend or distribution reinvestment are not
subject to the CDSC. The Portfolios may waive the CDSC on
redemptions of shares following the death or disability of a
shareholder, to meet the requirements of certain qualified
retirement plans, or under a monthly, bimonthly, or quarterly
systematic withdrawal plan. See the Portfolio's SAI for further
information about CDSC waivers.
OTHER
A transaction, service, administrative or other similar fee may
be charged by your broker-dealer, agent, financial intermediary
or other financial representative with respect to the purchase,
sale or exchange of Class A, Class B or Class C shares made
through such financial representative. Such financial
intermediaries may also impose requirements with respect to the
purchase, sale, or exchange of shares that are different from, or
in addition to, those imposed by a Portfolio, including
requirements as to the minimum initial and subsequent investment
amounts.
In addition to the discount or commission paid to dealers or
agents, AFD from time to time pays additional cash or other
<PAGE>
incentives to dealers or agents, including EQ Financial
Consultants, Inc., an affiliate of AFD, in connection with the
sale of shares of the Portfolios. Such additional amounts may be
utilized, in whole or in part, in some cases together with other
revenues of such dealers or agents, to provide additional
compensation to registered representatives who sell shares of the
Portfolios. On some occasions, such cash or other incentives will
be conditioned upon the sale of a specified minimum dollar amount
of the shares of a Portfolio and/or other Alliance Mutual Funds
during a specific period of time. Such incentives may take the
form of payment for attendance at seminars, meals, sporting
events or theater performances, or payment for travel, lodging
and entertainment incurred in connection with travel by persons
associated with a dealer or agent and their immediate family
members to urban or resort locations within or outside the United
States. Such dealer or agent may elect to receive cash incentives
of equivalent amount in lieu of such payments.
________________________________________________________________
GENERAL INFORMATION
________________________________________________________________
Under unusual circumstances, a Portfolio may suspend redemptions
or postpone payment for up to seven days or longer, as permitted
by federal securities law. Each Portfolio reserves 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 Subscription Application. A shareholder's manual
explaining all available services will be provided upon request.
To request a shareholder manual, call 800-227-4618.
<PAGE>
FINANCIAL HIGHLIGHTS
[TO BE INSERTED]
<PAGE>
For more information about the Portfolios, the following
documents are available upon request:
- -- ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The Portfolios' annual and semi-annual reports to shareholders
contain additional information on the Portfolios' investments.
In the annual report, you will find a discussion of the market
conditions and investment strategies that significantly affected
a Portfolio's performance during its last fiscal year.
- -- STATEMENT OF ADDITIONAL INFORMATION (SAI)
Each Portfolio has an SAI, which contains more detailed
information about the Portfolio, including its operations and
investment policies. The Portfolios' SAIs are incorporated by
reference into (and is legally part of) this prospectus.
You may request a free copy of the current annual/semi-annual
report or the SAI, by contacting your broker or other financial
intermediary, or by contacting Alliance:
BY MAIL: C/O ALLIANCE FUND SERVICES, INC.
P.O. BOX 1520, SECAUCUS, NJ 07096-1520
BY PHONE: For Information: (800) 221-5672
For Literature: (800) 227-4618
Or you may view or obtain these documents from the SEC:
IN PERSON: at the SEC's Public Reference Room in
Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
ON THE INTERNET: www.sec.gov
You also may find more information about Alliance and the
Portfolios on the Internet at: www.Alliancecapital.com.
58
<PAGE>
[LOGO] 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, 1999
________________________________________________________________
This Statement of Additional Information is not a prospectus
but supplements and should be read in conjunction with the
current Prospectus for the Arizona Portfolio, Florida Portfolio,
Massachusetts Portfolio, Michigan Portfolio, Minnesota Portfolio,
New Jersey Portfolio, Ohio Portfolio, Pennsylvania Portfolio and
Virginia Portfolio (the "Portfolios") of Alliance Municipal
Income Fund II (the "Fund") that offers the Class A, Class B and
Class C shares of the Portfolios (the "Prospectus") and, if the
Portfolios begin to offer Advisor Class shares, the prospectus
for the Portfolios that offers the Advisor Class shares of the
Portfolios (the "Advisor Class Prospectus" and, together with the
Prospectus for the Portfolios that offers the Class A, Class B
and Class C shares, the "Prospectus(es)"). The Portfolios
currently do not offer Advisor Class shares. Copies of such
Prospectus(es) may be obtained by contacting Alliance Fund
Services, Inc. at the address or the "For Literature" telephone
number shown above.
TABLE OF CONTENTS
PAGE
Investment Policies and Restrictions
Management of the Fund
Expenses of the Fund
Purchase of Shares
Redemption and Repurchase of Shares
Shareholder Services
Net Asset Value
Dividends, Distributions and Taxes
Brokerage and Portfolio Transactions
General Information
Report of Independent Auditors and
Financial Statements
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
_________________________________________________________________
Alliance Municipal Income Fund II (the "Fund") is a non-
diversified, open-end investment company. 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
2
<PAGE>
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide
specific detail on each of these obligations in which Fund assets
may be invested.
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" 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
3
<PAGE>
against the municipality that is a party to the "moral
obligation" contract in the event of such non-appropriation.
The following brief summaries are included for the
purpose of providing certain information regarding the economic
climate and financial condition of the states of 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 May 1997 with respect to
Virginia, August 1997 with respect to Minnesota, September 1997
with respect to Florida and Massachusetts, November 1997 with
respect to Michigan and Pennsylvania and December 1997 with
respect to New Jersey and Ohio 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 obligors to make
timely payments of principal and interest on such obligations. In
addition, a number of factors may adversely affect the ability of
the issuers of municipal securities to repay their borrowings
that are unrelated to the financial or economic condition of a
state, and that, in some cases, are beyond their control.
Furthermore, issuers of municipal securities are generally not
required to provide ongoing information about their finances and
operations to holders of their debt obligations, although a
number of cities, counties and other issuers prepare annual
reports.
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,
4
<PAGE>
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
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 2.9% population growth from July 1995 to July
1996 was the second fastest rate in the nation, and compares to a
national growth rate of 0.91% for the same period. From 1990
through 1996, Arizona's 22% population growth was second only to
Nevada's. The unemployment rate in Arizona for the first three
quarters of 1997 was 4.3% compared to a national rate of 4.9%.
Geographically, Arizona is the nation's sixth largest
state in terms of area (113,417 square miles) and has the twenty-
first largest population (4.55 million 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 78% of total population and 86% of total wage and
salary employment in Arizona.
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. 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,
5
<PAGE>
finance, insurance, tourism and real estate industries. The
service industry is Arizona's single largest employment sector.
A significant percentage of these jobs are directly related to
tourism. In the late 1980's and early 1990's, Arizona's economy
was 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 were 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 sharply declined in 1996.
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 1997 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 have risen
each year since 1994 and the Joint Legislative Budget Committee
projects that, despite a $110 million income tax reduction in
1998, the 1998 corporate income tax collections will increase
37.3% and individual income tax collections will increase 13.1%
over 1997. Such results reflect strong economic growth in the
State as well as a perceived improvement in the State's business
climate.
Per capita income levels in Arizona have traditionally
lagged behind the United States average. However, Arizona's per
capita increase in personal income was second in the nation in
1994, and led the nation in 1995. The diversification of
Arizona's economy, and its current strength, led to this increase
in per capita income, although Arizona still lags behind, and is
expected to continue to lag behind, the United States average.
Arizona is likely to experience continued population
growth in the remainder of the 1990's. The current expansion
rate of more than 2% is forecast to continue for the remainder of
the decade to be driven by jobs, 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 1996, and has had a robust 20% expansion
since 1993.
6
<PAGE>
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.
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
7
<PAGE>
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
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 its 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 repeal the tax increase until the voters could
consider the measure at a 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 conservative nature
of Arizona's Legislature means that tax increases are less
likely. From 1992 through 1996, the State adopted substantial
tax relief, including the 20% individual income tax reduction
described above. In 1996, the Legislature reduced property taxes
8
<PAGE>
by $200 million, in part by repealing the state tax levy of $.47
per $100 assessed valuation.
Arizona's budget outlook has improved significantly in
recent years. The Arizona State budget for fiscal year 1997 was
$4.9 billion and is $5.1 billion for fiscal year 1998. These
increases are in line with Arizona's growth. State revenues have
consistently exceeded projections. The State's operating funds
balance is projected to be $550.4 million for fiscal year 1997
and $528.9 million for fiscal year 1998. The State has
accumulated more than $282 million in a budget stabilization or
"rainy day" fund. The improving Arizona economy has resulted in
reduced social welfare expenditures, including the State Medicaid
program, and substantial reversions into the State's general fund
for fiscal years 1995-1998.
Arizona municipalities 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. In
1993 Maricopa County had a $4.5 million general fund deficit 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. Maricopa County's financial
condition has recently improved. However, The Maricopa County
health care budget currently is running a substantial deficit.
The county is considering privatization of its health care
operations.
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 capital facilities. The State Supreme Court also
affirmed a lower court order directing the Legislature to remedy
the constitutional defect by June 30, 1998. In 1996, the
legislature amended the financing system but on January 15, 1997,
the Supreme Court ruled that the amendments were insufficient to
comply with its earlier mandate. In 1997, the legislature
amended the system again with the Assistance to Build Classrooms
Fund ("ABC" legislation). On December 23, 1997, the Arizona
Supreme Court ruled that the ABC legislation failed to comply
with the Court's mandate. The Legislature will debate further
school finance reform in the 1998 session.
9
<PAGE>
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 issued refunds and credit vouchers to federal retirees who
paid income taxes on their pensions in the 1984-88 tax years.
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
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 from 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 September 1, 1997, relating to
$202,595,000 State of Florida Department of Environmental
Protection Preservation 2000 Revenue Refunding Bonds, Series
1997B.
Economic Climate
As of April 1, 1996 Florida was the fourth most populous
state in the nation with an estimated population of 14.4 million.
The State's average annual population growth since 1987 has been
approximately 2.2 percent while the nation's average annual
growth rate for the same period was approximately 1.0 percent.
During this same period, Florida maintained an average growth of
approximately 224,000 new residents per year.
From 1985 through 1995 Florida's per capita income rose
an average of 5.0 percent per year, while the national per capita
10
<PAGE>
income increased an average of 4.9 percent. The structure of
Florida's income differs from that of the nation. Because
Florida has a proportionally greater retiree population, property
income (dividends, interest and rent) and transfer payments
(social security and pension benefits) are a relatively more
important source of income. Florida's employment income in 1995
represented 60.6 percent 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 70.8 percent. 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 1995, Florida's total personal income increased
by 103 percent and per capita income expanded by approximately
62.5 percent. For the U.S., total and per capita personal income
increased by approximately 77.8 percent and 61.0 percent,
respectively. The southeast as a whole increased its personal
income by 90.2 percent and its per capita income by approximately
68.2 percent.
Between 1987 and 1996, Florida's total employment has
increased by approximately 27.5 percent Since 1987 non-
agricultural job creation has increased by over 35.6 percent
compared to the national average which increased by 20.2 percent
over the same period. Contributing to Florida's rapid rate of
growth in employment and income is international trade.
Structural changes to Florida's economy have also contributed
heavily to the State's strong performance. 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.
Florida's service industries sector accounts for nearly
87 percent of total non-farm employment in Florida. While
structurally the southeast and the nation are endowed with a
greater proportion of manufacturing jobs, which tend to pay
higher wages than some types of service jobs, service employment,
historically, tends to be less sensitive to the business cycle.
Moreover, manufacturing jobs nationwide and in the southeast are
concentrated in areas such as heavy equipment, primary metals,
chemicals, and textile mill products. Florida's manufacturing
section has a concentration in high-tech and high value-added
sectors, such as electrical and electronic equipment, as well as
printing and publishing. These types of jobs tend to be less
cyclical than other forms of manufacturing. Since the beginning
of the nineties Florida's manufacturing sector has kept pace with
the nation at about 2.6 percent of total U.S. manufacturing.
Tourism is also one of Florida's most important industries.
Approximately 42.9 million people visited the State in 1995.
11
<PAGE>
Florida's dependency on the highly cyclical construction
and construction-related manufacturing sectors has declined. For
example, total contract construction employment as a share of
total non-farm employment reached a peak of over 10 percent in
1973. In 1980, the share was roughly 7.5 percent percent, and in
1996, the share had edged downward to nearly 5 percent. This
trend is expected to continue as Florida's economy continues to
diversify. Florida, nevertheless, has a dynamic construction
industry, with single and multi-family housing starts accounting
for approximately 8.1 percent of total U.S. housing starts in
1996, while the State's population is 5.5 percent of the nation's
population. Total housing starts were 118,400 in 1996.
Florida's unemployment rate through much of the 1980's
tracked below the national average. From 1988 to 1994, however,
the unemployment rate tracked above the national average. Since
1994, the average rate of unemployment for Florida has been 5.4
percent, while the national average has been 5.5 percent.
Florida's unemployment rate is projected to remain slightly below
the national average through 1998.
Fiscal Matters
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 has estimated that
additional non-recurring general revenues of $159 million during
fiscal year 1994-95 will be generated as a result of increased
economic activity due to Hurricane Andrew.
On November 8, 1994 a constitutional amendment was
ratified by the voters which limits the growth in state revenues
in a given fiscal year to no more than the average annual growth
rate in Florida personal income over the previous five years.
Revenues collected in excess of the limitation are to be
deposited into the Budget Stabilization Fund unless 2/3 of the
members of both houses of the legislature vote to raise the
limit. For the first year, which was fiscal year 1995-96, the
limit was based on actual revenues from fiscal year 1994-95.
State revenues are defined as taxes, licenses, fees, charges for
services imposed by the Legislature on individuals, business or
agencies outside of state government and revenue from the sale of
lottery tickets.
Florida prepares an annual budget which is formulated
each year and presented to the Governor and Legislature. Under
current law, the State budget as a whole, and each separate fund
12
<PAGE>
within the State budget, must be kept in balance from currently
available revenues each State fiscal Year.
In fiscal year 1995-1996, Florida derived an estimated
66 percent 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 during fiscal year 1995-1996, is the sales
and use tax, accounting for 69 percent of general revenue funds
available. For the fiscal year which ended June 30, 1996,
receipts from this source were $11,461 million, an increase of
7.4 percent from fiscal year 1994-95.
In fiscal year 1996-97, the estimated General Revenue
plus Working Capital and Budget Stabilization Funds available
total $16,617.4 million, a 6.7 percent increase from fiscal year
1995-96. The $15,568.7 million in Estimated Revenues represents
a 6.3 percent increase from the analogous figures in 1995-96.
With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund appropriations at $15,537.2 million
unencumbered reserves at the end of 1996-97 are estimated at
$1,080.0 million.
For fiscal year 1997-98, the General Revenue plus
Working Capital and Budget Stabilization Funds available total
$17,553.9 million, a 5.6 percent increase over 1996-97. The
$16,321.6 million in Estimated Revenues represent a 4.8 percent
increase over the analogous figure in 1996-97. With combined
General Revenue, Working Capital Fund, and Budget Stabilization
Fund appropriations at $16,716.5 million, unencumbered reserves
at the end of 1997-98 are estimated at $837.4 million.
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.
13
<PAGE>
Litigation
Due to its size and broad range of activities, the State
is involved in numerous routine legal actions. The departments
involved believe that the results of such pending or anticipated
litigation will not materially affect the State of Florida's
financial position.
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 August 6, 1997, relating to $271,280,000 General Obligation
Refunding Bonds, 1997 Series B and the Governor's Budget
Recommendation for Fiscal Year 1998.
Economic Climate
The Commonwealth of Massachusetts is a densely populated
urban state with a well-educated population, comparatively high
income levels, low rates of unemployment and a relatively
diversified economy. 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. In 1996, the population of
Massachusetts was approximately 6,092,000.
14
<PAGE>
Per capita personal income for Massachusetts residents,
unadjusted for differentials in the cost of living, was $26,994
in 1995, as compared to the national average of $22,788. 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. During 1996, personal income in Massachusetts
grew 5.0 percent.
The Massachusetts service sector, which constituted
35.2% of the total non-agricultural work force in August 1996, is
the largest sector in the Massachusetts economy. Government
employment represents 12.2% 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 since 1993.
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 the first
three quarters of 1996, the Gross State Product for Massachusetts
grew at a rate of 2.9 percent, approximately the same rate as the
national average. Between 1988 and 1992, total employment in
Massachusetts declined 10.7%. In 1993, 1994, 1995 and 1996,
however, total employment increased by 1.6%, 2.2%, 2.4% and 2.3%,
respectively. Massachusetts' unemployment rate averaged 8.6% in
1992, 6.9% in 1993, 6.0% in 1994, 5.4% in 1995 and 4.3% in 1996.
During the first nine months of 1997, the unemployment rate
averaged 4.0%, nearly a full percentage point lower than the
national average.
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.
15
<PAGE>
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, fiscal year 1995 and fiscal year 1996
were $1.140 billion, $1.149 billion and $1.231 billion and $1.183
billion, respectively, and are projected to be $1.284 billion for
fiscal year 1997. 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. In 1998, when the Commonwealth retires its last
Fiscal Recovery Bond, the long-term debt service obligations are
projected to decrease by 2 percent, or $26.24 million, from
fiscal year 1997. Short-term debt service obligations are
expected to increase to approximately $15 million in fiscal year
1998 as Central Artery/Tunnel Project cash flow requirements
begin to outpace the inflow of federal revenues. The
Commonwealth will fund this interim cash shortfall with Grant
Anticipation Notes to be paid back as federal reimbursements are
received.
In Fiscal Year 1990, Massachusetts had a GAAP basis
budget deficit of nearly $1.9 billion. That deficit margin
steadily decreased and in 1995, the Commonwealth ended the year
with a GAAP basis budget surplus of $287.4 million. In 1996, the
GAAP basis budget surplus was $709.2 million and the statutory
basis surplus was $1.1 billion.
In Fiscal Year 1996, the Commonwealth Stabilization Fund
was funded to its statutory limit of $543.3 million. An
additional $232 million was available for deposit into the Fund
but, because it had reached its statutory ceiling, these funds
flowed into the Tax Reduction Fund, triggering a $150 million
income tax cut for Tax Year 1996 and an $84 million tax cut for
Tax Year 1997.
Preliminary results indicate that Fiscal Year 1997 tax
collections totaled approximately $12.861 billion, an increase of
approximately $812 million, or 6.7 percent, over Fiscal Year 1996
and approximately $354 million higher than previous official
estimates. Total 1997 revenues are estimated to have been
approximately $17.918 billion. Projected total Fiscal Year 1997
expenditures are approximately $17.735 billion, including $212.8
million in supplemental spending requests filed by the Governor.
Under these spending and revenue estimates, approximately $241
million would be transferred to the Commonwealth Stabilization
Fund on account of Fiscal Year 1997, bringing its balance to
approximately $804.3 million, and $160.7 million would be
transferred to a newly established capital projects fund.
16
<PAGE>
The Fiscal Year 1998 budget, approved on July 10, 1997,
is based on a consensus revenue forecast of $12.85 billion which,
according to preliminary results, is equivalent to the amount of
actual tax receipts for Fiscal Year 1997. On July 30, 1997, the
Executive Office revised the Fiscal Year 1998 tax forecast to
$13.06 billion and filed legislation that would reduce the tax
rate on certain income. The Executive Office estimates the cost
of this tax cut at $196 million in 1998, $587 million in 1999,
$985 million in 2000 and $1.229 billion in 2001, at which time
the rate reduction would be fully implemented. The Fiscal Year
1998 budget provides for total appropriations of approximately
$18.4 billion, a 3.3 percent increase over Fiscal Year 1997
expenditures. Governor William Weld vetoed or reduced
appropriations totaling $3.3 million.
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 and,
in addition, permits certain debt servicings and expenditures for
identified capital projects to be excluded from the limits by 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 1997, approximately 19.9% of
Massachusetts' budget is estimated to be allocated to Local Aid.
Direct Local Aid increased from $2.359 billion in fiscal year
1992 to $2.547 billion in fiscal year 1993, to $2.727 billion in
fiscal year 1994 and to $2.976 billion in fiscal year 1995.
Fiscal year 1996 expenditures for direct Local Aid were $3.246
billion, a 9.1% increase over 1995. It is estimated that fiscal
year 1997 expenditures for Local Aid will be $3.534 billion,
which will be an increase of approximately 8.9% above the fiscal
17
<PAGE>
year 1996 level. 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
appropriations for Local Aid in fiscal years 1992 through 1997
did not meet the levels set forth in the initiative law.
During fiscal years 1993, 1994, 1995 and 1996, Medicaid
expenditures of the Commonwealth were $3.151 billion, $3.313
billion, $3.898 billion and $3.416 billion, respectively. The
average annual growth rate from fiscal year 1992 to fiscal year
1996 was 3.9%, compared to an average annual growth rate of
approximately 17% between fiscal year 1987 and fiscal year 1991.
The Executive Office for Administration and Finance estimated
that fiscal year 1997 Medicaid expenditures were approximately
$3.394 billion. Factoring out one-time payments in 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, Medicaid expenditures are
projected to remain flat from fiscal year 1996 to fiscal year
1997. 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 and
in the Supreme Court of the United States 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.
18
<PAGE>
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
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 November 4, 1997, relating to
$900,000,000 State of Michigan Full Faith and Credit General
Obligation Notes.
Economic Climate
In recent years, Michigan's economy has been
diversifying, although manufacturing is still an important
component of the State's economy. In 1996, employment in
manufacturing accounted for 22.2% of the State's workforce.
Michigan's economy has recovered from the recessionary
period of the early 1990s. Unemployment rates, which had
averaged approximately 9.3% in 1991, declined to 4.9% in 1996.
The 1996 unemployment rate was Michigan's lowest in over 30 years
and was approximately 0.5% lower than the national average,
compared to the 27 year history of having unemployment higher
than the national average. State manufacturing employment, which
had decreased from 1990 to 1991, has increased each year since.
Similarly, Michigan's average hourly manufacturing wage increased
approximately 20.3% between 1990 and 1996, compared to an 18%
increase nationwide. In 1992, Michigan per capita income was
more than $500 below the national average. Since that time, per
capita income in Michigan has increased 24%, compared to an 18%
19
<PAGE>
increase nationwide, and in 1996 was more than $500 above the
national average.
The State's May 1997 economic forecast for calendar year
1998 projects healthy growth. Real gross domestic product is
projected to grow 2.0% in 1998. Total wage and salary employment
is projected to grow 1.3% and the unemployment rate is projected
to decline slightly to 4.8%.
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
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 the proportion in effect
in the 1978-79 fiscal year. The State originally determined that
proportion to be 41.6%. 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 1995-96.
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
20
<PAGE>
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 State's budget for fiscal year 1997-98 includes
General Purpose appropriations of 8.58 billion, 2.1 percent above
fiscal year 1996-97 expenditures, and projected General Purpose
revenues of approximately $8,595.9 million and total General
Purpose resources of approximately $8,700.3 million. As of
September 30, 1997, the accrued balance of the BSF was $646.3
million net of a reserve for future education funding of $529.1
million.
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.
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 as 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 approved by
voters on March 15, 1994. Under Proposal A, 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
21
<PAGE>
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, tax collection,
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.
In an order dated June 10, 1997 and a decision rendered
July 31, 1997, the Michigan Supreme Court decided, in the
consolidated cases of Durant v. State of Michigan and Schmidt v.
State of Michigan, that the special education and special
education transportation, bilingual education, driver education
and school lunch programs provided by local school districts are
state mandated programs and, therefore, under the Michigan
Constitution the state is obligated to fund these programs. The
Court ruled that money damages, without interest, shall be paid
to the 84 plaintiff school districts for the full amount of the
underfunding for state mandated programs during the 1991-92,
1992-93, and 1993-94 school years. It is presently estimated
that the underfunding for the 84 plaintiff school districts for
those three years amounts to $212 million.
On October 30, 1997 legislative leaders of both parties
and representatives of the executive branch jointly announced a
tentative resolution of remaining 1997-98 budget matters
including proposed funding of the 84 plaintiff school district
claims. This tentative resolution, if implemented, could result
in a fiscal year 1997-98 BSF reduction of approximately $212
million. Approximately 400 other school districts have asserted
similar claims. Proposed resolutions of all these claims are
currently under consideration. It is not known at this time what
action will be taken concerning those claims.
22
<PAGE>
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 August 1, 1997, relating to $11,000,000
State of Minnesota General Obligation Taxable State Various
Purpose Bonds.
Economic Climate
Minnesota resident population grew from 4,085,000 in
1980 to 4,657,800 in 1996. The state's population growth rate
from 1995 to 1996 was 0.93%. In comparison, United States
population grew at an annual compound rate of 0.91% during this
period. Minnesota population is currently forecast to grow at an
annual compounded rate of 0.8% through 2005.
In 1996, 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
been a strong sector, with Minnesota employment growth
23
<PAGE>
outperforming that of the United States in both the 1980-1990 and
1990-1996 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 30.3% of the State's durable goods employment was
concentrated in 1996, as compared to 19.6% 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 1996, 29.8% of Minnesota's non-
durable goods employment was concentrated in food and kindred
industries and 17.8% in paper and allied industries. This
compares to 22.1% and 8.9%, 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
17,300 employed in 1979 to 7,900 employed in 1996. It is not
expected that mining employment will return to 1979 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 four percentage points of national per capita personal
income. In 1996, Minnesota per capita personal income was 105.6%
of its United States counterpart. During the period 1980 to
1990, Minnesota ranked first in growth of personal income and
second during the period 1990 to 1996 among the 12 states in the
North Central Region. Over the period 1980 to 1990, Minnesota
non-agricultural employment grew 20.3 percent while the entire
North Central Region grew 14.4 percent. During the 1990-1996
period, Minnesota non-agricultural employment increased 14.2
percent, while regional employment increased 10.4 percent.
Between 1985 and 1995, increases in retail sales in Minnesota
averaged 5.6% 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.
From January 1995 through the first half of 1997, the
State's monthly unemployment rate was generally less than the
national unemployment rate, averaging 3.7% in 1995 and 4.0% in
1996, as compared to the national averages of 5.6% and 5.4%,
24
<PAGE>
respectively. As of June 1997, Minnesota's 1997 unemployment
rate averaged 3.5%, while the national monthly unemployment rate
averaged 5.3%.
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 1997, the Governor submitted a proposed
budget to the legislature for the 1997-99 biennium (the "Current
Biennium"). The proposed budget was based on the November 1996
forecast of Accounting General Fund revenues and expenditures.
In February 1997, 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 February 1997. 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.
25
<PAGE>
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 $522 million.
A special Property Tax Reform Reserve Account of $46
million was appropriated to be used for reform of the property
tax system. In addition, 60% of any remaining forecast balance
in an odd-numbered year must be added to the Property Tax Reform
Reserve Account.
A revenue and expenditure forecast for the Current
Biennium was prepared at the end of the 1997 first special
legislative session in June 1997. Accounting General Fund
revenues for the Current Biennium were estimated to be $21.926
billion and Accounting General Fund expenditures were estimated
to be $20.904 billion. On the basis of these estimates, the
Accounting General Fund would end the Current Biennium on
June 30, 1999 with an Unreserved Accounting General Fund balance
of $1.022 billion, comprising a Cash Flow Account of $350
million, a Budget Reserve Account of $522 million, a Property Tax
Reform Reserve Account of $46 million, appropriations carried
forward of $72 million and an Unrestricted Accounting General
Fund balance of $32.3 million.
MinnesotaCare Program. Legislation passed by the 1992
legislature established the MinnesotaCare 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 that 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. Program revenues are derived from dedication of
insurance premiums and taxes on hospitals, healthcare providers,
HMOs and prescription drugs. Total resources available to the
Health Care Access Fund in the Current Biennium are forecast to
total $609 million with projected expenditures of $371 million.
School District Credit Enhancement Program. In 1993,
the Legislature established a school district credit enhancement
26
<PAGE>
program. Under this program, the state may, in certain
circumstances and subject to the availability of funds, issue a
warrant and pay debt service coming due on school district
obligations. The amounts paid on behalf of any school district
are required to be repaid by it with interest either through a
reduction of subsequent state-aid payments or, with state
approval, by the levy of an ad valorem tax.
Based upon the amount of certificates of indebtedness
and capital notes for equipment and bonds enrolled in the program
as of August 1997, during the Current Biennium the total amount
of principal and interest coming due is estimated at $345
million, with the maximum amount of principal and interest
payable in any one month being $108 million. These amounts are
expected to increase. However, the state has not had to make any
debt service payments on behalf of school districts under the
program and does not expect to make any payments in the future.
If such payments are made the state expects to recover all or
substantially all the amounts so paid pursuant to contractual
agreements with the school districts.
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.
In 1994, in Cambridge State Bank et al. v. James the
Minnesota Supreme Court ruled that the State must refund a
portion of the Minnesota bank excise taxes paid by financial
institutions for tax years 1979 through 1983. The 1995 Minnesota
Legislature authorized the Commissioner of Finance to issue up to
$400 million of State revenue bonds to pay the judgment and the
related obligations.
As of July 30, 1997, $191.2 million of the $200 million
of bond proceeds had been expended to pay the judgment and
related obligations. The Commissioner of Revenue now expects the
total payment to be approximately $216 million, and $16.6 million
has been appropriated to pay the amount of the claims in excess
of the $200 million funded with bond proceeds. Additional claims
have been filed which the Commissioner of Revenue has contested
as barred by the statute of limitations. The Commissioner of
Revenue now estimates that maximum total payment of all such
contested claims would be an additional $40 million.
In Independent School District No. 625, Saint Paul,
Minnesota v. State of Minnesota, the St. Paul School District
("District") commenced a suit in state court against the State of
Minnesota, the Legislature, the Governor, the Board of Education,
27
<PAGE>
and the Department of Children, Families and Learning and its
Commissioner claiming that the State has failed to provide
sufficient resources to the District to enable it to provide an
adequate education to the District's poor and minority students
and students in need of special education and English
instruction. The complaint seeks declaratory relief and an order
that the State provide the District with the resources it needs.
The complaint also seeks an order enjoining the State from
continuing to use the current State compensatory aid funding
formula which provides additional funding to districts based on
the number of students enrolled from families receiving AFDC
benefits. While it is impossible at this point to accurately
predict the State's exposure in this case, it is possible that
the State could be ordered to pay in excess of $10 million to the
District.
Plaintiffs in Minnesota Home Health Care Association v.
Gomez allegedly represent a class of all home health care
agencies in the State of Minnesota. They have sued the
Department of Human Services ("DHS") for declaratory and
injunctive relief claiming that DHS has violated federal law.
The potential loss to the State is estimated at $20 million and
may impact the Accounting General Fund. The State prevailed in
the District Court and an appeal to the Eighth Circuit Court of
Appeals was decided in favor of the State.
In Minneapolis Branch of the NAACP v. State of
Minnesota, the Minnesota Branch of the NAACP and several
Minneapolis school children and their parents brought suit in
State Court against the State of Minnesota, the Governor, the
Treasurer, the Auditor, the Attorney General, the Legislature,
various legislators, the State Department of Children, Families
and Learning and several of its officials, the State Board of
Education and its members, and the Metropolitan Council, claiming
that the segregation of minority and poor students in the
Minneapolis public schools has deprived the students of an
adequate education in violation of the Minnesota Constitution.
The plaintiffs also claim that the unequal education received by
Minneapolis students relative to students in suburban schools
violates the Minneapolis students' right to equal protection
under the Minnesota Constitution. It is impossible at this point
to estimate the State's exposure in this case especially since
the plaintiffs have not articulated the precise relief they are
seeking. It is possible that the relief the plaintiffs will
ultimately request will involve the redistribution of minority
and poor families in the Minneapolis/St. Paul metropolitan area.
The cost of any such relief, if required to be paid by the State,
could exceed $10 million. The District Court has denied several
pretrial motions by the State to dismiss the case. Pretrial
proceedings are continuing and, as of January 1998, no trial date
had been set.
28
<PAGE>
Plaintiffs in Peter v. Johnson, et al. claim that the
State and school districts are required to provide certain
special education services in private, parochial schools.
Although damages, costs and attorneys' fees are claimed, no
specific dollar amount is identified. If the State should lose
the case, the amount of any judgment is difficult to estimate and
it is possible that any relief granted could result in the
expenditure of funds for education programs in excess of $10
million above current levels.
In PepsiCo, et al. v. Commissioner of Revenue, a case
before the Tax Court, the taxpayers are twelve corporations who
claim unconstitutional treatment under certain provisions of the
Minnesota tax law. The most significant issue in the case
involves the tax provision which accorded a special research and
development credit only to domiciliary corporations. The
Department of Revenue has not determined the potential refund
liability were the plaintiffs to prevail; however, the aggregate
refunds to all similarly-situated taxpayers could exceed $10
million.
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.
29
<PAGE>
The following is based on information obtained from an
Official Statement, dated December 1, 1997, relating to
$703,940,000 New Jersey Transportation Trust Fund Authority
Transportation System Bonds, 1997 Series A.
Economic Climate
New Jersey is the ninth largest state in population and
the fifth smallest in land area. With an average of 1,077
persons per square mile, it is the most densely populated of all
the states. Between 1980 and 1990 the annual population growth
rate was .49% and between 1990 and 1996 the growth rate
accelerated to .53%. While this rate of growth compared
favorably with other Middle Atlantic States, it was less than the
national rate of increase.
The State's economic base is diversified, consisting of
a variety of manufacturing, construction and service industries,
supplemented by commercial agriculture. 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 $237.2
billion for 1995 and $248.1 billion for 1996. Personal income
increased 4.6% between 1995 and 1996 but was below the national
rate of 5.4%. Historically, New Jersey's average per capita
income has been well above the national average. In 1996, the
State ranked second among all states in per capita personal
income ($31,053).
After experiencing a boom during the mid-1980s, New
Jersey, as well as the rest of the Northeast United States,
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.
Reflecting the downturn, the rate of unemployment in New
Jersey rose from 3.6% during the first quarter of 1989 to a
recessionary peak of 9.3% in 1992. Since then, the unemployment
rate fell to an average of 6.2% in 1996 and 5.5% for the first
six months of 1997.
30
<PAGE>
For the recovery period as a whole, May 1992 to June
1997, service-producing employment in New Jersey has expanded by
283,500 jobs. Hiring has been reported by food stores, auto
dealers, wholesale distributors, trucking and warehousing firms,
utilities, business and engineering/management service firms,
hotels/hotel-casinos, social service agencies and health care
providers other than hospitals. Employment growth was
particularly strong in business services and its personnel supply
component with increases of 17,300 and 7,500, respectively, in
the 12-month period ending June 1997.
In the manufacturing sector, employment losses slowed
between 1992 and 1994. After an average annual job loss of
33,500 from 1989 through 1992, New Jersey's factory job losses
fell to 13,300 during 1993 and 7,300 during 1994. During 1995
and 1996, however, manufacturing job losses increased slightly to
10,100 and 13,900 respectively, reflecting a slowdown in national
manufacturing production activity.
Conditions have slowly improved in the construction
industry, where employment has risen by 18,600 since its low in
May 1992. Between 1992 and 1996, this sector's hiring rebound
was driven primarily by increased homebuilding and nonresidential
projects. During 1996 and the first six months of 1997, public
works projects and homebuilding became the growth segments while
nonresidential construction lessened but remained positive.
Nonresidential construction activity, as measured by
contract awards, grew by 19.6% in 1994, 3.0% in 1995 and 7.0% in
1996. More recently, nonresidential building construction
contracts increased by 45.8% in the first five months of 1997
compared with the same period in 1996. Residential construction
contracts, despite monthly fluctuations, increased by 17.1% for
the first five months of 1997 as compared to the first five
months of 1996 ($989 million and $845 million, respectively).
Nonbuilding or infrastructure construction rose robustly by 64.0%
during this period. Helped by these increases, total
construction contracts rose by 41.0% when comparing the first
five months of 1996 and 1997.
Total new vehicle registrations rose in 1994 by 5.8%,
declined by 4.4% in 1995, then rose 2.6% in 1996. Through May
1997, however, total new vehicle registration rose by 2.8% when
compared to the same time period in 1996.
The rising economic trend experienced in new Jersey has
led to higher retail sales, which showed steady growth from 1992
through 1996, including a 3.8% increase from 1995 to 1996. The
higher retail sales, in turn, produced steady increases in retail
trade jobs (both full- and part-time). Retail trade employment
has risen by nearly 49,000 since a May 1992 low point. From
31
<PAGE>
December 1996 to June 1997, the number of retail jobs rose by
8,700.
Financial Condition
The State Constitution provides, in part, that no money
may be drawn from the State Treasury except for appropriations
made by law and that no 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 1998 fiscal year, the undesignated fund balances
in the General State Funds, accounting for the largest part of
the financial operations of the state, are projected to be $553.5
million. Such balances were estimated at $1.07 billion for the
1997 fiscal year and the actual balances for fiscal years 1996
and 1995 were $882.2 million and $950.2 million respectively.
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. The number of municipalities which
exceeded statutory debt limits was six as of December 31, 1994.
Two municipalities incurred a cash deficit greater than 4% of its
tax levy for 1994 and 1995. 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 local financing authorities. 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, etc.) and special taxing districts (fire, water,
etc.).
32
<PAGE>
Litigation
There are a number of suits making monetary claims
against the State, its agencies and employees that together if
decided in favor of the complainants would significantly increase
State expenditures above those anticipated. There are also
individual suits that could have that effect. Among them are
suits challenging (a) amendments to the pension laws enacted on
June 30, 1994; (b) the method of calculating/collecting the
hospital assessment authorized by the Health Care Reform Act of
1992; (c) the constitutionality of annual A-901 hazard and solid
waste licensure renewals fees collected by the Department of
Environmental Protection and Energy; (d) the State's failure to
provide funding to hospitals required by state law to treat all
patients, regardless of ability to pay; and (e) the State's
compliance with the court order in Abbot v. Burke to close the
spending gap between poor urban school districts and wealthy
districts.
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
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 December 1, 1997, relating to
$40,000,000 State of Ohio Mental Health Capital Facilities Bonds,
Series II-1997A.
33
<PAGE>
Economic Climate
Ohio's 1995 estimated population of over 11 million
ranked Ohio seventh among the states in population. 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
Ohio. Six cities have population of over 100,000 and 19 over
50,000.
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 non-agricultural payroll workers in Ohio.
However, manufacturing (including auto-related manufacturing)
remains an important part of Ohio's economy and Ohio ranked
fourth in the nation in 1991 in gross state product derived from
manufacturing. 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 1996. The
unemployment rate in Ohio has declined from 4.9% in 1996 to 4.0%
by October 1997.
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
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.
The last complete fiscal biennium ended June 30, 1997 with a
General Revenue Fund ("GRF") fund balance of $834,900,000. At
the end of 1997, the Budget Stabilization Fund had a balance of
$862,700,000.
Most State operations are financed through the 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.
34
<PAGE>
The TOF includes the total consolidated cash balances,
revenues, disbursements and transfers of the GRF and several
other specified funds. 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% of
GRF revenues for the then preceding fiscal year. GRF cash flow
deficiencies occurred in four months in fiscal year 1997, with
the highest being approximately $566 million. The Office of
Budget and Management projects that GRF cash flow deficiencies
will occur in eight months in fiscal year 1998. All those
actual, and those projected, cash flow deficiencies are within
the TOF limitations discussed above.
Schools
The Ohio Supreme Court concluded in a March 1997
decision that major aspects of the State's school funding system
are unconstitutional because the system permits spending
disparities among districts. It ordered the State to provide for
and fund sufficiently a system complying with the Ohio
Constitution, staying its order for a year to permit time for
responsive corrective actions by the legislature. The Court has
indicated that property taxes may still play a role in, but "can
no longer be the primary means" of, school funding.
Under the current financial structure, 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 local property taxes
and, in 119 districts, income taxes for significant portions of
their budgets. A number of the State's 612 public and 49 joint
vocational school districts have in any year required special
assistance to avoid year-end deficits. A current program
provides for individual district local borrowing, with direct
application of certain subsidy distributions to repayment, if
needed. In fiscal year 1997 under this program, 12 districts
borrowed a total of $113,164,000.
New legislation addresses larger school districts with
financial difficulties. The legislation is similar in
application to that employed with respect to municipalities, as
discussed below. It has been applied to five districts and nine
have been placed on a preliminary "fiscal watch" status.
35
<PAGE>
Municipalities
Ohio's incorporated cities and villages rely primarily
on property and municipal income taxes for their operations, and,
with other local governments, receive certain State subsidies and
reimbursements distributed by the State. Procedures have been
established for those few cities and villages 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 24 cities and
villages. In 18 of these cities and villages the fiscal
situation has been resolved and the procedures terminated. A
recent amendment to the fiscal emergency legislation extended its
potential application to counties and townships. The provisions
of the amendments to the fiscal emergency legislation have been
applied to one city.
At present Ohio 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.
Litigation
The State of Ohio is a party to various legal
proceedings seeking damages or injunctive relief and generally
incidental to its operations. The ultimate disposition of these
proceedings is not presently determinable, but in the opinion of
the Ohio Attorney General will not have a material adverse effect
on payment of State obligations. Litigation pending in federal
district court and in the Ohio Court of Claims contests the Ohio
Department of Human Services' ("ODHS") prior Medicaid financial
eligibility rules for married couples where one spouse is living
in a nursing facility and the other spouse resides in the
community. ODHS promulgated new eligibility rules effective
January 1, 1996. It is appealing a court order directing it to
provide notice to persons potentially effected by the former
rules from 1990 through 1995. It is not possible at this time to
predict whether this appeal will be successful or, should
plaintiffs prevail, the period (beyond the current fiscal year)
during which necessary additional Medicaid expenditures would
have to be made. Plaintiffs have estimated total additional
36
<PAGE>
Medicaid expenditures of $600,000,000 for the retroactive period
and, based on current law, it is estimated that Ohio's share of
those additional Medicaid expenditures would be approximately
$240,000,000. The Court of Claims case may come to trial later
this year.
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
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 13, 1997, relating to the issuance of $225,000,000
Commonwealth of Pennsylvania 4.50% Tax Anticipation Notes, Series
of 1997-1998.
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 services 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 $3.6 billion in crop and
livestock products annually, while agribusiness and food related
industries support $39 billion in economic activity annually.
37
<PAGE>
Non-agricultural employment in Pennsylvania over the ten
years ending in 1996 increased at an annual rate of 1.03 percent.
This rate compares to a 0.41 percent rate for the middle Atlantic
region and 1.8 percent for the U.S. during the period 1986
through 1996. For the last three years, employment in the
Commonwealth has increased 3.6 percent. The growth in employment
experienced in Pennsylvania during this period is higher than the
3.0 percent growth in the Middle Atlantic region.
Non-manufacturing employment has increased in recent
years to its 1996 level of 82.5 percent of total employment in
Pennsylvania. Consequently, manufacturing employment constitutes
a diminished share of total employment within the Commonwealth.
Manufacturing, contributing 17.9 percent of 1996 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 1996, the services sector accounted for
31.1 percent of all non-agricultural employment while the trade
sector accounted for 22.7 percent.
Pennsylvania's annual average unemployment rate was
below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise
to 6.9 percent in 1991 and 7.5 percent in 1992. The resumption
of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1 percent in 1993. As of
September 1997, the most recent month for which data is
available, the seasonally adjusted unemployment rate for the
Commonwealth was 5.3 percent, compared to 4.9 percent for the
United States.
Personal income in the Commonwealth for 1996 was $299.0
billion, an increase of 4.9% over the previous year. During the
same period, national personal income increased at a rate of
5.6%. Based on the 1996 personal income estimates, per capita
income for 1996 is estimated at $24,803 in the Commonwealth,
compared to per capita income in the United States of $24,426.
Personal income in Pennsylvania for the first quarter of 1997 is
estimated on a seasonally adjusted annual basis to be $309.2
million, an increase of 6.1% over the first quarter of 1996.
Financial Condition
Pennsylvania utilizes the fund method of accounting.
The General Fund, the Commonwealth's largest and principal
operating fund, receives all tax receipts, revenues, federal
grants and reimbursements that are not specified by law to be
deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the
General Fund. Debt service on all obligations, except that
38
<PAGE>
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).
Fiscal 1998 Budget (Budgetary Basis): The budget for
fiscal 1998 was enacted in May 1997. Commonwealth revenues for
the fiscal year at that time were estimated to be $17.435 billion
before reserves for tax refunds. That estimate represented an
increase over estimated fiscal 1997 Commonwealth revenues of 1.0
percent. Although fiscal 1997 revenues exceeded the estimate,
the adopted fiscal 1998 budget revenue estimate remains unchanged
and represents a 0.7 percent increase over actual fiscal 1997
revenues. Fiscal 1998 estimates for commonwealth revenues are
based on an economic forecast for national economic growth to
slow through the remainder of calendar year 1997. A growth rate
of just above 1.0 percent is anticipated to be maintained for the
last two quarters of the fiscal year and result in a 1.2 percent
growth rate in real gross domestic product for the second
calendar quarter of 1998 over the second quarter of 1997. This
anticipated rate of economic growth is a result of anticipated
slowing of gains in consumer spending, business investment and
residential housing. Inflation is projected to remain modest and
the unemployment rate is expected to reach 6.0 percent by the
second calendar quarter of 1998.
The rate of anticipated growth of Commonwealth revenues
is also effected by the enactment of tax reductions and tax
revenue dedications effective for the 1998 fiscal year.
Excluding these newly enacted changes, revenues are projected to
increase by 2.4 percent during fiscal 1998. Tax reductions
enacted for the 1998 fiscal year budget totaled an estimated
$170.6 million, including $16.2 million that is reflected in
higher projected tax refunds. In addition, $75 million of
existing sales tax revenue has been earmarked for mass transit
funding and one cent of the cigarette tax ($10.8 million) has
been earmarked for a children's health program and are no longer
included in the General Fund. Major changes to taxes enacted for
fiscal 1998 include: (i) the repeal of the sales and use tax on
computer services ($79.1 million); (ii) an increase in the amount
of income that is exempt from the personal income tax for low-
income families ($25.4 million); (iii) enactment of a research
and development tax credit program for business ($15.0 million);
(iv) conforming state tax laws to federal laws for sub-chapter S
and limited liability companies ($16.3 million); and various
other miscellaneous changes. Most changes were effective
beginning in July 1997 although some are effective retroactively
to January 1997.
39
<PAGE>
The reserve for tax refunds for fiscal 1998 has been
increased by 21.3 percent to $655.0 million. A portion of the
additional reserves reflect tax refund liabilities that are
expected to result in cash payments in a subsequent fiscal year.
Appropriations enacted for fiscal 1998 are 3.7 percent
($618 million) above appropriations enacted for fiscal 1997
(including supplemental appropriations.) Major funding increases
provided by the fiscal 1998 budget include: (i) $166 million of
appropriations for elementary and secondary education plus an
estimated $51 million in reduced employer retirement
contributions payable by local school districts due to a
reduction in the contribution rate; (ii) $42 million for higher
education institutions plus $16 million for student scholarships;
(iii) $70 million for higher caseload, utilization, and cost of
nursing home care; (iv) $60 million for economic development
assistance through programs providing incentive grants and loans;
and (v) $38 million for corrections including $17 million for
operating costs for new and expanded facilities. The balance of
the increase is spread over many other departments and program
operations.
Based on current expectations and the adopted budget for
fiscal 1998 and excluding any estimate for appropriation lapses
during the fiscal year, the unappropriated surplus is projected
to decline from $402.7 million at the beginning of the fiscal
year to $16.7 million at fiscal year-end (prior to transfers to
the Tax Stabilization Reserve Fund).
Fiscal 1997 Financial Results (Budgetary Basis):
Commonwealth General Fund revenues for the fiscal year were above
estimate and exceeded fiscal year expenditures and encumbrances.
For fiscal year 1997, 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
1997 closing unappropriated surplus was $591.4 million, an
increase of $403.1 million over the fiscal 1996 closing
unappropriated surplus prior to transfers.
Commonwealth revenues were $576.1 million, 3.4 percent,
above the estimate of revenues used at the time the budget was
enacted. Tax revenue in fiscal 1997 grew 6.1 percent over tax
revenues in fiscal 1996. Receipts from the personal income tax
produced the largest single component of higher revenues for the
fiscal year: collections were $236.3 million over estimate
representing a 6.9 percent increase over fiscal 1996 receipts.
Expenditures (excluding pooled financing expenditures)
from Commonwealth revenues totaled $16,347.7 million,
representing an increase of 1.7 percent over spending during
fiscal 1996.
40
<PAGE>
Transfers to the Tax Stabilization Reserve Fund for
fiscal 1997 operations were $88.7 million, representing fifteen
percent of the ending unappropriated balance, plus an additional
$100 million authorized by the General Assembly when it enacted
the fiscal 1998 budget.
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, 1996 showed a surplus of approximately $118.5 million,
an increase of approximately $28 million over the previous fiscal
year surplus.
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 $1,761.7 million of its Special Tax Revenue Bonds.
PICA's authority to issue bonds has expired and, as of June 30,
1997, PICA had $1,102.4 million in special revenue bonds
outstanding. Currently, Philadelphia is operating under a five-
year fiscal plan approved by PICA on May 20, 1997.
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 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 $4,795.1
million at June 30, 1997, a decrease of $261 million from
June 30, 1996. Over the 10-year period ending June 30, 1997,
total outstanding general obligation debt increased at an annual
rate of 0.5 percent. Within the most recent 5-year period,
outstanding general obligation debt has decreased at an annual
rate of 0.3 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
41
<PAGE>
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
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.
In January of 1992, the U.S. District Court denied the
ACLU's motion for class certification and held that the "next
friends" seeking to represent the interests of the 16 minor
plaintiffs in the case were inadequate representatives. The
Commonwealth filed a motion for summary judgment on most of the
counts in ACLU's complaint. After the motion for summary
judgment was filed, the ACLU filed a renewed motion to certify
sub-classes.
In December of 1994, the Third Circuit reversed the
ruling. Consistent with the Third Circuit's ruling, the District
Court recently certified the class, and the parties have resumed
discovery.
42
<PAGE>
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania
held in County of Allegheny v. Commonwealth of Pennsylvania, that
the statutory scheme for county funding of the judicial system is
in conflict with the Pennsylvania Constitution. However, the
Supreme Court of Pennsylvania stayed its judgment to afford the
General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the
prior system of county funding shall remain in place until this
is done.
On December 7, 1992, the State Association of County
Commissioners filed a new action in mandamus seeking to compel
the Commonwealth to comply with the decision in County of
Allegheny. The Court issued the writ on July 26, 1996, and
appointed retired Justice Frank J. Montemuro, Jr. as special
master to devise and submit a plan for implementation. Following
issuance of the writ, the President of the Senate and the Speaker
of the House have filed a petition seeking reconsideration from
the Court.
On January 28, 1997, the Supreme Court announced the
establishment of a tripartite committee, including
representatives of the Executive Department, the Legislative
Department and Justice Montemuro, to develop an implementation
plan. On July 26, 1997, Justice Montemuro filed a report
recommending a four phase implementation plan. The first phase
of the recommended plan, transfer of of specified court employees
into the state payroll system, was to begin on January 1, 1998
with completion of the final phase early next century.
The General Assembly has yet to consider legislation
implementing the Supreme Court of Pennsylvania's judgment.
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,
43
<PAGE>
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
litigation consists of two parallel cases; a federal court case
has been indefinitely stayed, pending resolution of a state court
case.
Trial and post-trial briefing have been completed, and
oral argument was heard on September 8, 1997 before Judge
Pellegrini of the Commonwealth Court. Judge Pellegrini took the
case under advisement.
Autin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union
("ACLU") brought a class action lawsuit in the United States
District Court for the Eastern District of Pennsylvania on behalf
of the inmate populations in thirteen Commonwealth correctional
institutions. The lawsuit challenged the conditions of
confinement at each institution and included specific allegations
of over-crowding, deficiencies in medical health services,
inadequate environmental conditions, disparate treatment of HIV
positive prisoners and other assorted claims. No damages are
sought. The ACLU sought injunctive relief which would modify
conditions, change practices and procedures, and increase the
number of staff deployment.
On August 1, 1994, the parties submitted a proposed
settlement agreement to the Court for its review. The Court
approved the Settlement Agreement with a January 17, 1995
Memorandum. On February 3, 1995, the Commonwealth paid $1.3
million in attorneys' fees to the plaintiffs' attorneys in
accordance with the Agreement. The remaining $100,000 in
attorneys' fees will paid upon dismissal of the preliminary
injunction relating to certain health issues. The parties are
currently complying with monitoring provisions outlined in the
Agreement. The monitoring phase will expire on January 6, 1998.
The attorneys' fees for the 3-year monitoring period will not
exceed $60,000 in any one year.
44
<PAGE>
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. On December 15, 1995, the
Commonwealth of Pennsylvania entered into a Settlement Agreement
("Agreement") pursuant to which the parties settled all claims
which Envirotest might have had against the Commonwealth arising
from the suspension of the emissions testing program. Under the
Agreement, Envirotest is to receive $145 million, with interest
at 6 percent per annum, payable $25 million in 1995, $40 million
each in 1996, 1997 and 1998. An additional $11 million may be
required to be paid in 1998, depending upon the results of
property liquidations by Envirotest.
Pennsylvania Human Relations Commission/School
District of Philadelphia, et al. v. Commonwealth of
Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania
and the Governor of Pennsylvania, along with the City of
Philadelphia and the Mayor of Philadelphia, were joined as
additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant
to the Pennsylvania Human Relations Act. The enforcement action
was pursued to remedy unintentional conditions of segregation in
the public schools of Philadelphia. The Commonwealth and the
City were joined in the "remedial phase" of the proceeding "to
determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the
Philadelphia public schools."
Trial commenced on May 30, 1996. The Supreme Court of
Pennsylvania on July 1, 1996 assumed extraordinary plenary
jurisdiction and directed Judge Smith to conclude the proceedings
within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion. The Supreme Court
retained jurisdiction. The Court found that "[b]ecause of the
lack of adequate funds to comply with the remedial order, the
School District is entitled to additional resources for 1996-1997
of $45.1 million.
On September 10, 1996, the Supreme Court of Pennsylvania
issued an order granting the Commonwealth's Motion to Vacate.
The Court directed its Prothonotary to establish a briefing
schedule and a date for oral argument and indicated that it would
issue a further order limiting the issues to be addressed.
Finally, the Supreme Court stated that Commonwealth Court "is
divested of jurisdiction of th[e] matter..., and all further
proceedings in the Commonwealth Court are stayed pending further
45
<PAGE>
order of the [Supreme] Court." The Supreme Court again retained
jurisdiction.
On January 28, 1997, the Supreme Court set forth three
issues to be briefed and established a briefing schedule. Briefs
have been filed, but the Supreme Court has not scheduled oral
arguments.
Marrero, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of Philadelphia,
the City of Philadelphia, the School District of Philadelphia,
and two non-profit organizations filed in the Commonwealth Court
a civil action for declaratory judgment that the present
statutory scheme for funding public education, as applied to the
School District of Philadelphia, violates the Constitution of
Pennsylvania. Petitioners seek an order that requires, among
other things, the legislature to amend the present education
legislation to assure that funding for Philadelphia public
schools makes adequate provision for the greater needs of
disadvantaged Philadelphia students.
The respondents have filed preliminary objections
seeking dismissal of the action. After briefs were filed, the
Commonwealth Court heard oral argument on September 10, 1997 and
took the matter under advisement.
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
46
<PAGE>
of the Virginia Portfolio are available only to Virginia
residents.
The following is based on information obtained from an
Official Statement, dated June 1, 1997, relating to $152,075,000
Commonwealth of Virginia General Obligation Bonds, Series 1997.
Economic Climate
The Commonwealth of Virginia is the twelfth most
populous state in the nation, with approximately 6,677,200
residents. In 1995, its population density was 168 persons per
square mile, compared with 72 persons per square mile for the
United States.
The Commonwealth is divided into five distinct regions--
a coastal plain cut into peninsulas by four large tidal rivers, a
piedmont plateau of rolling farms and woodlands, the Blue Ridge
Mountains, the fertile Shenandoah Valley and the Appalachian
plateau extending over the southwest corner of the Commonwealth.
Approximately one-third of all land in Virginia is used for
farming and other agricultural services. This variety of
terrain, the location of the Commonwealth on the Atlantic
Seaboard at the southern extremity of the northeast population
corridor and its close proximity to the nation's capital have had
a significant influence on the development of the present
economic structure of the Commonwealth.
The largest metropolitan area is the Northern Virginia
portion of the Washington, D.C. metropolitan area. This is the
fastest growing metropolitan area in the Commonwealth and had a
1996 population of 1,970,900. 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.
metropolitan area in 1994 was $28,762.
According to the U.S. Department of Commerce, Virginians
received over $166 billion in personal income in 1996,
representing an increase of 83.4 percent over 1986 and greater
than the national gain of 68.9 percent for the same period. In
1996, Virginia had per capita income of $24,925, the highest of
the Southeast region and greater than the national average of
$24,231. Virginia's per capita income rose from 94 percent to
103 percent of the national average from 1970 to 1996. From 1986
to 1995, Virginia's 5 percent average rate of growth in personal
per capita income was approximately equal to the national rate of
growth. Much of Virginia's per capita income gain in the last
decade has been due to the continued strength of the
47
<PAGE>
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.
More than 3.5 million residents of the Commonwealth are
in the civilian labor force. Services, the largest employment
sector, accounts for 28.4 percent of nonagricultural employment,
and has increased 19.1 percent from 1991-1995. Manufacturing is
also a significant employment sector, accounting for 13.1 percent
of nonagricultural employment in 1995. The industries with the
greatest manufacturing employment are transportation equipment,
textiles, food processing, printing, electric and electronic
equipment, apparel, chemicals, lumber and wood products and
machinery. Employment in the manufacturing sector decreased 2.4
percent from 1991 to 1995.
Virginia generally has one of the lowest unemployment
rates in the nation, according to statistics published by the
U.S. Department of Labor. During 1996, an average of 4.4 percent
of Virginia's citizens were unemployed as compared with the
national average which was 5.4 percent. During the first six
months of 1997, Virginia's unemployment rate averaged 4.25
percent and in August 1997 was down to 4.1 percent.
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.
Financial Condition
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 used to
offset, in part, anticipated shortfalls in revenues in years when
48
<PAGE>
appropriations, based on previous forecasts, exceed expected
revenues in subsequent forecasts. As of June 30, 1996, $84.9
million was on deposit in the Revenue Stabilization Fund. In
addition, $151.6 million of the General Fund balance on June 30,
1996 was reserved for deposit in the Revenue Stabilization Fund.
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.
On April 7, 1996, the 1996-98 Appropriation Act became
effective. That Act appropriated $35.078 billion for the 1996-98
biennium -- approximately $1.411 billion in spending increases
above the level necessary to continue FY 1996 workloads and
costs. Of these increases, $107.2 million resulted from the
deposits to the Revenue Stabilization Fund ($66.6 million for
deposit on June 30, 1997 and an estimated $40.6 million scheduled
for deposit on June 30, 1998). The remainder provided the state
share of Standards of Quality for public schools, proposed
increases in higher education, increased spending for adult and
juvenile corrections, expansion of economic development, and
mandated increases in several entitlement programs in health and
human resources, primarily for Medicaid. The Act also included
more than $200 million in settlement payments to federal retirees
(see "Litigation" below). The Act projected over $35.258 billion
in revenues, providing for an unappropriated balance surplus on
June 30, 1998.
On April 30, 1997, the Governor signed the 1997
Appropriation Act amending the 1996-98 budget. The 1997 Act
included general fund spending amendments totaling about $226.1
million above the 1996-98 Appropriation Act. Of this total,
$187.7 million supported operating expenses and $17.7 million was
required for deposit into the Revenue Stabilization Fund. An
additional $9.1 million was left unappropriated, bringing the
total general fund unappropriated balance to $20.7 million on
June 30, 1998.
49
<PAGE>
Litigation
The Commonwealth, its officials and employees are named
as defendants in legal proceedings which occur in the normal
course of governmental operations, some involving substantial
amounts. It is not possible at the present time to estimate the
ultimate outcome or liability, if any, of the Commonwealth with
respect to these lawsuits. However, the ultimate liability
resulting from these suits is not expected to have a material,
adverse effect on the financial condition of the Commonwealth.
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 without 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. Department of Taxation, commenced in 1989,
federal retirees sought refunds of state income taxes during
1985-1988. In a Special Session in 1994, the General Assembly
passed emergency legislation to provide payments to federal
retirees in settlement of their claims for overpaid taxes.
Approximately 91 percent of the retirees accepted the settlement
which provided for annual payments over a five-year period,
commencing March 31, 1995.
On September 15, 1995, the Virginia Supreme Court
rendered its decision in Harper, reversed the judgment of the
trial court, entered final judgment in favor of the plaintiff
retirees who elected not to settle, and directed that the amounts
unlawfully collected be refunded with statutory interest. The
total cost of refunding all Virginia income taxes paid on federal
pensions on account of the settlement (approximately $316.2
million) and the judgment ($78.7 million) is approximately $394.9
million, of which $203.2 million ($124.5 in respect of the
settlement and the entire $78.7 million in respect of the
judgment) has been paid, leaving $191.7 million payable in
respect of the settlement--approximately $63.2 million in fiscal
year 1997, $62.5 million on March 31, 1998, and (subject to
appropriation) $66 million on March 31, 1999.
Additional Investment Policies
Except as otherwise noted, the following investment
policies apply to all Portfolios of the Fund.
50
<PAGE>
General. Municipal securities include municipal bonds
as well as short-term (i.e., maturing in under one year to as
much as three years) municipal notes, demand notes and tax-exempt
commercial paper. In the event a Portfolio invests in demand
notes, Alliance Capital Management L.P. (the "Adviser") will
continually monitor the ability of the obligor under such notes
to meet its obligations. Typically, municipal bonds are issued
to obtain funds used to construct a wide range of public
facilities, such as schools, hospitals, housing, mass
transportation, airports, highways and bridges. The funds may
also be used for general operating expenses, refunding of
outstanding obligations and loans to other public institutions
and facilities.
Municipal bonds have two principal classifications:
general obligation bonds and revenue or special obligation bonds.
General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal
and interest. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source but not from
general tax and other unrestricted revenues of the issuer. The
term "issuer" means the agency, authority, instrumentality or
other political subdivision whose assets and revenues are
available for the payment of principal of and interest on the
bonds. Certain types of private activity bonds are also
considered municipal bonds if the interest thereon is exempt from
federal income tax.
Private activity bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the
principal and interest on such private activity bonds depends
solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for
such payment.
Each Portfolio may invest a portion of its assets in
municipal securities that pay interest at a coupon rate equal to
a base rate plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or
"cap." Although the specific terms of these municipal securities
may differ, the amount of any additional interest payment
typically is calculated pursuant to a formula based upon an
applicable short-term interest rate index multiplied by a
designated factor. The additional interest component of the
coupon rate of these municipal securities generally expires
before the maturity of the underlying instrument. These
municipal securities may also contain provisions that provide for
51
<PAGE>
conversion at the option of the issuer to constant interest rates
in addition to standard call features.
A Portfolio may invest a maximum of 35% of its total
assets in zero coupon securities, which are debt obligations that
do not entitle the holder to any periodic payments prior to
maturity and are issued and traded at a discount from their face
amounts. The discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. The market
prices of zero coupon securities are generally more volatile than
the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a
greater degree than do securities having similar maturities and
credit quality that do pay periodic interest.
Each Portfolio may also invest in municipal securities,
the interest rate on which has been divided into two different
and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the
"Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of
the components (the "Residual Component") pays a current residual
interest rate based on the difference between the total interest
paid by the issuer on the municipal securities and the auction
rate paid on the Auction Component. A Portfolio may purchase
both Auction and Residual Components.
Because the interest rate paid to holders of Residual
Components is generally determined by subtracting the interest
rate paid to the holders of Auction Components from a fixed
amount, the interest rate paid to Residual Component holders will
decrease the Auction Component's rate increases and increase as
the Auction Component's rate decreases. Moreover, the extent of
the increases and decreases in market value of Residual
Components may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal
security having similar credit quality, redemption provisions and
maturity.
Municipal notes in which a Portfolio may invest include
demand notes, which are tax-exempt obligations that have stated
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.
52
<PAGE>
Other short-term obligations constituting municipal
notes include tax anticipation notes, revenue anticipation notes,
bond anticipation notes and tax-exempt commercial paper. Tax
anticipation notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of
various seasonal tax revenues, such as ad valorem, income, sales,
use and business taxes. Revenue anticipation notes are issued in
expectation of receipt of other types of revenues, such as
federal revenues available under the Federal Revenue Sharing
Programs. Bond anticipation notes are issued to provide interim
financing until long-term financing can be arranged. In most
such cases, the long-term bonds provide the money for the
repayment of the notes.
Tax-exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less (however, issuers
typically do not issue such obligations with maturities longer
than seven days). Such obligations are issued by state and local
municipalities to finance seasonal working capital needs or as
short-term financing in anticipation of longer-term financing.
There are, of course, variations in the terms of, and
the security underlying, municipal securities, both within a
particular rating classification and between such
classifications, depending on many factors. The ratings of
Moody's Investors Services, Inc. ("Moody"), Standard & Poors
Rating Services ("S&P"), Duff & Phelps Credit Rating Co. ("Duff &
Phelp") and Fitch IBCA, Inc. ("Fitch") represent their opinions
of the quality of the municipal securities rated by them. It
should be emphasized that such ratings are general and are not
absolute standards of quality. Consequently, municipal
securities with the same maturity, coupon and rating may have
different yields, while the municipal securities of the same
maturity and coupon, but with different ratings, may have the
same yield. The Adviser appraises independently the fundamental
quality of the securities included in the Fund's portfolios.
Yields on municipal securities are dependent on a
variety of factors, including the general conditions of the
municipal securities market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. An
increase in interest rates generally will reduce the market value
of portfolio investments, and a decline in interest rates
generally will increase the value of portfolio investments.
Municipal securities with longer maturities tend to produce
higher yields and are generally subject to greater price
movements than obligations with shorter maturities. Under normal
circumstances the average weighted maturity of the securities in
each Portfolio will range between 10 and 30 years. However, no
Portfolio has any restrictions on the maturity of municipal
securities in which it may invest. Since the Portfolios'
53
<PAGE>
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 Portfolios' respective investment
objectives depends in part on the continuing ability of the
issuers of municipal securities in which the Fund invests to meet
their obligations for the payment of principal and interest when
due. Municipal securities historically have not been subject to
registration with the Securities and Exchange Commission (the
"Commission"), although from time to time there have been
proposals which would require registration in the future.
After purchase by a Portfolio, a municipal security may
cease to be rated or its rating may be reduced below the minimum
required for purchase by such Portfolio. Neither event requires
sales of such security by such Portfolio, but the Adviser will
consider such event in its determination of whether such
Portfolio should continue to hold the security. To the extent
that the ratings given by Moody's, S&P, Duff & Phelps or Fitch
may change as a result of changes in such organizations or their
rating systems, the Adviser will attempt to use such changed
ratings in a manner consistent with the Fund's quality criteria
as described in the Prospectus for each of its Portfolios.
Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Code. In addition, the obligations of such
issuers may become subject to laws enacted in the future by
Congress, state legislatures, or referenda extending the time for
payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the
possibility that, as a result of litigation or other conditions,
the ability of any issuer to pay, when due, the principal or the
interest on its municipal bonds may be materially affected.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
securities. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the
availability of municipal securities for investment by the Fund
and the value of the Fund's Portfolios would be affected.
Additionally, the Fund would reevaluate the Portfolios'
investment objectives and policies.
54
<PAGE>
Futures Contracts and Options on Futures Contracts.
Each Portfolio may enter into contracts for the purchase or sale
for future delivery of municipal securities or obligations of the
U.S. Government securities or contracts based on financial
indices, including an index of municipal securities or U.S.
Government securities ("futures contracts") and may purchase and
write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities
called for by the contract at a specified price on a specified
date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current
contract value") and the price at which the contract was
originally struck. No physical delivery of the fixed-income
securities underlying the index is made. Options on futures
contracts written or purchased by a Portfolio will be traded on
U.S. exchanges or over-the-counter. These investment techniques
will be used only to hedge against anticipated future changes in
interest rates which otherwise might either adversely affect the
value of the securities held by a Portfolio or adversely affect
the prices of securities which a Portfolio intends to purchase at
a later date.
The Fund has adopted a policy that futures contracts and
options on futures contracts only be used as a hedge and not for
speculation. In addition to this requirement, a Portfolio will
not enter into any futures contracts or options on futures
contracts if immediately thereafter the aggregate of the market
value of the Portfolio's outstanding futures contracts and the
market value of the futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of the total
assets.
The correlation between movements in the price of
futures contracts or options on futures contracts and movements
in the price of the securities hedged or used for cover will not
be perfect and could produce unanticipated losses. If the value
of the index increases, the purchaser of the futures contract
thereon will be entitled to a cash payment. Conversely, if the
value of the index declines, the seller of a futures contract
will be entitled to a cash payment. In connection with its
purchase of index futures each Portfolio will deposit liquid
assets equal to the market value of the futures contract (less
related margin) in a segregated account with the Fund's custodian
or a futures margin account with a broker. If the Adviser were
to forecast incorrectly, a Portfolio might suffer a loss arising
55
<PAGE>
from adverse changes in the current contract values of the bond
futures or index futures which it had purchased or sold. A
Portfolio's ability to hedge its positions through transactions
in index futures depends on the degree of correlation between
fluctuations in the index and the values of the securities which
the Portfolio owns or intends to purchase, or general interest
rate movements.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
Options on Municipal and U.S. Government Securities. In
an effort to increase current income and to reduce fluctuations
in net asset value, the Portfolios intend to write covered put
and call options and purchase put and call options on municipal
securities and U.S. Government securities that are traded on U.S.
exchanges. There are no specific limitations on the writing and
purchasing of options by those Portfolios.
A put option gives the purchaser of such option, upon
payment of a premium, the right to deliver a specified amount of
a security to the writer of the option on or before a fixed date
at a predetermined price. A call option gives the purchaser of
the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a
fixed date at a predetermined price. A call option written by a
Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate
right to acquire that security without additional cash
consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange
of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call on the same security and in
the same principal amount as the call written where the exercise
price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise
price of the call written if the difference is maintained by the
Portfolio in liquid assets in a segregated account with the
Fund's custodian. A put option written by a Portfolio is
"covered" if the Portfolio maintains liquid assets with a value
equal to the exercise price in a segregated account with the
Fund's custodian, or else holds a put on the same security and in
the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the purchaser of
an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and
demand and interest rates.
56
<PAGE>
The Portfolios intend to write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
a Portfolio does not own the underlying security, and is designed
to provide a hedge against a decline in value in another security
which the Portfolio owns or has the right to acquire. In such
circumstances, a Portfolio collateralizes its obligation under
the option by maintaining in a segregated account with the Fund's
custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily. A
Portfolio would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option, while at
the same time achieving the desired hedge.
In purchasing a call option, a Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security increased by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security declined or remained the same or did not
increase during the period by more than the amount of the
premium. In purchasing a put option, the Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security declined by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security increased or remained the same or did not
decrease during that period by more than the amount of the
premium. If a put or call option purchased by a Portfolio were
permitted to expire without being sold or exercised, its premium
would be lost by the Portfolio.
If a put option written by a Portfolio were exercised
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by a
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a
decrease in the market value of the underlying security caused by
rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then
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
57
<PAGE>
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 may be are
illiquid and it may not be possible for the Portfolios to effect
a closing transaction at a time when the Adviser believes it
would be advantageous to do so. See "Description of the
Portfolios-Additional Investment Policies and Practices -Illiquid
Securities" in the Prospectus.
Interest Rate Transactions. Each Portfolio may enter
into interest rate swaps and may purchase or sell interest rate
caps and floors.
A Portfolio enters into these transactions primarily to
preserve a return or spread on a particular investment or portion
of its portfolio. A Portfolio may also enter into these
transactions to protect against price increases of securities the
Adviser anticipates purchasing for the Portfolio at a later date.
The Portfolios do not intend to use these transactions in a
speculative manner. Interest rate swaps involve the exchange by
a Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a contractually-based principal amount from the
party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal
amount from the party selling such interest rate floor.
Each Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis,
depending upon whether they are hedging their assets or their
liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any,
of a Portfolio's obligations over its entitlements with respect
to each interest rate swap will be accrued daily, and an amount
of liquid assets having an aggregate net asset value at least
58
<PAGE>
equal to the accrued excess will be maintained in a segregated
account by the custodian. If a Portfolio enters into an interest
rate swap on other than a net basis, the Portfolio will maintain
in a segregated account with the custodian the full amount,
accrued daily, of the Portfolio's obligations with respect to the
swap. A Portfolio will not enter into any interest rate swap, cap
or floor unless the unsecured senior debt or the claims paying
ability of the other party thereto is then rated in the highest
rating category of at least one nationally recognized rating
organization. The Adviser will monitor the creditworthiness of
counterparties on an ongoing basis. If there were a default by
such a counterparty, the Portfolios would have contractual
remedies. The swap market has grown substantially in recent
years, with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap
documentation. The Adviser has determined that, as a result, the
swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has
not yet been developed and, accordingly they are less liquid than
swaps. To the extent a Portfolio sells (i.e., writes) caps and
floors it will maintain in a segregated account with the
custodian liquid assets equal to the full amount, accrued daily,
of the Portfolio's obligations with respect to any caps or
floors.
The use of interest rate swaps is a highly specialized
activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities
transactions. If the Adviser were incorrect in its forecasts of
market values, interest rates and other applicable factors, the
investment performance of the Portfolios would diminish compared
with what they would have been if these investment techniques
were not used. Moreover, even if the Adviser is correct in its
forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being
hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by any of the Portfolios.
These transactions do not involve the delivery of securities or
other underlying assets of principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net
amount of interest payments that a Portfolio is contractually
obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount
of interest payments that the Portfolio contractually is entitled
to receive. A Portfolio may purchase and sell (i.e., write) caps
and floors without limitation, subject to the segregated account
requirement described above.
59
<PAGE>
When-Issued Securities and Forward Commitments. Each
Portfolio may purchase municipal securities offered on a "when-
issued" basis and may purchase or sell municipal securities on a
"forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment by a
Portfolio and settlement, no payment is made for the securities
purchased by the purchaser, and, thus, no interest accrues to the
purchaser from the transaction. The use of when-issued
transactions and forward commitments enables a Portfolio to hedge
against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling bond
prices, a Portfolio might sell municipal securities which it
owned on a forward commitment basis to limit its exposure to
falling bond prices. In periods of falling interest rates and
rising bond prices, a Portfolio might sell a municipal security
held by the Portfolio and purchase the same or a similar security
on a when-issued or forward commitment basis, thereby obtaining
the benefit of currently higher cash yields. However, if the
Adviser were to forecast incorrectly the direction of interest
rate movements, the Portfolio might be required to complete such
when-issued or forward transactions at prices less favorable than
the current market value.
When-issued municipal securities and forward commitments
may be sold prior to the settlement date, but a Portfolio enters
into when-issued and forward commitment transactions only with
the intention of actually receiving or delivering the municipal
securities, as the case may be. To facilitate such transactions,
the Fund's custodian bank will maintain, in a separate account of
the Fund, liquid assets having value equal to, or greater than,
any commitments to purchase municipal securities on a when-issued
or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of a Portfolio, the
portfolio securities themselves. If a Portfolio, however,
chooses to dispose of the right to acquire a when-issued security
prior to its acquisition or dispose of its right to deliver or
receive against a forward commitment, it can incur a gain or
loss. When-issued municipal securities may include bonds
purchased on a "when, as and if issued" basis under which the
issuance of the securities depends upon the occurrence of a
subsequent event, such as approval of a proposed financing by
appropriate municipal authorities. Any significant commitment of
Portfolio assets to the purchase of securities on a "when, as an
if issued" basis may increase the volatility of the Portfolio's
net asset value. At the time a Portfolio makes the commitment to
purchase or sell a municipal security on a when-issued or forward
60
<PAGE>
commitment basis, it records the transaction and reflects the
value of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. No when-issued or
forward commitments will be made by any Portfolio if, as a
result, more than 20% of the value of such Portfolio's total
assets would be committed to such transactions.
General. The successful use of the foregoing investment
practices, all of which are highly specialized investment
activities, draws upon the Adviser's special skill and experience
with respect to such instruments and usually depends on Adviser's
ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Portfolios may
not achieve the anticipated benefits of futures contracts,
options, interest rate transactions or forward commitment
contracts, or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of such instruments
and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its position in
futures contracts, options, interest rate transactions and
forward commitment contracts will depend on the availability of
liquid markets in such instruments. Markets for all these
vehicles with respect to municipal securities are relatively new
and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures
contracts and options on futures contracts. If, for example, a
secondary market did not exist with respect to an option
purchased or written by a Portfolio over-the-counter, it might
not be possible to effect a closing transaction in the option
(i.e., dispose of the option) with the result that (i) an option
purchased by the Portfolio would have to be exercised in order
for the Portfolio to realize any profit and (ii) the Portfolio
might not be able to sell portfolio securities covering the
option until the option expired or it delivered the underlying
security or futures contract upon exercise. No assurance can be
given that the Portfolios will be able to utilize these
instruments effectively for the purposes set forth above.
Furthermore, the Portfolios' ability to engage in options and
futures transactions may be limited by tax considerations.
Repurchase Agreements. Each Portfolio may seek
additional income by investing in repurchase agreements
pertaining only to U.S. Government securities. A repurchase
agreement arises when a buyer purchases a security and
61
<PAGE>
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time
the buyer's money is invested in the security and which is not
related to the coupon rate on the purchased security. Such
agreements permit a Portfolio to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. Each Portfolio maintains procedures for
evaluating and monitoring the creditworthiness of vendors of
repurchase agreements. In addition, each Portfolio requires
continual maintenance of collateral held by the Fund's custodian
in an amount equal to, or in excess of, the market value of the
securities which are the subject of the agreement. In the event
that a vendor defaulted on its repurchase obligation, a Portfolio
might suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. In the
event of a vendor's bankruptcy, a Portfolio might be delayed in,
or prevented from, selling the collateral for its benefit.
Repurchase agreements may be entered into with member banks of
the Federal Reserve System including the Fund's custodian or
"primary dealers" (as designated by the Federal Reserve Bank of
New York) in U.S. Government securities. It is the Fund's current
practice to enter into repurchase agreements only with such
primary dealers.
Illiquid Securities. Subject to any applicable
fundamental investment policy, a Portfolio will not maintain more
than 15% of its net assets in illiquid securities. These
securities include, among others, securities for which there is
no readily available market, options purchased by a Portfolio
over-the-counter, the cover for such options and repurchase
agreements not terminable within seven days. Because of the
absence of a trading market for these investments, a Portfolio
may not be able to realize their value upon sale.
Future Developments. A Portfolio may, following written
notice to its shareholders, take advantage of other investment
practices which are not at present contemplated for use by the
Portfolio or which currently are not available but which may be
developed, to the extent such investment practices are both
consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Such investment practices, if
they arise, may involve risks which exceed those involved in the
activities described above.
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
62
<PAGE>
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 "Financial Highlights" in the Prospectus
for the portfolio turnover rates of each Portfolio.
Special Risk Considerations. Securities rated Baa are
considered by Moody's or BB by S&P, Duff & Phelps or Fitch to
have speculative characteristics. Sustained periods of
deteriorating economic conditions or rising interest rates are
more likely to lead to a weakening in the issuer's capacity to
pay interest and repay principal than in the case of higher-rated
securities. Securities rated below investment grade, i.e., Ba or
BB and lower, ("lower-rated securities") are subject to greater
risk of loss of principal and interest than higher-rated
securities and are considered to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay
principal, which may in any case decline during sustained periods
of deteriorating economic conditions or rising interest rates.
They are also generally considered to be subject to greater
market risk than higher-rated securities in times of
deteriorating economic conditions. In addition, lower-rated
securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment
grade securities.
The market for lower-rated securities may be thinner and
less active than that for higher-quality securities, which can
adversely affect the prices at which these securities can be
sold. To the extent that there is no established secondary
market for lower-rated securities, the Portfolio may experience
difficulty in valuing such securities and, in turn, the
Portfolio's assets. In addition, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities.
The ratings of fixed-income securities by Moody's, S&P,
Duff & Phelps and Fitch are a generally accepted barometer of
credit risk. They are, however, subject to certain limitations
from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between
the time a rating is assigned and the time it is updated. In
63
<PAGE>
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.
Investment Restrictions
Unless specified to the contrary, the following
restrictions are fundamental policies which may not be changed
with respect to any Portfolio without the affirmative vote of the
holders of a majority of such Portfolio's outstanding voting
securities, which means with respect to any such Portfolio
(1) 67% or more or the shares represented at a meeting at which
more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the outstanding shares,
whichever is less. Each such Portfolio may not:
64
<PAGE>
(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 Investment Company Act of 1940, as
amended (the "1940 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 of 5% of the
value of the Fund's total assets will be
repaid before any subsequent investments are
made;
65
<PAGE>
(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 (the
"Securities Act");
(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.
Whenever any of the investment restrictions listed above
states a minimum or maximum percentage of a Portfolio's assets
which may be invested in any security or other asset, it is
intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of a Portfolio's
acquisition of such security or other asset. Accordingly, any
later increase or decrease in percentage beyond the specified
limitations resulting from a change in values or net assets will
not be considered a violation. Under the 1940 Act, a Portfolio
is not permitted to borrow unless immediately after such
borrowing there is "asset coverage," as that term is defined and
used in the 1940 Act of at least 300% for all borrowings of the
Portfolio. In addition, under the 1940 Act, in the event asset
coverage falls below 300%, a Portfolio must within three days
reduce the amount of its borrowing to such an extent that the
asset coverage of its borrowings is at least 300%.
66
<PAGE>
_________________________________________________________________
MANAGEMENT OF THE FUND
_________________________________________________________________
Adviser
Alliance Capital Management L.P., (the "Adviser") a
Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been
retained under an investment advisory agreement (the "Advisory
Agreement") to provide investment advice and, in general, to
conduct the management and investment program of the Fund under
the supervision of the Fund's Trustees (see "Management of the
Fund" in the Prospectus).
The Adviser is a leading international investment
manager supervising client accounts with assets as of
December 31, 1998, totaling more than $____ billion (of which
more than $____ 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. The 54
registered investment companies managed by the Adviser,
comprising ____ separate investment portfolios, currently have
more than 3.5 million shareholders. As of December 31, 1998, the
Adviser and its subsidiaries employed approximately 2,000
employees who operate out of domestic offices and the offices of
subsidiaries in Bahrain, Bangalore, Cairo, Chennai, Hong Kong,
Istanbul, Johannesburg, London, Luxembourg, Madrid, Moscow,
Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul, Singapore,
Sydney, Tokyo, Toronto, Vienna and Warsaw. As of December 31,
1998, the Adviser was retained as an investment manager for
employee benefit plan assets of ___ of the FORTUNE 100 companies.
Alliance Capital Management Corporation ("ACMC"), 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"). ECI is a holding
company controlled by AXA-UAP ("AXA") a French insurance holding
company which at March 1, 1998, beneficially owned approximately
59% of the outstanding voting shares of ECI. As of June 30,
1998, ACMC, Inc. and Equitable Capital Management Corporation,
each a wholly-owned direct or indirect subsidiary of Equitable,
together with Equitable, owned in the aggregate approximately 57%
of the issued and outstanding units representing assignments of
beneficial ownership of limited partnership interests in the
Adviser.
67
<PAGE>
AXA is a holding company for an international group of
insurance and related financial services companies. AXA's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities
principally in Western Europe, North America and the Asia/Pacific
area. AXA is also engaged in asset management, investment
banking, securities trading, brokerage, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of March 31,
1998, more than 30% of the voting power of AXA was controlled
directly and indirectly by FINAXA, a French holding company. As
of March 31, 1998 approximately 74% of the voting power of FINAXA
was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA
Assurances I.A.R.D. Mutuelle, itself controlled directly and
indirectly more than 42% of the voting power of FINAXA. Acting
as a group, the Mutuelles AXA control AXA and FINAXA.
Under the Advisory Agreement, the Adviser furnishes
advice and recommendations with respect to the portfolios of
securities and investments and provides persons satisfactory to
the Trustees to act as officers and employees of the Fund. Such
officers and employees, as well as certain trustees of the Fund,
may be employees of the Adviser or its affiliates.
The Adviser is, under the Advisory Agreement,
responsible for certain expenses incurred by the Fund including,
for example, office facilities and certain administrative
services, and any expenses incurred in promoting the sale of Fund
shares (other than the portion of the promotional expenses borne
by the Fund in accordance with an effective plan pursuant to Rule
12b-1 under the 1940 Act, and the costs of printing Fund
prospectuses and other reports to shareholders and fees related
to registration with the Commission and with state regulatory
authorities).
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of services other than those specifically provided to
the Fund by the Adviser, the Fund may employ its own personnel.
For such services, it also may utilize personnel employed by the
Adviser or by affiliates of the Adviser. In such event, the
services will be provided to the Fund at cost and the payments
specifically approved by the Fund's Trustees. The Fund paid to
the Adviser a total of $-0-, $-0-, $-0-, $-0-, $-0-, $-0-, $-0-,
$-0- and $-0- in respect of such services during the fiscal year
of the Fund ended in 1998 for the Arizona, Florida,
68
<PAGE>
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios, respectively.
For the fiscal year ended September 30, 1996 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, $69,715, $0,
$0, $0, $132,135, $9,284, $154,349 and $0, respectively.
For the fiscal year ended September 30, 1997 advisory
fees payable to the Advisor with respect to the Arizona, Florida
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios amounted to $-0-, $63,642,
$-0-, $-0-, $-0-, 140,698, $-0-, $178,565 and $-0-, respectively.
For the fiscal year ended September 30, 1998 advisory
fees payable to the Adviser with respect to the Arizona, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios amounted to $3,561, $13,406,
$-0-, $-0-, $-0-, $185,731, $71,960, $280,947 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
1940 Act of any such party, at a meeting called for that purpose
and 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 1940 Act. Most recently, the
Trustees approved the continuance of the Advisory Agreement with
respect to each Portfolio until September 30, 1999 at their
meeting held on July 16, 1998.
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
69
<PAGE>
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 Alliance Institutional Reserves,
Inc., AFD Exchange Reserves, The Alliance Fund, Inc., Alliance
All-Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Global Dollar Government Fund, Inc., Alliance Global Environment
Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global
Strategic Income Trust, Inc., Alliance Government Reserves,
Alliance Greater China '97 Fund Inc., Alliance High Yield Fund,
Inc., Alliance Growth and Income Fund, Inc., Alliance
Institutional Funds, Inc. Alliance International Fund, Alliance
Money Market Fund, Alliance Mortgage Securities Income Fund,
Inc., Alliance Limited Maturity Government Fund, Inc., Alliance
Multi-Market Strategy Trust, Inc., Alliance Municipal Income
Fund, Inc., Alliance Municipal Income Fund II, Alliance Municipal
Trust, Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Real Estate Investment
Fund, Inc., Alliance/Regent Sector Opportunity Fund, Inc.,
Alliance Select Investor Series, 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, 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, Alliance World Dollar Government Fund, Inc.,
Alliance World Dollar Government Fund II, Inc., The Austria Fund,
70
<PAGE>
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 officers of the Fund, their ages and
their principal 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 the following persons is 1345 Avenue of the
Americas, New York, New York 10105.
Trustees
JOHN D. CARIFA,1 53, is the President, Chief Operating
Officer and a Director of ACMC, with which he has been associated
since prior to 1993.
RUTH BLOCK, 67, was formerly Executive Vice President
and Chief Insurance Officer of The Equitable Life Assurance
Society of the United States. She is a Director of Ecolab
Incorporated (specialty chemicals) and Amoco Corporation (oil and
gas). Her address is 75 Briar Woods Trail, Stamford,
Connecticut, 06903.
DAVID H. DIEVLER, 68, is an independent consultant. He
was formerly a Senior Vice President of ACMC, until 1994. His
address is P.O. Box 167, Spring Lake, New Jersey, 07762.
JOHN H. DOBKIN, 56, is President of Historic Hudson
Valley (historic preservation) since prior to 1993. Previously
he was a Director of the National Academy of Design. His address
is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, Jr., 66, is an investment adviser and
independent consultant. He was formerly Senior Manager of Barrett
Associates, Inc., a registered investment adviser, with which he
has been associated since prior to 1993. His address is Room
100, 2 Greenwich Plaza, Greenwich, Connecticut 06831.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation with which he has been associated since
prior to 1993. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
_________________________
1An "interested person" of the Fund as defined in the 1940
Act.
71
<PAGE>
University. His address is 25 Cleveland Lane, Princeton, NJ
08540.
CLIFFORD L. MICHEL, 59, is a member of the law firm of
Cahill Gordon & Reindel with which he has been associated since
prior to 1993. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is 80 Pine Street, New
York, NY 10005.
DONALD J. ROBINSON, 64, was formerly a partner at
Orrick, Herrington & Sutcliff and is currently Senior Counsel to
that law firm. His address is 98 Hellis Peak Road, Weston, VT
05161.
Officers
JOHN D. CARIFA, Chairman and President, (see biography,
above).
SUSAN P. KEENAN, 41, Senior Vice President, is a Senior
Vice President of ACMC with which she has been associated since
prior to 1993.
WAYNE D. LYSKI, 57, Senior Vice President, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1993.
KATHLEEN A. CORBET, 38, Senior Vice President, is an
Executive Vice President of ACMC, with which she has been
associated since July 1993. Previously, she headed Equitable
Capital Management Corporation's fixed income management
department since prior to 1993.
WILLIAM E. OLIVER, 46, Vice President, has been a Vice
President of ACMC since 1993.
DAVID M. DOWDEN, 32, Vice President, is a Vice President
of ACMC, with which he has been associated since 1993.
Previously, he was an analyst in the Municipal Strategy Group at
Merrill Lynch Capital Markets.
TERRANCE T. HULTS, 31, Vice President, is Vice President
of ACMC, with which he has been associated since 1993.
Previously, he was an Associate and trader in the Municipal
Derivative Products Department at Merrill Lynch Capital Markets.
EDMUND P. BERGAN, JR., 48, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributor,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1993.
72
<PAGE>
DOMENICK PUGLIESE, 37, Assistant Secretary, is Vice
President and Assistant General Counsel of AFD, with which he
has been associated since May 1995. Previously, he was Vice
President and Counsel of Concord Financial Holding Corporation
since 1994, and Vice President and Associate General Counsel of
Prudential Securities since prior to 1993.
ANDREW L. GANGOLF, 44, Assistant Secretary, has been a
Vice President and Assistant General Counsel of AFD, with which
he has been associated since December 1994. Prior thereto he was
a Vice President and Assistant Secretary of Delaware Management
Company, Inc. since prior to 1993.
EMILIE D. WRAPP, 42, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1993.
MARK D. GERSTEN, 48, Treasurer and Chief Financial
Officer, is a Vice President of AFD and a Senior Vice President
of AFS with which he has been associated since prior to 1993.
The aggregate compensation paid by the Fund to each of
the Trustees during its fiscal year ended September 30, 1998, the
aggregate compensation paid to each of the Trustees during
calendar year 1997 by all of the funds to which the Adviser
provides investment advisory services (collectively, the
"Alliance Fund Complex") and the total number of registered
investment companies (and separate investment portfolios within
those funds) 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 or director of one or more other
registered investment companies in the Alliance Fund Complex.
73
<PAGE>
Total Number
Total Number of Investment
of Funds in Portfolios
the Alliance within the
Total Fund Complex, Funds,
Compensation Including the the Fund, as
from the Fund, as to Including
Alliance which the to which
Aggregate Fund Complex, Trustee is the Trustee
Compensation Including a Director is a Director
Name of Trustee from the Fund the Fund or Trustee or Trustee
John D. Carifa -0- -0- 53 118
David H. Dievler $3,803 $ 46 83
Ruth Block $3,803 $ 40 81
John H. Dobkin $2,952 $ 43 80
William H. Foulk, Jr. $2,979 $ 48 113
Dr. James M. Hester $3,807 $ 40 73
Clifford L. Michel $3,807 $ 41 93
Donald J. Robinson $3,803 $ 44 117
______________________
As of ___________, 1999, 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 Principal Underwriter to distribute
the Fund's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with the distribution
of its Class A, Class B and Class C shares in accordance with a
plan of distribution which is included in the Agreement and which
has been duly adopted and approved in accordance with Rule 12b-1
adopted by the Commission under the 1940 Act (the "Rule 12b-1
Plan").
In approving the Agreement, the Trustees of the Fund
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
74
<PAGE>
During the fiscal year ended September 30, 1998, the
Arizona, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
Ohio, Pennsylvania and Virginia Portfolios paid distribution
services fees for expenditures under the Agreement, with respect
to Class A shares, in amounts aggregating $52,405, $79,660,
$45,450, $21,097, $15,895 $55,370, $31,955, $87,720 and $18,247,
respectively, which constituted approximately 30% of each
portfolio's average daily net assets attributable to Class A
shares during the period, and the Adviser made payments from its
own resources as described above aggregating $2,599,050. Of the
$3,046,655 paid by the Fund and the Adviser with respect to the
Class A shares under the Agreement, $299,325 was spent on
advertising, $22,214 on the printing and mailing of prospectuses
for persons other than current shareholders, $1,222,453 for
compensation to broker-dealers and other financial intermediaries
(including, $662,521 to the Fund's Principal Underwriters),
$384,478 for compensation to sales personnel, $1,118,185 was
spent on printing of sales literature, travel, entertainment, due
diligence and other promotional expenses, and $______ was spent
on interest on Class A shares financing.
During the Fund's fiscal year ended September 30, 1998,
the Arizona, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, Ohio, Pennsylvania and Virginia Portfolios paid
distribution services fees for expenditures under the Agreement,
with respect to Class B shares, in amounts aggregating $98,403,
$308,958, $125,563, $73,567, $411,830, $419,389, $315,487.
$338,646 and $85,643, respectively, which constituted
approximately 1.00% of each portfolio's average daily net assets
attributable to Class B shares during the period, and the Adviser
made payments from its own resources as described above
aggregating $4,213,488. Of the $6,225,502 paid by the Fund and
the Adviser with respect to the Class B shares under the
Agreement, $342,771 was spent on advertising, $29,986 on the
printing and mailing of prospectuses for persons other than
current shareholders, $4,391,722 for compensation to broker-
dealers and other financial intermediaries (including, $760,844
to the Fund's Principal Underwriters), $210,188 for compensation
to sales personnel, $1,032,131 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $218,704 was spent on interest on
Class B shares financing.
During the Fund's fiscal year ended September 30, 1998,
the Arizona, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, Ohio, Pennsylvania and Virginia Portfolios paid
distribution services fees for expenditures under the Agreement,
with respect to Class C shares, in amounts aggregating $372,644,
$530,264, $518,157, $313,588, $467,822, $496,476, $517,271.
$405,077 and $592,189, respectively, which constituted
approximately 2.72%, 1.30%, 2.54%, 3.33% 3.37%, 1.03% 1.39%,
75
<PAGE>
1.03%, and 3.75%, respectively, of each portfolio's average daily
net assets attributable to Class C shares during the period, and
the Adviser made payments from its own resources as described
above aggregating $1,422,218. Of the $2,587,860 paid by the Fund
and the Adviser with respect to the Class C shares under the
Agreement, $153,693 was spent on advertising, $13,807 on the
printing and mailing of prospectuses for persons other than
current shareholders, $1,713,738 for compensation to broker-
dealers and other financial intermediaries (including, $348,346
to the Fund's Principal Underwriters), $103,246 for compensation
to sales personnel, $471,850 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $131,525 was spent on interest on
Class C shares financing.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Portfolio as accrued.
The distribution services fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge, and at the same time to permit the
Principal Underwriter to compensate broker-dealers in connection
with the sale of such shares. In this regard the purpose and
function of the combined contingent deferred sales charges and
distribution services fees on the Class B and Class C shares are
the same as those of the initial sales charge and distribution
services fee with respect to the Class A shares, in that in each
case the sales charge and distribution services fee provide for
the financing of the distribution of the relevant class of the
Portfolio's shares.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
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, 1997 and thereafter for successive twelve-month
76
<PAGE>
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 1940 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 1940 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, 1999 at their meeting on
July 16, 1998.
Unreimbursed distribution expenses incurred as of the
end of the Fund'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 the Fund were, as of that time, as
follows: Class B - ($$$$)(% as % of Net Assets of Class); Class C
- - ($$$$)(% as % of Net Assets of Class).
The Plan is in compliance with rules of the National
Association of Securities Dealers, Inc. which effectively limit
the annual asset-based sales charges and service fees that a
mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to
that class. The rules also limit the aggregate of all front-end,
deferred and asset-based sales charges imposed with respect to a
class of shares by a mutual fund that also charges a service fee
to 6.25% of cumulative gross sales of shares of that class, plus
interest at the prime rate plus 1% per annum.
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 Fund's 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
services arrangements would be made and that shareholders would
not be adversely affected.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser located at 500 Plaza Drive, Secaucus,
New Jersey 07094, receives a transfer agency fee per account
holder of the Class A shares, Class B shares and Class C shares
of each Portfolio of the Fund, plus reimbursement for out-of-
77
<PAGE>
pocket expenses. The transfer agency fee with respect to the
Class B shares and Class C shares is higher than the transfer
agency fee with respect to the Class A shares reflecting the
additional costs associated with the Class B shares and Class C
shares contingent deferred sales charge. For the fiscal year
ended September 30, 1998, the Fund paid Alliance Fund Services,
Inc. $224,942 for transfer agency services.
_______________________________________________________________
PURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares --How To Buy Shares."
General
Shares of each Portfolio are offered on a continuous
basis at a price equal to their net asset value plus an initial
sales charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares"), or without
any initial sales charge and, as long as the shares are held one
year or more, without any contingent deferred sales charge
("Class C shares"), or, to investors eligible to purchase Advisor
Class shares, without any initial, contingent deferred or asset
based sales charge, in each case as described below. Shares of
each Portfolio that are offered subject to a sales charge are
offered through (i) investment dealers that are members of the
National Association of Securities Dealers, Inc. and have entered
into selected dealer agreements with the Principal Underwriter
("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered
into selected agent agreements with the Principal Underwriter
("selected agents"), and (iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased and
held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers
or other financial intermediaries and approved by the Principal
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by the
categories of investors described in clauses (i) through (iv)
below under "--Sales at Net Asset Value" (other than officers,
directors and present and full-time employees of selected dealers
or agents, or relatives of such person, or any trust, individual
retirement account or retirement plan account for the benefit of
such relative, none of whom is eligible on the basis solely of
such status to purchase and hold Advisor Class shares) or (iv) by
78
<PAGE>
directors and present or retired full-time employees of CB
Richard Ellis, Inc. Generally, a fee-based program must charge
an asset-based or other similar fee and must invest at least
$250,000 in Advisor Class shares of the Fund in order to be
approved by the Principal Underwriter for investment in Advisor
Class shares.
Investors may purchase shares of a Portfolio either
through selected dealers, agents, financial representatives or
directly through the Principal Underwriter. A transaction,
service, administrative or other similar fee may be charged by
your broker-dealer, agent, financial intermediary or other
financial representative with respect to the purchase, sale or
exchange of Class A, Class B or Advisor Class shares made through
such financial representative. Such financial representative may
also impose requirements with respect to the purchase, sale or
exchange of shares that are different from, or in addition to,
those imposed by the Fund, including requirements as to the
minimum initial and subsequent investment amounts. Sales
personnel of selected dealers and agents distributing the Fund's
shares may receive differing compensation for selling Class A,
Class B, Class C or Advisor Class shares.
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of
shares to the public in response to conditions in the securities
markets or for other reasons.
The public offering price of shares of each Portfolio is
their net asset value, plus, in the case of Class A shares, a
sales charge which will vary depending on the purchase
alternative chosen by the investor, as shown in the table below
under "Class A Shares". On each Fund business day on which a
purchase or redemption order is received by the Fund and trading
in the types of securities in which the Portfolio invests might
materially affect the value of Portfolio shares, the per share
net asset value is computed in accordance with the Fund's
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. A Fund business
day is any day on which the Exchange is open for trading.
The respective per share net asset values of the
Class A, Class B, Class C and Advisor Class shares are expected
to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class B and
Class C shares may be lower than the per share net asset values
of the Class A and Advisor Class shares, as a result of the
differential daily expense accruals of the distribution and
79
<PAGE>
transfer agency fees applicable with respect to those classes of
shares. Even under those circumstances, the per share net asset
values of the four classes eventually will tend to converge
immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differential
among the classes.
The Fund will accept unconditional orders for shares of
each Portfolio to be executed at the public offering price equal
to their net asset value next determined (plus applicable Class A
sales charges), as described below. Orders received by the
Principal Underwriter prior to the close of regular trading on
the Exchange on each day the Exchange is open for trading are
priced at the net asset value computed as of the close of regular
trading on the Exchange on that day (plus applicable Class A
sales charges). In the case of orders for purchase of shares
placed through selected dealers, agents or financial
representatives, as applicable, the applicable public offering
price will be the net asset value as so determined, but only if
the selected dealer, agent or financial representatives receives
the order prior to the close of regular trading on the Exchange
and transmits it to the Principal Underwriter prior to 5:00 p.m.
Eastern time. The selected dealer, agent or financial
representative, as applicable, is responsible for transmitting
such orders by 5:00 p.m. Eastern Time (certain selected dealers,
agents or financial representatives may enter into operating
agreements permitting them to transmit purchase information to
the Principal Underwriter after 5:00 p.m. Eastern time and
receive that day's net asset value.) If the selected dealer,
agent or financial representative fails to do so, the investor's
right to that day's closing price must be settled between the
investor and the selected dealer, agent or financial
representative, as applicable. If the selected dealer, agent or
financial representatives, as applicable, receives the order
after the close of regular trading on the Exchange, the price
will be based on the net asset value determined as of the close
of regular trading on the Exchange on the next day it is open for
trading.
Following the initial purchase of Portfolio shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate
portion of the Subscription Application or an "Autobuy"
application obtained by calling the "For Literature" telephone
number shown on the cover of this Statement of Additional
Information. Except with respect to certain omnibus accounts,
telephone purchase order may not exceed $500,000. Payment for
shares purchased by telephone can be made only by Electronic
Funds Transfer from a bank account maintained by the shareholder
at a bank that is a member of the National Automated Clearing
House Association ("NACHA"). If a shareholder's telephone
80
<PAGE>
purchase request is received before 3:00 p.m. Eastern time on a
Fund business day, the order to purchase shares is automatically
placed the following Fund business day, and the applicable public
offering price will be the public offering price determined as of
the close of business on such following business day.
Full and fractional shares are credited to a
subscriber's account in the amount of his or her subscription.
As a convenience to the subscriber, and to avoid unnecessary
expense to a Portfolio, stock certificates representing shares of
a Portfolio are not issued except upon written request to the
Fund by the shareholder or his or her authorized selected dealer
or agent. This facilitates later redemption and relieves the
shareholder of the responsibility for and inconvenience of lost
or stolen certificates. No certificates are issued for
fractional shares, although such shares remain in the
shareholder's account on the books of the Fund.
In addition to the discount or commission amount paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash or other incentives to dealers or agents,
including EQ Financial Consultants, Inc. formerly Equico
Securities, Inc., an affiliate of the Principal Underwriter, in
connection with the sale of shares of a Portfolio. Such
additional amounts may be utilized, in whole of in part, to
provide additional compensation to registered representatives who
sell shares of a Portfolio. On some occasions, such cash or
other incentives will be conditioned upon the sale of a specified
minimum dollar amount of the shares of a Portfolio and/or other
Alliance Mutual Funds, as defined below, during a specific period
of time. On some occasions, such cash or other incentives may
take the form of payment for attendance at seminars, meals,
sporting events or theater performance, or payment for travel,
lodging and entertainment incurred in connection with travel
taken by persons associated with a dealer or agent and their
immediate family members to urban or resort locations within or
outside the United States. Such dealer or agent may elect to
receive cash incentives of equivalent amounts in lieu of such
payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of
each Portfolio, have the same rights and are identical in all
respects, except that (i) Class A shares bear the expense of the
initial sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of
the deferred sales charge, (ii) Class B shares and Class C shares
each bear the expense of a higher distribution services fee than
do Class A shares, and Advisor Class shares do not bear such a
fee, (iii) Class B and Class C shares bear higher transfer agency
costs than that borne by Class A and Advisor Class shares,
81
<PAGE>
(iv) each of Class A, Class B and Class C shares has exclusive
voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid and other
matters for which separate class voting is appropriate under
applicable law, provided that, if each Portfolio submits to a
vote of the Class A shareholders an amendment to the Rule 12b-1
Plan that would materially increase the amount to be paid
thereunder with respect to the Class A shares then such amendment
will also be submitted to the Class B and Advisor Class
shareholders and the Class A shareholders, the Class B
shareholders and the Advisor Class shareholders will vote
separately by class and (v) Class B and Advisor Class shares are
subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service
options available.
The Trustees of the Fund have determined that currently
no conflict of interest exists between or among the Class A,
Class B, Class C and Advisor Class shares. On an ongoing basis,
the Trustees of the Fund, pursuant to their fiduciary duties
under the 1940 Act and state law, will seek to ensure that no
such conflict arises.
Alternative Retail Purchase Arrangements --Class A, Class B
and Class C Shares2
The alternative purchase arrangements available with
respect to Class A shares, Class B shares and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length
of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Portfolio, the
accumulated distribution services fee and contingent deferred
sales charge on Class B shares prior to conversion, or the
accumulated distribution services fee and contingent deferred
sales charge on Class C shares would be less than the initial
sales charge and accumulated distribution services fee on Class A
shares purchased at the same time and to what extent such
differential would be offset by the higher return of Class A
shares. Class A shares will normally be more beneficial than
Class B shares to the investor who qualifies for reduced initial
sales charges on Class A shares, as described below. In this
regard, the Principal Underwriter will reject any order (except
orders from certain retirement plans) for more than $250,000 for
Class B shares. Class C shares will normally not be suitable for
_________________________
2Advisor Class shares are sold only to investors described
above in this section under "--General."
82
<PAGE>
the investor who qualifies to purchase Class A shares at net
asset value. For this reason, the Principal Underwriter will
reject any order for more than $1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the time
of purchase, investors purchasing Class A shares would not have
all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for
an extended period of time might consider purchasing Class A
shares because the accumulated continuing distribution charges on
Class B shares or Class C shares may exceed the initial sales
charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration
against the fact that, because of such initial sales charges, not
all their funds will be invested initially.
Other investors might determine, however, that it would
be more advantageous to purchase Class B shares or Class C shares
in order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and
being subject to a contingent deferred sales charge for a three-
year and one-year period, respectively. For example, based on
current fees and expenses, an investor subject to the 4.25%
initial sales charge or Class A shares would have to hold his or
her investment approximately seven years for the Class C
distribution services fee to exceed the initial sales charge plus
the accumulated distribution services fee of Class A shares. In
this example, an investor intending to maintain his or her
investment for a longer period might consider purchasing Class A
shares. This example does not take into account the time value of
money, which further reduces the impact of the Class C
distribution services fees on the investment, fluctuations in net
asset value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Portfolio shares
for the three-year period during which Class B shares are subject
to a contingent deferred sales charge may find it more
advantageous to purchase Class C shares.
During the Fund's fiscal year ended September 30, 1998,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $921,302; the
Minnesota Portfolio were $161,228; the New Jersey Portfolio were
$302,725; the Ohio Portfolio were $307,343; the Pennsylvania
Portfolio were $481,173; the Michigan Portfolio were $150,208;
the Massachusetts Portfolio were $465,051; the Virginia Portfolio
83
<PAGE>
were $338,750; and the Arizona Portfolio were $431,719; of that
amount, the Principal Underwriter, received the amount of $36,819
for the Florida Portfolio; $5,086 for the Minnesota Portfolio;
$12,544 for the New Jersey Portfolio; $5,272 for the Ohio
Portfolio; $24,654 for the Pennsylvania Portfolio; $6,064 for the
Michigan Portfolio; $18,390 for the Massachusetts Portfolio;
$12,522 for the Virginia Portfolio and $16,215 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, 1998, the Principal Underwriter received in
contingent deferred sales charges with respect to Class B
redemptions $22,273 for the Florida Portfolio; $17,153 for the
Minnesota Portfolio; $28,616 for the New Jersey Portfolio;
$19,687 for the Ohio Portfolio, $13,516 for the Pennsylvania
Portfolio, $7,111 for the Michigan Portfolio, $11,227 for the
Massachusetts Portfolio, $3,440 for the Virginia Portfolio and
$11,605 for the Arizona Portfolio.
During the Fund's fiscal year ended September 30, 1997,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $179,295; the
Minnesota Portfolio were $76,848; the New Jersey Portfolio were
$200,989; the Ohio Portfolio were $136,379; and the Pennsylvania
Portfolio were $166,634; $103,555 for the Michigan Portfolio;
$152,917 for the Massachusetts Portfolio; $66,692 for the
Virginia Portfolio; and $197,939 for the Arizona Portfolio. Of
that amount, the Principal Underwriter, received the amount of
$6,676 for the Florida Portfolio; $2,259 for the Minnesota
Portfolio; $6,728 for the New Jersey Portfolio; $-0- for the Ohio
Portfolio; $6,672 for the Pennsylvania Portfolio; $3,231 for the
Michigan Portfolio; $6,544 for the Massachusetts Portfolio;
$2,344 for the Virginia Portfolio; and $8,550 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, 1997, the Principal Underwriter received in
contingent deferred sales charges with respect to Class B
redemptions $24,195 for the Florida Portfolio; $10,660 for the
Minnesota Portfolio; $51,440 for the New Jersey Portfolio;
$23,986 for the Ohio Portfolio, $19,985 for the Pennsylvania
Portfolio, $4,700 for the Michigan Portfolio, $5,545 for the
Massachusetts Portfolio, $6,835 for the Virginia Portfolio and
$26,432 for the Arizona Portfolio. During the fiscal year ended
September 30, 1997, the Principal Underwriter received in
contingent deferred sales charges with respect to Class C
redemptions $1,137 for the Florida Portfolio; $1,172 for the
Minnesota Portfolio; $2,401 for the New Jersey Portfolio; $2,176
for the Ohio Portfolio; $1,087 for the Pennsylvania Portfolio;
84
<PAGE>
$2,053 for the Michigan Portfolio; $2,193 for the Massachusetts
Portfolio; $187 for the Virginia Portfolio and $1,329 for the
Arizona Portfolio.
During the Fund's fiscal year ended September 30, 1996,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $23,267; the
Minnesota Portfolio were $43,060; the New Jersey Portfolio were
$46,008; the Ohio Portfolio were $105,920; the Pennsylvania
Portfolio were $183,685; the Michigan Portfolio were $8,128; the
Massachusetts Portfolio were $75,492; the Virginia Portfolio were
$47,115; and the Arizona Portfolio were $124,091; of that amount,
the Principal Underwriter, received the amount of $3,352 for the
Florida Portfolio; $1,328 for the Minnesota Portfolio; $8,654 for
the New Jersey Portfolio; $3,682 for the Ohio Portfolio; $6,546
for the Pennsylvania Portfolio; $2,409 for the Michigan
Portfolio; $3,001 for the Massachusetts Portfolio; $1,756 for the
Virginia Portfolio and $5,423 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, 1996, the Principal Underwriter received in
contingent deferred sales charges with respect to Class B
redemptions $38,548 for the Florida Portfolio; $14,547 for the
Minnesota Portfolio; $61,041 for the New Jersey Portfolio;
$31,911 for the Ohio Portfolio, $35,245 for the Pennsylvania
Portfolio, $3,076 for the Michigan Portfolio, $4,230 for the
Massachusetts Portfolio, $6,613 for the Virginia Portfolio and
$3,142 for the Arizona Portfolio. During the fiscal year ended
September 30, 1996, the Principal Underwriter received in
contingent deferred sales charges with respect to Class C
redemptions $17 for the Florida Portfolio; $89 for the Minnesota
Portfolio; $1,555 for the New Jersey Portfolio; $528 for the Ohio
Portfolio; $651 for the Pennsylvania Portfolio; $61 for the
Michigan Portfolio; $21 for the Massachusetts Portfolio; $0 for
the Virginia Portfolio and $0 for the Arizona Portfolio.
Class A Shares
The public offering price of Class A shares is the net
asset value plus a sales charge, as set forth below.
85
<PAGE>
Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000. . . 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000. . . 3.36 3.25 3.00
$250,000 but
less than
$500,000. . . 2.30 2.25 2.00
$500,000 but
less than
$1,000,000.* . 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemption, as described below under "--Class B
Shares." In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends and
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
of compensation to selected dealers and agents for selling
86
<PAGE>
Class A Shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "Class B
Shares--Conversion Feature" and "--Conversion of Advisor Class
Shares to Class A Shares." Each Portfolio receives the entire
net asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may, however, elect to reallow the entire sales
charge to selected dealers and agents for all sales with respect
to which orders are placed with the Principal Underwriter. A
selected dealer who receives reallowance in excess of 90% of such
a sales charge may be deemed to be an "underwriter" under the
Securities Act.
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, 1998.
87
<PAGE>
Arizona Portfolio
Net Asset Value per Share at
September 30, 1998 $11.03
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .49
Per Share Offering Price to
the Public $11.52
Florida Portfolio
Net Asset Value per Share at
September 30, 1998 $10.48
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 $10.95
Massachusetts Portfolio
Net Asset Value per Share
at September 30, 1998 $11.39
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .51
Per Share Offering Price to
the Public $11.90
Michigan Portfolio
Net Asset Value per Share
at September 30, 1998 $10.62
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .47
Per Share Offering Price to
the Public $11.09
88
<PAGE>
Minnesota Portfolio
Net Asset Value per Share at
September 30, 1998 $ 10.22
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 $10.67
New Jersey Portfolio
Net Asset Value per Share at
September 30, 1998 $10.46
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 $10.92
Ohio Portfolio
Net Asset Value per Share at
September 30, 1998 $10.45
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 $10.91
Pennsylvania Portfolio
Net Asset Value per Share at
September 30, 1998 $10.66
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .47
Per Share Offering Price to
the Public $11.13
89
<PAGE>
Virginia Portfolio
Net Asset Value per Share
at September 30, 1998 $11.02
Per Share Sales Charge - 4.25%
of offering price (4.44% of
net asset value per share) $ .49
Per Share Offering Price to
the Public $11.51
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but subject in most such cases to a contingent
deferred sales charge, or (ii) a reduced initial sales charge.
The circumstances under which investors may pay a reduced initial
sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of a
Portfolio into a single "purchase," if the resulting "purchase"
totals at least $100,000. The term "purchase" refers to: (i) a
single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed
amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares of a Portfolio for
his, her or their own account(s); (ii) a single purchase by a
trustee or other fiduciary purchasing shares for a single trust,
estate or single fiduciary account although more than one
beneficiary is involved; or (iii) a single purchase for the
employee benefit plans of a single employer. The term "purchase"
also includes purchases by any "company," as the term is defined
in the 1940 Act, but does not include purchases by any such
company which has not been in existence for at least six months
or which has no purpose other than the purchase of shares of a
Portfolio or shares of other registered investment companies at a
discount. The term "purchase" does not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit card holders of a company, policy
holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase"
may also include shares, purchased at the same time through a
single selected dealer or agent, of any other "Alliance Mutual
Fund." Currently, the Alliance Mutual Funds include:
AFD Exchange Reserves
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
90
<PAGE>
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Fund
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
91
<PAGE>
Cumulative Quantity Discount (Right of Accumulation). An
investor's purchase of additional Class A shares of a Portfolio
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all shares of a Portfolio
held by the investor and (b) all shares of any
other Alliance Mutual Fund held by the investor;
and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with that
of the investor into a single "purchase" (see
above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Portfolio worth
an additional $100,000, the sales charge for the $100,000
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Fund, rather than the 3.25%
rate.
To qualify for the Combined Purchase Privilege or to
obtain the Cumulative Quantity Discount on a purchase through a
selected dealer or agent, the investor or selected dealer or
agent must provide the Principal Underwriter with sufficient
information to verify that each purchase qualifies for the
privilege or discount.
Statement of Intention. Class A investors may also
obtain the reduced sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B,
Class C and/or Advisor Class shares) of a Portfolio or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction
of the dollar amount indicated in the Statement of Intention. At
the investor's option, a Statement of Intention may include
purchases of shares of a Portfolio or any other Alliance Mutual
Fund made not more than 90 days prior to the date that the
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.
92
<PAGE>
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at
least $100,000 in Class A shares of a Portfolio, the investor and
the investor's spouse each purchase shares of a Portfolio worth
$20,000 (for a total of $40,000), it will be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% sales charge on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Portfolio shares, are not subject to
escrow. When the full amount indicated has been purchased, the
escrow will be released. To the extent that an investor
purchases more than the dollar amount indicated on the Statement
of Intention and qualifies for a further reduced sales charge,
the sales charge will be adjusted for the entire amount purchased
at the end of the 13-month period. The difference in the sales
charge will be used to purchase additional shares of the Fund
subject to the rate of the sales charge applicable to the actual
amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
a Portfolio should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the
Portfolios or any other Alliance Mutual Fund at a reduced sales
charge on a monthly basis during the 13-month period following
such a plan's initial purchase. The sales charge applicable to
such initial purchase of shares of the Portfolios will be that
normally applicable, under the schedule of sales charges set
forth in this Statement of Additional Information, to an
investment 13 times larger than such initial purchase. The sales
93
<PAGE>
charge applicable to each succeeding monthly purchase will be
that normally applicable, under such schedule, to an investment
equal to the sum of (i) the total purchase previously made during
the 13-month period and (ii) the current month's purchase
multiplied by the number of months (including the current month)
remaining in the 13-month period. Sales charges previously paid
during such period will not be retroactively adjusted on the
basis of later purchases.
Reinstatement Privilege. A shareholder who has caused
any or all of his or her Class A or Class B shares of a Portfolio
to be redeemed or repurchased may reinvest all or any portion of
the redemption or repurchase proceeds in Class A shares of the
Portfolio at net asset value without any sales charge, provided
that (i) such reinvestment is made within 120 calendar days after
the redemption or repurchase date and (ii) for Class B shares, a
contingent deferred sales charge has been paid and the Principal
Underwriter has approved, at its discretion, the reinvestment of
such shares. Shares are sold to a reinvesting shareholder at the
net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for federal income tax purposes
except that no loss will be recognized to the extent that the
proceeds are reinvested in shares of a Portfolio within 30
calendar days after the redemption or repurchase transaction.
The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or
repurchased, except that the privilege may be used more than once
in connection with transactions whose sole purpose is to transfer
a shareholder's interest in a Portfolio to his or her individual
retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written
request sent to the Fund at the address shown on the cover of
this Statement of Additional Information.
Sales at Net Asset Value. Each Portfolio may sell its
Class A shares at net asset value (i.e., without an initial sales
charge) and without a contingent deferred sales charge to certain
categories of investors including: (i) investment management
clients of the Adviser or its affiliates; (ii) officers and
present or former Directors or Trustees of the Fund; present or
former directors and trustees of other investment companies
managed by the Adviser; present or retired full-time employees of
the Adviser, the Principal Underwriter, Alliance Fund Services,
Inc. and their affiliates; officers and directors of ACMC, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; officers, directors and present and full-time
employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives")
of any such person; or any trust, individual retirement account
94
<PAGE>
or retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not
be resold except to the Fund); (iii) the Adviser, Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
certain employee benefit plans for employees of the Adviser, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their service and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a fee
based program, sponsored and maintained by a registered broker-
dealer and approved by the Principal Underwriter, pursuant to
which persons pay an asset-based fee to such or its affiliate or
agent, for services in the nature of investment advisory or
administrative services; and (vi) persons who establish to the
Principal Underwriter's satisfaction that they are investing,
within such time period as may be designated by the Principal
Underwriter, proceeds of redemption of share of such other
registered investment companies as may be designated from time to
time by the Principal Underwriter and (vii) employer-sponsored
qualified pension or profit-sharing plans (including Section
401(k) plans), custodial accounts maintained pursuant to Section
403(b)(7) retirement plans and individual retirement accounts
(including individual retirement accounts to which simplified
employee pension (SEP) contributions are made), if such plans or
accounts are established or administered under programs sponsored
by administrators or other persons that have been approved by the
Principal Underwriter.
Class B Shares
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
Class B shares are paid to the Principal Underwriter and are used
by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to a Portfolio in connection with the sale of the
Class B shares, such as the payment of compensation to selected
dealers and agents for selling Class B shares. The combination
of the contingent deferred sales charge and the distribution
95
<PAGE>
services fee enables a Portfolio to sell the Class B shares
without a sales charge being deducted at the time of purchase.
The higher distribution services fee incurred by Class B shares
will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which
are redeemed within three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 Class B shares (proceeds
of $600), 10 Class B shares will not be subject to the charge
because of dividend reinvestment. With respect to the remaining
40 Class B shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 2.0% (the applicable rate in the
second year after purchase as set forth below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred
Sales Charge as a %
of Dollar Amount
Year Since Purchase Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions and, second,
of shares held longest during the time they are subject to the
96
<PAGE>
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charges is waived on
redemptions of shares (i) following the death or disability, as
defined in the Internal Revenue Code of 1986, as amended (the
"Code"), of a shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who
has attained the age of 70-1/2, (iii) that had been purchased by
present or former Directors or Trustees of the Fund, by the
relative of any such person, by any trust, individual retirement
account or retirement plan account for the benefit of any such
person or relative, or by the estate of any such person or
relative, or (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services--Systematic Withdrawal Plan" below).
Conversion Feature. Six years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee
97
<PAGE>
for an indefinite period which may extend beyond the period
ending six years after the end of the calendar month in which the
shareholder's purchase order was accepted.
Class C Shares
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of
a sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that each
Portfolio will receive the full amount of the investor's purchase
payment and, as long as the shares are held for one year or more,
without a contingent deferred sales charge so that the investor
will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution
services fee enables each Portfolio to sell Class C shares
without either an initial or contingent deferred sales charge, as
long as the shares are held for one year or more. Class C shares
do not convert to any other class of shares of the Portfolio and
incur higher distribution services fees and transfer agency costs
than Class A shares and Advisor Class shares, and will thus have
a higher expense ratio and pay correspondingly lower dividends
than Class A shares and Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
98
<PAGE>
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts and employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary that satisfies the
requirements to purchase shares set forth under "Purchase of
Shares--General" or (ii) the holder is otherwise no longer
eligible to purchase Advisor Class shares as described in the
Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically and
without notice to the shareholder, other than the notice
contained in the Advisor Class Prospectus and this Statement of
Additional Information, to Class A shares of the Fund during the
calendar month following the month in which the Fund is informed
of the occurrence of the Conversion Event. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on the
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee
and have a higher expense ratio than Advisor Class shares. As a
result, Class A shares may pay correspondingly lower dividends
and have a lower net asset value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
99
<PAGE>
redeem his Advisor Class shares, which would constitute a taxable
event under federal income tax law.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Share--How to Sell Shares". If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
Redemption
Subject only to the limitations described below, the
Fund's Agreement and Declaration of Trust require that the Fund
redeem the shares of each Portfolio tendered to it, as described
below, at a redemption price equal to their net asset value as
next computed following the receipt of shares tendered for
redemption in proper form. Except for any contingent deferred
sales charge which may be applicable to Class A shares, Class B
shares or Class C shares, there is no redemption charge. Payment
of the redemption price will be made within seven days after the
Fund's receipt of such tender for redemption. If a shareholder
is in doubt about what documents are required by his or her fee-
based program or employee benefit plan, the shareholder should
contact his or her financial representative.
The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during
which an emergency (as determined by the Commission) exists as a
result of which disposal by the Fund of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the
Fund.
Payment of the redemption price will be made in cash.
The value of a shareholder's shares on redemption or repurchase
100
<PAGE>
may be more or less than the cost of such shares to the
shareholder, depending upon the market value of the Fund's
portfolio securities at the time of such redemption or
repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment (either in cash or in portfolio
securities) received by a shareholder upon redemption or
repurchase of his shares, assuming the shares constitute capital
assets in his hands, will result in long-term or short-term
capital gains (or loss) depending upon the shareholder's holding
period and basis in respect of the shares redeemed.
To redeem shares of a Portfolio for which no share
certificates have been issued, the registered owner or owners
should forward a letter to the Fund containing a request for
redemption. The signature or signatures on the letter must be
guaranteed by an "eligible guarantor institution" as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
To redeem shares of the Fund represented by share
certificates, the investor should forward the appropriate share
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
share certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
Prior to March 1, 1998 this service can be employed only once in
any 30 day period (except for certain Omnibus accounts). A
telephone redemption request by electronic funds transfer may not
exceed $100,000 (except for certain omnibus accounts), and must
be made by 4:00 p.m. Eastern time on a Fund business day as
defined above. Proceeds of telephone redemptions will be sent by
Electronic Funds Transfer to a shareholder's designated bank
account at a bank selected by the shareholder that is a member of
the NACHA.
101
<PAGE>
Telephone Redemption By Check. Each Fund shareholder is
eligible to request redemption by check of Portfolio shares for
which no stock certificates have been issued by telephone at
(800) 221-5672 before 4:00 p.m. Eastern time on a Fund business
day in an amount not exceeding $50,000 per day. Prior to
March 1, 1998 this service can be employed only once in any 30
day period (except for certain Omnibus accounts). Proceeds of
such redemptions are remitted by check to the shareholder's
address of record. A shareholder otherwise eligible for
telephone redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
Telephone Redemptions-General. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
redemption service at any time without notice. Telephone
redemption is not available with respect to shares (i) for which
certificates have been issued, (ii) held in nominee or "street
name" accounts, (iii) held by a shareholder who has changed his
or her address of record within the preceding 30 calendar days or
(iv) held in any retirement plan account. Neither the Fund nor
the Adviser, the Principal Underwriter or Alliance Fund Services,
Inc. will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for redemptions are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers or agents may charge a commission for handling telephone
requests for redemptions.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
102
<PAGE>
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value.) If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of a Portfolio to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of a Portfolio are offered through a financial
intermediary or selected dealer or agent, the repurchase is
settled by the shareholder as an ordinary transaction with or
through the selected dealer or agent, who may charge the
shareholder for this service. The repurchase of shares of a
Portfolio as described above is a voluntary service of the Fund
and the Fund may suspend or terminate this practice at any time.
General
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of a Portfolio recently purchased by check, redemption proceeds
will not be made available until the Fund is reasonably assured
that the check has cleared, normally up to 15 calendar days
following the purchase date.
_______________________________________________________________
SHAREHOLDER SERVICES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set
forth below are applicable to Class A, Class B, Class C and
103
<PAGE>
Advisor Class shares unless otherwise indicated. If you are an
Advisor Class shareholder through an account established under a
fee-based program your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Automatic Investment Program
Investors may purchase shares of a Portfolio through an
automatic investment program utilizing electronic fund transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
Exchange Privilege
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may on a tax-free basis,
exchange Class A shares of the Fund for Advisor Class shares of
the Fund. Exchanges of shares are made at the net asset value
next determined and without sales or service charges. Exchanges
may be made by telephone or written request. Telephone exchange
requests must be received by Alliance Fund Services, Inc. by
4:00 p.m. Eastern time on a Fund business day in order to receive
that day's net asset value.
Shares will continue to age without regard to exchanges
for purpose of determining the contingent deferred sales charge,
if any, upon redemption and, in the case of Class B shares, for
the purpose of conversion to Class A shares. After an exchange,
your Class B shares will automatically convert to Class A shares
104
<PAGE>
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 contingent deferred sales charge applicable to the original
shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request. Call
Alliance Fund Services, Inc. at 800-221-5672 to exchange
uncertificated shares. Except with respect to exchanges of
Class A shares of the Fund for Advisor Class shares of the Fund,
exchanges of shares as described above in this section are
taxable transactions for federal tax purposes. The exchange
service may be changed, suspended, or terminated on 60 days'
written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check or
electronic funds transfer will be permitted only after the
Alliance Mutual Fund whose shares have been tendered for exchange
is reasonably assured that the check or electronic funds transfer
has cleared, normally up to 15 calendar days following the
purchase date. Exchanges of shares of Alliance Mutual Funds will
generally result in the realization of a capital gain or loss for
federal income tax purpose.
Each Portfolio shareholder, and the shareholder's
selected dealer, agent or financial representative, as
applicable, are authorized to make telephone requests for
exchanges unless Alliance Fund Services, Inc., receives written
instruction to the contrary from the shareholder, or the
shareholder declines the privilege by checking the appropriate
box on the Subscription Application found in the Prospectus. Such
telephone requests cannot be accepted with respect to shares then
represented by stock certificates. Shares acquired pursuant to a
telephone request for exchange will be held under the same
account registration as the shares redeemed through such
exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
105
<PAGE>
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. During periods of drastic
economic or market developments, such as the market break of
October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the following
Fund business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
Dividend Direction Plan
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Portfolio
account, a Class A, Class B, Class C or Advisor Class account
with one or more other Alliance Mutual Funds may direct that
income dividends and/or capital gains paid on his or her Class A,
Class B, Class C or Advisor Class Portfolio shares be
automatically reinvested, in any amount, without the payment of
106
<PAGE>
any sales or service charges, in shares of the same class of such
other Alliance Mutual Fund(s). Further information can be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information. Investors
wishing to establish a dividend direction plan in connection with
their initial investment should complete the appropriate section
of the Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of a Portfolio having a current net asset value of at least
$4,000 (for quarterly or less frequent payments), $5,000 (for bi-
monthly payments) or $10,000 (for monthly payments) may establish
a systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from a Portfolio automatically reinvested in additional shares of
such Portfolio.
Shares of a Portfolio owned by a participant in the
Fund's systematic withdrawal plan will be redeemed as necessary
to meet withdrawal payments and such payments will be subject to
any taxes applicable to redemptions and, except as discussed
below, any applicable contingent deferred sales charge. Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a shareholder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
107
<PAGE>
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 "For Literature" telephone number shown on the
cover of this Statement of Additional Information.
CDSC Waiver for Class B and Class C Shares. Under a
systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3%
quarterly of the value at the time of redemption of the Class B
or Class C shares in a shareholders account may be redeemed free
of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares that are held
the longest will be redeemed next. Redemption of Class B shares
in excess of the foregoing limitations will be subject to any
otherwise applicable contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
Statements and Reports
Each shareholder of a Portfolio receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a monthly cumulative dividend statement and a
confirmation of each purchase and redemption. By contacting his
or her broker or Alliance Fund Services, Inc., a shareholder can
arrange for copies of his or her account statements to be sent to
another person.
108
<PAGE>
Shareholder Services Applicable to
Class A and Class C Shareholders Only
Checkwriting
A new Class A or Class C investor may fill out the
Signature Card which is included in the Prospectus to authorize
the Fund to arrange for a checkwriting service through State
Street Bank and Trust Company (the "Bank") to draw against
Class A or Class C shares of a Portfolio redeemed from the
investor's account. Under this service, checks may be made
payable to any payee in any amount not less than $500 and not
more than 90% of the net asset value of the Class A or Class C
shares in the investor's account (excluding for this purpose the
current month's accumulated dividends and shares for which
certificates have been issued). A Class A or Class C shareholder
wishing to establish this checkwriting service subsequent to the
opening of his or her Portfolio account should contact the Fund
by telephone or mail. Corporations, fiduciaries and institutional
investors are required to furnish a certified resolution or other
evidence of authorization. This checkwriting service will be
subject to the Bank's customary rules and regulations governing
checking accounts, and the Fund and the Bank each reserve the
right to change or suspend the checkwriting service. There is no
charge to the shareholder for the initiation and maintenance of
this service or for the clearance of any checks.
When a check is presented to the Bank for payment, the
Bank, as the shareholder's agent, causes the Fund to redeem, at
the net asset value next determined, a sufficient number of full
and fractional shares of a Portfolio in the shareholder's account
to cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various
factors, to market fluctuations, a shareholder should not attempt
to close his or her account by use of a check. In this regard,
the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks
are returned to the shareholder. The checkwriting service
enables the shareholder to receive the daily dividends declared
on the shares to be redeemed until the day that the check is
presented to the Bank for payment.
_______________________________________________________________
NET ASSET VALUE
_______________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
109
<PAGE>
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Trustees of the Fund deem
necessary in order to comply with Rule 22c-1 under the 1940 Act.
The Fund's per share net asset value is calculated by dividing
the value of the Fund's total assets, less its liabilities, by
the total number of its shares then outstanding. A Fund business
day is any weekday on which the Exchange is open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Trustees.
The Board of Trustees has delegated to the Adviser certain of the
Board's duties with respect to the following procedures. Readily
marketable securities listed on the Exchange are valued, except
as indicated below, at the last sale price reflected on the
consolidated tape at the close of the Exchange on the business
day as of which such value is being determined. If there has
been no sale on such day, the securities are valued at the quoted
bid prices on such day. If no bid prices are quoted on such day,
then the security is valued at the mean of the bid and asked
prices at the close of the Exchange on such day as obtained from
one or more dealers regularly making a market in such security.
Where a bid and asked price can be obtained from only one such
dealer, such security is valued at the mean of the bid and asked
price obtained from such dealer unless it is determined that such
price does not represent current market value, in which case the
security shall be valued in good faith at fair value by, or in
accordance with procedures established by, the Board of Trustees.
Securities for which no bid and asked price quotations are
readily available are valued in good faith at fair value by, or
in accordance with procedures established by, the Board of
Trustees. Readily marketable securities not listed on the
Exchange or on a foreign securities exchange are valued in like
manner. Portfolio securities traded on the Exchange and on one
or more other foreign or other national securities exchanges, and
portfolio securities not traded on the Exchange but traded on one
or more foreign or other national securities exchanges are valued
in accordance with these procedures by reference to the principal
exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
110
<PAGE>
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Trustees.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Trustees determines that this
method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups
of securities and any developments related to specific
securities.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Trustees.
The Board of Trustees may suspend the determination of
the Funds net asset value (and the offering and sales of shares),
subject to the rules of the Commission and other governmental
rules and regulations, at a time when: (1) the Exchange is
closed, other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the Commission by order permits a
suspension of the right of redemption or a postponement of the
date of payment on redemption.
For purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in a
111
<PAGE>
foreign currency will be converted into U.S. Dollars at the mean
of the current bid and asked prices of such currency against the
U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Trustees.
The assets attributable to the Class A shares, Class B
shares, Class C shares and Advisor Class shares will be invested
together in a single portfolio. The net asset value of each
class will be determined separately by subtracting the
liabilities allocated to that class from the assets belonging to
that class in conformance with the provisions of a plan adopted
by the Fund in accordance with Rule 18f-3 under the 1940 Act.
_________________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_________________________________________________________________
General Each Portfolio of the Fund intends for each
taxable year to qualify as a "regulated investment company" under
the Code. Such qualification relieves a Portfolio of federal
income tax liability on the part of its net investment company
taxable income and net realized capital gains which it timely
distributes to its shareholders. Such qualification does not, of
course, involve governmental supervision of management or
investment practices or policies. Investors should consult their
own counsel for a complete understanding of the requirements each
Portfolio must meet to qualify for such treatment.
Until the 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
112
<PAGE>
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
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.
Substantially all of the dividends paid by the Fund are
anticipated to be exempt from Federal income taxes. Shortly
after the close of each calendar year, a notice is sent to each
shareholder advising him of the total dividends paid into his
account for the year and the portion of such total that is exempt
from Federal income taxes. This portion is determined by the
ratio of the tax-exempt income to total income for the entire
year and, thus, is an annual average rather than a day-by-day
determination for each shareholder.
Each Portfolio generally will be required to withhold
tax at the rate of 31% with respect to dividends of net ordinary
113
<PAGE>
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
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
114
<PAGE>
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
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.
115
<PAGE>
State Taxation of the Portfolios
Arizona Portfolio. It is anticipated that substantially
all of the dividends paid by the Arizona Portfolio will be exempt
from Arizona individual, corporate and fiduciary income taxes.
Dividends will be exempt from such taxes to the extent
attributable to interest received from the Portfolio's
investments in Arizona municipal securities or U.S. government
securities. Distributions of capital gains will be subject to
Arizona income taxes. Interest on indebtedness incurred to
purchase or carry securities which yield income which is exempt
from Arizona income tax is not deductible for purposes of Arizona
income tax.
Florida Portfolio. Although Florida does not impose on
individual income tax, it imposes an intangible personal property
tax on Florida resident individuals and trusts at the rate of $2
per $1,000 taxable value of certain securities and other
intangible assets, including mutual fund shares. Florida
municipal securities and U.S. Government securities are exempt
from the intangible tax. Shares of the Florida Portfolio will
qualify as exempt if, among other things, the entire Portfolio is
invested in exempt securities at the close of the calendar year.
It is anticipated that Florida Portfolio shares will qualify and
will be exempt from the intangible tax. Exempt interest-
dividends and gain paid by the Portfolio to corporate
shareholders will be subject to Florida corporate income tax.
Corporate shareholders who are subject to Federal alternative
minimum tax (AMT) may be subject to Florida AMT on portfolio
distributions out of the income of AMT-subject bonds in which the
Florida Portfolio invests.
Massachusetts Portfolio. It is anticipated that
substantially all of the dividends paid by the Massachusetts
Portfolio will be exempt from the Massachusetts personal and
fiduciary income taxes. Dividends will be exempt from such taxes
to the extent attributable to interest derived from Massachusetts
municipal securities or U.S. Government securities.
Distributions designated as attributable to capital gains, other
than gains on certain Massachusetts municipal securities, are
subject to the Massachusetts personal and fiduciary income taxes
at capital gains tax rates. Distributions to corporate
shareholders are subject to the Massachusetts corporate excise
tax.
Michigan Portfolio. It is anticipated that
substantially all of the dividends paid by the Michigan Portfolio
will be exempt from Michigan income, intangible and single
business taxes. Dividends will be exempt from such taxes to the
extent that they are derived from Michigan municipal securities
and U.S. Government securities, provided that at least 50% of the
116
<PAGE>
Portfolio's total assets consist of Michigan municipal securities
at the close of each quarter of the Portfolio's taxable year.
Dividends exempt from Michigan income tax are also exempt from
the uniform city income tax imposed by certain Michigan cities.
Capital gain distributions which are attributable to the sale of
non-Michigan municipal securities are subject to Michigan income
and single business taxes; but are exempt from Michigan
intangible tax to the extent that such distributions reinvested
in Portfolio shares.
Minnesota Portfolio. It is anticipated that
substantially all of the dividends paid by the Minnesota
Portfolio will be exempt from Minnesota personal and fiduciary
income taxes. Portfolio dividends will be exempt from these tax
to the extent that they are derived from Minnesota municipal
securities, provided that at least 95% of the dividends paid by
the Portfolio during its fiscal year are derived from Minnesota
municipal securities. Distributions of capital gains from the
Minnesota Portfolio will be subject to Minnesota and fiduciary
incomes taxes and certain taxpayers may also be subject to the
Minnesota alternative minimum tax ("AMT") on distributions
attributable to the AMT-Subject bonds in which the Portfolio
invests. Interest on indebtedness incurred to purchase or carry
securities which yield income which is exempt from Minnesota
income tax will not be deductible for Minnesota income tax
purposes. Distributions to corporate shareholders are subject to
Minnesota franchise tax.
New Jersey Portfolio. It is anticipated that
substantially all distributions paid by the New Jersey Portfolio
to individuals and fiduciaries will be exempt from the New Jersey
income tax, provided the Portfolio is a New Jersey "qualified
investment fund". Distributions of dividends and capital gains
will be exempt from such taxes to the extent derived from New
Jersey or U.S. Government securities provided, among other
things, that the Portfolio invest only in interest bearing
obligations, obligations issued at a discount, 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, at least 80% of the
aggregate principal amount of the Portfolio's investments,
excluding cash and cash items and financial options and similar
financial instruments described above, must be invested in New
Jersey municipal securities or U.S. Government securities at the
close of each quarter of the tax year. Distributions to
corporate shareholders are subject to New Jersey corporation
business (franchise) and New Jersey corporation income taxes.
Ohio Portfolio. It is anticipated that substantially
all of the distributions of income and capital gains paid by the
Ohio Portfolio will be exempt from the Ohio personal income tax,
117
<PAGE>
Ohio school district income taxes and Ohio municipal income
taxes, and that such distributions will not be includible in the
net income tax base of the Ohio franchise tax. Distributions
will be so exempt to the extent that they are derived from Ohio
municipal securities, 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 Ohio 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. It is anticipated that
substantially all of the dividends paid by the Pennsylvania
Portfolio will be exempt from Pennsylvania personal and fiduciary
income taxes, the Philadelphia School District investment net
income tax and the Pennsylvania corporate net income tax.
Dividends will be exempt from such taxes to the extent
attributable to interest received from the Portfolio's
investments in Pennsylvania municipal securities and U.S.
Government securities. Distributions of capital gain from the
Portfolio are subject to Pennsylvania individual, fiduciary and
corporate income taxes, but are not taxable for purposes of the
Philadelphia School District income tax. Shares of the
Pennsylvania Portfolio will be exempt from Pennsylvania county
personal property taxes to the extent that the Portfolio consists
of Pennsylvania municipal securities or U.S. Government
securities. Portfolio shares are included for purposes of
determining a corporation's capital stock value subject to the
Pennsylvania capital stock/franchise tax.
Virginia Portfolio. It is anticipated that
substantially all of the dividends paid by the Virginia Portfolio
will be exempt from Virginia individual income, estate, trust and
corporate income taxes. Dividends will be exempt to the extent
that they are either (i) exempt from regular federal income tax
and attributable to interest from Virginia municipal securities
or (ii) attributable to interest on U.S. Government securities,
provided that the Portfolio qualifies as a regulated investment
company under the Code and at the end of each quarter of its
taxable year at least 50% of the value of the Portfolio's total
assets consist of obligations Whose interest is exempt from
Federal income tax. Distributions attributable to capital gains
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) to purchase or
carry shares of the Virginia Portfolio generally will not be
deductible for Virginia income tax purposes.
118
<PAGE>
________________________________________________________________
BROKERAGE AND PORTFOLIO TRANSACTIONS
________________________________________________________________
Subject to the general supervision of the Trustees of
the Fund, the Adviser makes the investment decisions and places
the orders for portfolio securities for each of the Fund's
Portfolios and determines the broker or dealer to be used in each
specific transaction. Most transactions for the Fund's
Portfolios, including transactions in listed securities, are
executed in the over-the-counter market by approximately fifteen
principal market maker dealers with whom the Adviser maintains
regular contact. Most transactions made by the Fund will be
principal transactions at net prices and the Fund will incur
little or no brokerage costs. Where possible, securities will be
purchased directly from the issuer or from an underwriter or
market maker for the securities unless the Adviser believes a
better price and execution is available elsewhere. Purchases
from underwriters of newly-issued securities for inclusion in a
Portfolio usually will include a concession paid to the
underwriter by the issuer and purchases from dealers serving as
market makers will include the spread between the bid and asked
price.
The Fund has no obligation to enter into transactions in
portfolio securities with any broker, dealer, issuer, underwriter
or other entity. In placing orders, it is the policy of the Fund
to obtain the best price and execution for its transactions.
Where best price and execution may be obtained from more than one
broker or dealer, the Adviser may, in its discretion, purchase
and sell securities through brokers and dealers who provide
research, statistical and other information to the Adviser. Such
services may be used by the Adviser for all of its investment
advisory accounts and, accordingly, not all such services may be
used by the Adviser in connection with the Fund. The
supplemental information received from a dealer is in addition to
the services required to be performed by the Adviser under the
Advisory Agreement, and the expenses of the Adviser will not
necessarily be reduced as a result of the receipt of such
information. Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Fund may consider sales of shares
of the Fund as a factor in the selection of dealers to enter into
portfolio transactions with the Fund.
No transactions for the Fund's Portfolios are executed
through any broker or dealer affiliated with the Fund's Adviser,
or with Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Adviser. During the fiscal year ended
September 30, 1995, 1996 and 1997, the Arizona, Florida,
119
<PAGE>
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 nine 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
governed by the 1940 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 1940 Act.
It is anticipated that annual shareholder meetings will
not be held; shareholder meetings will be held only when required
by federal or state law. Shareholders have available certain
procedures for the removal of Trustees.
A shareholder will be entitled to share pro rata with
other holders of the same class of shares all dividends and
distributions arising from each Portfolio's assets and, upon
redeeming shares, will receive the then current net asset value
of each Portfolio represented by the redeemed shares less any
applicable contingent deferred sales charge. The Fund is
empowered to establish, without shareholder approval, additional
portfolios, which may have different investment objectives and
policies than those of the Fund, and additional classes of shares
120
<PAGE>
within the Fund. If an additional portfolio or class were
established in the Fund, each share of the portfolio or class
would normally be entitled to one vote for all purposes.
Generally, shares of each portfolio and class would vote together
as a single class on matters, such as the election of Trustees,
that affect each portfolio and class in substantially the same
manner. Class A, B, C and Advisor Class shares have identical
voting, dividend, liquidation and other rights, except that each
class bears its own transfer agency expenses, each of Class A,
Class B and Class C shares of the Fund bears its own distribution
expenses and Class B shares and Advisor Class shares convert to
Class A shares under certain circumstances. Each class of shares
of the Fund votes separately with respect to the Fund's Rule
12b-1 distribution plan and other matters for which separate
class voting is appropriate under applicable law. Shares are
freely transferable, are entitled to dividends as determined by
the Trustees and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund.
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 ___________, 1998, there were outstanding: ________
shares of beneficial interest of the Fund, including: ________
Class A shares, ________ Class B shares and ________ Class C
shares of the Arizona Portfolio; ________ Class A shares,
________ Class B shares and ________ Class C shares of the
Florida Portfolio; ________ Class A shares, ________ Class B
shares and ________ Class C shares of the Massachusetts
Portfolio; ________ Class A shares, 908,509 Class B shares and
________ Class C shares of the Michigan Portfolio; ________
Class A shares, ________ Class B shares and ________ Class C
shares of the Minnesota Portfolio; ________ Class A shares,
________ Class B shares and ________ Class C shares of the New
Jersey Portfolio ________ Class A shares, ________ Class B shares
and ________ Class C shares of the Ohio Portfolio; ________
121
<PAGE>
Class A shares, ________ Class B shares and ________ Class C
shares of the Pennsylvania Portfolio; ________ Class A shares,
________ Class B shares and ________ Class C shares of the
Virginia Portfolio. 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 __________, 1999.
NO. OF
SHARES % OF % OF % OF
NAME AND ADDRESS OF CLASS CLASS A CLASS B CLASS C
ARIZONA PORTFOLIO
FLORIDA PORTFOLIO
MASSACHUSETTS PORTFOLIO
MICHIGAN PORTFOLIO
MINNESOTA PORTFOLIO
NEW JERSEY PORTFOLIO
OHIO PORTFOLIO
PENNSYLVANIA PORTFOLIO
VIRGINIA PORTFOLIO
122
<PAGE>
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. an indirect wholly-owned
subsidiary of Alliance, located at 1345 Avenue of the Americas,
New York, New York 10105, is the principal underwriter of shares
of the Funds. Under the Distribution Services Agreement between
the Fund and the Principal Underwriter, the Fund has agreed to
indemnify the distributors, in the absence of its willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations thereunder, against certain civil liabilities,
including liabilities under the Securities Act.
Counsel
Legal matters in connection with the issuance of the
shares offered hereby are passed upon by Seward & Kissel, New
York, New York. Seward & Kissel has relied upon the opinion of
Sullivan & Worcester, Boston, Massachusetts, for matters relating
to Massachusetts law.
Independent Auditors
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
Yield and Total Return Quotations
From time to time, a Portfolio states its "yield,"
"actual distribution rate" and "total return." Computed
separately for each class, a Portfolio's yield for any 30-day (or
one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. A Portfolio may advertise a
"taxable equivalent yield" that is calculated by assuming that net
investment income per share is increased by an amount sufficient
to offset the benefit of tax exemptions at the stated income tax
rate. 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 computed
123
<PAGE>
separately for Class A, Class B, and Class C shares. Computed
separately for each class, a Portfolio's "total return" is its
average annual compounded total return for recent one year, five
year and ten year periods (or the period since the Portfolio's
inception). A Portfolio's total return for such a period is
computed by finding, through the use of a formula prescribed by
the Commission, the average annual compounded rate of return over
the period that would equate an assumed initial amount invested to
the value of such investment at the end of the period. For
purposes of computing total return, income dividends and capital
gains distributions paid on shares of a Portfolio are assumed to
have been reinvested when received and the maximum sales charge
applicable purchases of a Portfolio is assumed to have been paid.
Yield Calculations
30-Day Tax
30-Day Yield Equivalent Yield
(period ended (period ended Distribution
Fund 9/30/98) 9/30/98) Rate
Florida
Class A 4.61% 7.27% 5.00%
Class B 4.13% 6.51% 4.55%
Class C 4.14% 6.53% 4.55%
Minnesota
Class A 4.29% 7.75% 4.76%
Class B 3.77% 6.81% 4.27%
Class C 3.78% 6.83% 4.27%
New Jersey
Class A 4.19% 7.24% 4.75%
Class B 3.66% 6.33% 4.26%
Class C 3.66% 6.33% 4.26%
Pennsylvania
Class A 4.15% 6.79% 4.78%
Class B 3.63% 5.94% 4.32%
Class C 3.64% 5.95% 4.32%
Massachusetts
Class A 4.21% 7.61% 4.90%
Class B 3.70% 6.69% 4.50%
Class C 3.70% 6.69% 4.50%
124
<PAGE>
Arizona
Class A 4.25% 7.41% 4.74%
Class B 3.74% 6.52% 4.31%
Class C 3.74% 6.52% 4.31%
Ohio
Class A 4.12% 7.32% 4.90%
Class B 3.59% 6.38% 4.43%
Class C 3.60% 6.40% 4.43%
Virginia
Class A 4.32% 7.55% 4.94%
Class B 3.81% 6.65% 4.53%
Class C 3.80% 6.64% 4.53%
Michigan
Class A 3.94% 6.65% 4.49%
Class B 3.42% 5.77% 4.03%
Class C 3.42% 5.77% 4.03%
Total Return Calculations
Ten-Year
One-Year period Five-Year period period ended
Fund ended 9/30/98 ended 9/30/98 9/30/98
Florida
Class A 4.34% 5.39% 5.91*
Class B 5.22% 5.52% 6.00*
Class C 7.22% 5.52% 6.00*
Minnesota
Class A 3.37% 4.74% 5.35*
Class B 4.17% 4.87% 5.43*
Class C 6.18% 4.89% 5.43*
New Jersey
Class A 3.76% 5.09% 5.70*
Class B 4.50% 5.24% 5.78*
Class C 6.50% 5.24% 5.78*
Pennsylvania
Class A 4.08% 5.76% 6.26*
Class B 4.98% 5.89% 6.36*
Class C 6.98% 5.91% 6.36*
125
<PAGE>
Massachusetts
Class A 4.52% 8.92%* N/A
Class B 5.40% 9.22%* N/A
Class C 7.40% 9.22%* N/A
Arizona
Class A 4.87% 7.68%* N/A
Class B 5.84% 8.02%* N/A
Class C 7.83% 8.02%* N/A
Ohio
Class A 3.71% 5.21% 5.77*
Class B 4.56% 5.37% 5.86*
Class C 6.56% 5.37% 5.86*
Virginia
Class A 5.02% 8.39%* N/A
Class B 5.85% 8.71%* N/A
Class C 7.85% 8.71%* N/A
Michigan
Class A 4.41% 7.27%* N/A
Class B 5.26% 7.51%* N/A
Class C 7.26% 7.51%* N/A
____________________
* Since Inception
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.
126
<PAGE>
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or to Alliance Fund Services, Inc. at the
address or telephone numbers shown on the front cover of this
Statement of Additional Information. This Statement of
Additional Information does not contain all the information set
forth in the Registration Statement filed by the Fund with the
Commission under the Securities Act. Copies of the Registration
Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the offices of
the Commission in Washington, D.C.
________________________________________________________________
REPORT OF INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
________________________________________________________________
127
<PAGE>
ALLIANCE MUNICIPAL INCOME FUND II
ANNUAL REPORT
SEPTEMBER 30, 1997
ALLIANCE CAPITAL
ARIZONA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-102.3%
ARIZONA LONG TERM MUNICIPAL BONDS-87.5%
AAA Glendale (Midwestern Univ)
Connie Lee Ser 96A
6.00%, 5/15/26 $ 795 $ 833,104
NR Goodyear Assessment
District Dist No. 1 Ser 96C
7.25%, 7/01/16 760 792,133
NR Hassayampa Cmnty Fac
Dist Spec Assessment Lien
7.75%, 7/01/21 2,530 2,581,359
AAA Maricopa Cnty Hlth Fac Rev
(Catholic Healthcare West)
MBIA Ser 93
7.152%, 7/01/13 (a) 750 793,380
AAA Maricopa Cnty MFHR (Tempe Grove Apts)
GNMA Ser 96A AMT
6.20%, 1/20/39 755 789,889
AA+ Maricopa Cnty IDR (Citizens Utilities)
Ser 95 AMT
6.20%, 5/01/30 775 825,824
AA- Mohave Cnty IDR (Cargill/North Star Steel)
Ser 95A AMT
6.70%, 3/01/20 750 831,307
AAA Mohave Cnty IDR Hlth Care Rev
(Chris Ridge & Silver) GNMA Ser 96
6.375%, 11/01/31 1,000 1,074,490
AAA Phoenix Arpt Rev
(Sky Harbor/Goodyear/Deer Valley)
MBIA Ser 94D AMT
6.30%, 7/01/10 655 714,933
AA Phoenix MFHR (Woodstone & Silver Springs)
Asset Gty Ser 93
6.25%, 4/01/23 795 828,740
AAA Pima Cnty SFMR GNMA/FNMA/FHLMC
Ser 97A AMT
6.25%, 11/01/30 2,750 2,881,505
NR Scottsdale GO Cmnty Fac Dist
(McDowell Mt Ranch) Ser 97
6.50%, 7/15/22 700 707,000
AAA Tempe MFHR (Quadrangles) FHA Ser 93
6.25%, 6/01/26 795 831,284
AAA Yuma MFHR (Alexandrite Sands Apt)
FHA Ser 90 AMT
7.70%, 12/01/29 805 847,222
TOTAL ARIZONA LONG TERM MUNICIPAL BONDS
(cost $14,844,283) 15,332,170
SHORT TERM MUNICIPAL NOTES-14.8%
A-1 Apache Cnty PCR (Tucson Elec Pwr Co)
Ser 81B VRDN (b)
4.20%, 10/01/21 1,000 1,000,000
VMIG1* Phoenix Civic Impt Corp Excise Tax Rev
Ser 95 VRDN (b) AMT
4.20%, 6/01/20 700 700,000
A-1+ Pima Cnty IDR (Tucson Elec Pwr Co)
Ser 82 VRDN (b)
4.15%, 7/01/22 700 700,000
VMIG1* Yavapai Cnty IDR (Kachina Pointe)
Ser 88 VRDN (b)
3.80%, 1/01/09 200 200,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $2,600,000) 2,600,000
TOTAL INVESTMENTS-102.3%
(cost $17,444,283) 17,932,170
Other assets less liabilities-(2.3%) (401,443)
NET ASSETS-100% $ 17,530,727
# Unaudited.
* Moody's Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
9
FLORIDA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-110.2%
LONG TERM MUNICIPAL BONDS-96.6%
FLORIDA-93.6%
NR Collier Cnty Fiddlers Creek
Cmnty Dev Dist
7.50%, 5/01/18 $13,500 $ 14,099,940
BBB+ Collier Cnty Hlth Fac
(The Moorings) Ser 94
7.00%, 12/01/19 2,000 2,186,320
AAA Dade Cnty Arpt Rev (Miami Int'l)
MBIA Ser 95B AMT
6.00%, 10/01/24 3,180 3,303,448
A3* Dade Cnty Spec Oblig
(Courthouse Ctr) Ser 95
6.10%, 4/01/20 3,000 3,154,380
AAA Escambia Cnty Hsg Fin Auth
SFMR FNMA/GNMA Ser 96B AMT
6.25%, 4/01/28 2,565 2,678,783
Baa1* Escambia Cnty PCR
(Champion Int'l Corp) Ser 96 AMT
6.40%, 9/01/30 5,000 5,310,350
AAA Florida Hsg Fin Agy
MFHR (Brittany of Rosemont)
AMBAC Ser 95G AMT
6.25%, 7/01/35 1,350 1,421,860
AAA Florida Hsg Fin Agy
MFHR (Landings at Boot Ranch)
AMBAC Ser 95K AMT
6.10%, 11/01/35 2,050 2,137,515
AAA Florida Hsg Fin Agy
MFHR (Turtle Creek Apts)
AMBAC Ser 96C AMT
6.20%, 5/01/36 3,245 3,393,621
AAA Florida Hsg Fin Agy SFMR GNMA/FNMA
Ser 94B AMT
6.65%, 7/01/26 2,950 3,078,620
AAA Florida Hsg Fin Agy SFMR GNMA/FNMA
Ser 95A AMT
6.65%, 1/01/24 6,720 7,218,019
AAA Hillsborough Cnty Aviation Auth
(Tampa Int'l Arpt) FGIC Ser 96A AMT
6.00%, 10/01/23 1,500 1,584,075
Aa3* North Miami Hlth Fac
Auth (Catholic Hlth Svcs Oblig Grp) Ser 96
6.00%, 8/15/24 1,200 1,241,544
NR Northern Palm Beach Cnty
(Abacoa) Ser 96A
7.20%, 8/01/16 1,930 2,063,035
A+ Palm Beach Cnty IDR
(Geriatric Care Inc) Ser 96
6.625%, 12/01/26 2,790 3,022,267
Aaa* Pinellas Cnty Hsg Fin Auth SFMR GNMA/FNMA
Ser 94A AMT
6.55%, 8/01/27 3,130 3,323,371
Baa2* Volusia Cnty Ed Fac Auth
(Embry-Riddle Aero Univ) Ser 96A
6.125%, 10/15/26 3,190 3,310,391
AA Volusia Cnty Hlth Fac Auth
(John Knox Village) Asset Gty
6.00%, 6/01/17 1,115 1,170,438
-------------
63,697,977
CALIFORNIA-3.0%
A+ California GO Ser 95 AMT
6.40%, 2/01/20 2,000 2,054,720
TOTAL LONG TERM MUNICIPAL BONDS
(cost $63,257,978) 65,752,697
10
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
SHORT TERM MUNICIPAL NOTES-13.6%
ARIZONA-4.9%
A-1 Apache Cnty PCR (Tucson Elec Pwr Co)
Ser 81B VRDN (a)
4.20%, 10/01/21 $ 3,300 $ 3,300,000
SOUTH CAROLINA-4.9%
A-1+ Berkeley Cnty IDR (Nucor Corp)
Ser 97 VRDN (a) AMT
4.25%, 4/01/30 3,300 3,300,000
TEXAS-1.0%
A Brazos River Harbor Dist (Dow Chemical Co)
Ser 97 VRDN (a) AMT
4.05%, 5/01/27 700 700,000
WASHINGTON-2.8%
A-1 Yakima Cnty Pub Corp (Macro Plastics Inc)
VRDN (a) AMT
4.20%, 12/01/26 1,950 1,950,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $9,250,000) 9,250,000
TOTAL INVESTMENTS-110.2%
(cost $72,507,978) 75,002,697
Other assets less liabilities-(10.2%) (6,944,620)
NET ASSETS-100% $ 68,058,077
# Unaudited.
* Moody's Rating.
(a) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
11
MASSACHUSETTS PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-92.6%
MASSACHUSETTS-88.5%
AAA Chelsea GO AMBAC Ser 94
6.00%, 6/15/14 $1,140 $ 1,215,388
AAA Holyoke GO FSA Ser 93B
6.125%, 8/01/13 1,115 1,194,366
AAA Massachusetts Ed Fin Auth
(Educational Loan) AMBAC Ser 94E AMT
6.00%, 1/01/12 1,080 1,124,582
AAA Massachusetts Hlth & Ed Fac Auth
(Beth Israel) AMBAC Ser G-4
8.370%, 7/01/25 (a) 1,000 1,089,550
AAA Massachusetts Hsg Fin Agy
MFHR (Harbor Point) AMBAC
Ser 96A AMT
6.40%, 12/01/15 1,110 1,184,126
A+ Massachusetts Hsg Fin Agy
SFMR Ser 40 AMT
6.65%, 12/01/27 5,350 5,735,361
A3* Massachusetts Ind Fin Agy
(Brooks School)
5.95%, 7/01/23 1,200 1,231,272
AAA Massachusetts Ind Fin Agy
(Heights Crossing) FHA Ser 95 AMT
6.15%, 2/01/35 1,150 1,185,328
AAA Massachusetts Muni Wholesale
Elec Pwr Supply Sys MBIA Ser 92A
6.00%, 7/01/18 1,140 1,172,011
AAA Massachusetts Port Auth Spec Fac
(US Air) MBIA Ser 96A AMT
5.875%, 9/01/23 1,135 1,162,955
AA+ Massachusetts Wtr Pollution Abatement
(So Essex Prog) Ser 94A
6.375%, 2/01/15 1,100 1,180,410
A1* New England Ed Loan Mktg Ser 93H AMT
6.90%, 11/01/09 3,805 4,217,043
-------------
21,692,392
PUERTO RICO-4.1%
BBB- Puerto Rico Port Auth
(American Airlines) Ser 96A AMT
6.25%, 6/01/26 950 1,009,964
TOTAL INVESTMENTS-92.6%
(cost $22,064,371) 22,702,356
Other assets less liabilities-7.4 % 1,803,527
NET ASSETS-100% $ 24,505,883
# Unaudited.
* Moody's Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
See Glossary of Terms on page 19.
See notes to financial statements.
12
MICHIGAN PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-98.0%
LONG TERM MUNICIPAL BONDS-83.8%
MICHIGAN-79.0%
AAA Detroit GO FGIC Ser 93
6.35%, 4/01/14 $ 385 $ 413,070
AAA Grand Rapids Swr Sys MBIA Ser 92
6.00%, 1/01/22 745 773,549
Aa2* Independence MFHR (Greenery Health)
FHA Ser 97
6.15%, 8/01/17 1,850 1,980,851
AAA Kent Cnty Arpt Fac
(Kent Cnty Int'l) Ser 95 AMT
6.10%, 1/01/25 760 794,861
AAA Michigan Hosp Fin Auth
Hosp Rev (St Johns) AMBAC Ser 92A
6.00%, 5/15/13 760 799,733
AA+ Michigan Hsg Dev Auth
SFMR Mortgage Rev FHA Ser 96B AMT
6.20%, 6/01/27 535 560,455
AA+ Michigan Hsg Dev Auth
SFMR Mortgage Rev Ser 95B AMT
7.05%, 6/01/26 3,245 3,425,454
AAA Michigan Strategic Fund
PCR (Detroit Edison) MBIA Ser 95AA
6.40%, 9/01/25 725 784,552
A- Michigan Strategic Fund
PCR (General Motors) Ser 95
6.20%, 9/01/20 735 785,443
A** Romulus Tax Increment
Finance Auth Ser 94
6.75%, 11/01/19 1,585 1,716,761
AA Troy MI Downtown Dev
Auth Asset Gty Ser 95A
6.375%, 11/01/18 735 788,912
-------------
12,823,641
PUERTO RICO-4.8%
BBB- Puerto Rico Port Auth
(American Airlines) Ser 96A AMT
6.25%, 6/01/26 725 770,762
TOTAL LONG TERM MUNICIPAL BONDS
(cost $13,069,055) 13,594,403
SHORT TERM MUNICIPAL NOTES-14.2%
VMIG1* Michigan Higher Ed Student
Loan Auth AMBAC
Ser XII-D AMT VRDN (a)
4.20%, 10/01/15 800 800,000
VMIG1* Michigan Hosp Rev
(Hospital Equipment Loan Program)
Ser 96A VRDN (a)
4.15%, 12/01/23 700 700,000
VMIG1* Michigan Hosp Rev
(Mt Clemens Hospital) VRDN (a)
4.20%, 8/15/15 800 800,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $2,300,000) 2,300,000
TOTAL INVESTMENTS-98.0%
(cost $15,369,055) 15,894,403
Other assets less liabilities-2.0% 330,604
NET ASSETS-100% $ 16,225,007
# Unaudited.
* Moody's Rating.
** Fitch Rating.
(a) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
13
MINNESOTA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-98.9%
MINNESOTA LONG TERM MUNICIPAL BONDS-87.9%
BBB+ Bass Brook PCR
(Minn Power & Light) Ser 92
6.00%, 7/01/22 $ 945 $ 972,830
AAA Duluth Arpt Lease St
Secured GO Ser 95C AMT
6.25%, 8/01/14 915 968,820
Aaa* Eagan MFHR (Woodridge Apts)
GNMA Ser 97A
5.95%, 2/01/32 930 968,828
Aaa* Little Canada MFHR
(Cedar Lakeside) GNMA Ser 97A
5.95%, 2/01/32 930 968,828
A- Minneapolis Common Bond
Fund Community Dev Agy
Ser 95-2 AMT
6.625%, 12/01/15 1,245 1,330,245
A- Minneapolis Common Bond
Fund Community Dev Agy
Ser 97-2 AMT
6.20%, 6/01/17 1,205 1,255,622
AAA Minneapolis COP Special
School Dist #1 MBIA Ser 96A
5.90%, 2/01/17 930 970,278
NR Minnesota Agric & Econ Dev Brd
(Small Business Loan Prog)
Ser 96A AMT
6.75%, 8/01/16 1,450 1,558,242
NR Minnesota Agric & Econ Dev Brd
(Small Business Loan Prog)
Ser 96B AMT
7.00%, 8/01/16 750 793,523
Baa1* Minnesota Higher Ed Fac
Auth (Hamline Univ) Ser 4-I
6.00%, 10/01/16 790 823,986
AA+ Minnesota Hsg Fin Agy
SFMR FHA Ser 89A AMT
7.90%, 7/01/19 2,660 2,768,129
AA+ Rochester Hlth Care Fac
(Mayo Med Ctr) Ser 92H
7.884%, 11/15/15 (a) 2,000 2,241,860
BBB South St. Paul Hosp Rev
(Health East) Ser 94
6.75%, 11/01/09 900 976,878
AAA St Francis GO Ind
Sch Dist # 15 CGIC Ser 95A
6.375%, 2/01/16 880 982,467
TOTAL MINNESOTA LONG TERM MUNICIPAL BONDS
(cost $16,606,347) 17,580,536
SHORT TERM MUNICIPAL NOTES-11.0%
A-1+ Cloquet PCR (Potlatch Corp)
Ser 85 VRDN (b)
4.05%, 12/01/09 600 600,000
VMIG1* Minnesota Higher Ed Fac Auth
(University of St Thomas)
Ser 97O VRDN (b)
4.05%, 10/01/21 900 900,000
AAA Plymouth MFHR
(The Lakes Apts) FNMA
Coll Ser 97A AMT VRDN (b)
4.30%, 5/15/27 700 700,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $2,200,000) 2,200,000
TOTAL INVESTMENTS-98.9%
(cost $18,806,347) 19,780,536
Other assets less liabilities-1.1% 214,262
NET ASSETS-100% $ 19,994,798
# Unaudited.
* Moody's Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
14
NEW JERSEY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-96.9%
NEW JERSEY LONG TERM MUNICIPAL BONDS-91.9%
AAA Essex Cnty Imp Auth Util Rev (Orange Twp)
MBIA Ser 93
6.00%, 12/01/17 $2,510 $ 2,633,442
BBB- New Jersey Eco Dev
(American Airlines) AMT
7.10%, 11/01/31 4,500 4,891,950
A+ New Jersey Eco Dev (Anheuser-Busch)
Ser 95 AMT
5.85%, 12/01/30 3,500 3,638,285
AAA New Jersey Eco Dev
(Hackensack Wtr Co) MBIA
Ser 94B AMT
5.90%, 3/01/24 3,545 3,656,100
AAA New Jersey Eco Dev (NJ American Wtr Co)
FGIC AMT
6.875%, 11/01/34 3,275 3,666,592
AAA New Jersey Eco Dev
(Pub Ser Elec & Gas) MBIA
Ser 94A AMT
6.40%, 5/01/32 3,400 3,625,964
BBB New Jersey Hlth Care Fac
(Englewood Hosp) Ser 94
6.75%, 7/01/24 4,230 4,565,354
BBB New Jersey Hlth Care Fac
(Franciscan Sisters,
St. Mary's Hosp) Ser 93
5.875%, 7/01/12 2,755 2,800,072
AAA New Jersey Hlth Care Fac
(Monmouth Med Ctr) CGIC Ser C
6.25%, 7/01/24 2,750 2,940,575
AAA New Jersey Hsg & Mtg MFHR AMBAC
Ser 96A AMT
6.25%, 5/01/28 4,000 4,191,200
A+ New Jersey Hsg & Mtg
MFHR (Sect 8) Ser 1
6.70%, 11/01/28 8,500 9,115,825
AAA New Jersey Hsg & Mtg SFMR MBIA
Ser 95O AMT
6.35%, 10/01/27 5,000 5,299,700
AAA Passaic Valley Sewer AMBAC Ser 92D
5.75%, 12/01/15 3,400 3,516,484
AAA Port Auth of NY & NJ
(JFK Int'l Arpt)
MBIA Ser 6 AMT
5.75%, 12/01/22 7,590 7,769,503
AA- Port Auth of NY & NJ 95th Ser AMT
6.125%, 7/15/29 3,205 3,327,912
AA- Salem Cnty NJ Waste Disposal Auth
(E.I. Dupont) Ser 92A AMT
6.125%, 7/15/22 3,500 3,672,550
BBB South Jersey Transportation
Auth NJ Lease Rev
(Raytheon Aircraft Service)
Ser 97A AMT
6.15%, 1/01/22 500 526,505
TOTAL NEW JERSEY LONG TERM MUNICIPAL BONDS
(cost $65,738,092 ) 69,838,013
SHORT TERM MUNICIPAL NOTES-5.0%
VMIG1* Essex Cnty Imp Auth
Ser 86 VRDN (a)
4.00%, 7/01/26 3,500 3,500,000
A-1 Newark NJ Hlth Care Fac (New Community)
FHA/GNMA Ser 95A VRDN (a)
4.15%, 6/01/30 300 300,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $3,800,000 ) 3,800,000
TOTAL INVESTMENTS-96.9%
(cost $69,538,092) 73,638,013
Other assets less liabilities-3.1% 2,383,047
NET ASSETS-100% $ 76,021,060
# Unaudited.
* Moody's Rating.
(a) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
15
OHIO PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-96.0%
LONG TERM MUNICIPAL BONDS-91.4%
OHIO-86.9%
BBB Akron (Akron Municipal
Baseball Stad) Ser 96
Zero Coupon, 12/01/16 $5,000 $ 4,212,050
BBB- Butler Cnty Hosp Rev
(Fort Hamilton Hughes)
7.50%, 1/01/10 1,400 1,531,796
AAA Cuyahoga Cnty MFHR
(Nat'l Terminal Apts)
FNMA Ser 96 AMT
6.40%, 7/01/16 5,180 5,527,837
BBB Dayton Spec Fac Rev (Emery Air Freight)
Ser 96D AMT
6.20%, 10/01/09 2,225 2,380,639
BBB Hamilton Cnty Hlth Sys (Franciscan
Sisters Providence) Ser 92
6.875%, 7/01/15 2,000 2,130,320
Aaa* Kent Ohio MFHR (Silver Meadows Apt)
GNMA Ser 95 AMT
7.15%, 12/20/26 2,000 2,210,680
NR Mahoning Valley Sanitary Dist Ser 94
7.75%, 5/15/14 1,500 1,673,100
Baa1* Ohio Air Quality Dev Auth
(Columbus Southern Pwr) Ser 85B
6.25%, 12/01/20 2,305 2,406,443
AAA Ohio Air Quality Dev Auth
(JMG Funding/Ohio Pwr)
AMBAC Ser 94B AMT
6.375%, 4/01/29 2,150 2,296,200
BB+ Ohio Air Quality Dev Auth
(Toledo Edison Co) Ser 97A AMT
6.10%, 8/01/27 5,000 5,096,550
Aa2* Ohio Hsg Fin Agy MFHR
(Insured Bridgeview Villa II) FHA AMT
6.45%, 12/01/33 1,965 2,056,491
AAA Ohio Hsg Fin Agy SFMR
GNMA Ser 94 B2 AMT
6.70%, 3/01/25 5,710 6,075,554
AAA Ohio Hsg Fin Agy SFMR GNMA
Ser 97 A1 AMT
6.15%, 3/01/29 735 775,638
BB+ Ohio Wtr Dev Auth (Cleveland Electric)
Ser 97A AMT
6.10%, 8/01/20 2,000 2,038,620
A Ohio Wtr Dev Auth
(North Star/BHP) AMT
6.45%, 9/01/20 2,255 2,418,645
-------------
42,830,563
PUERTO RICO-4.5%
BBB- Puerto Rico Port Auth
(American Airlines) Ser 96A AMT
6.25% 6/01/26 2,075 2,205,974
TOTAL LONG TERM MUNICIPAL BONDS
(cost $42,432,641) 45,036,537
SHORT TERM MUNICIPAL NOTE-4.6%
VMIG1* Ohio Hsg Fin Agy MFHR
(Kenwood Congregate) Ser 85 VRDN (a)
3.70%, 12/01/15
(cost $2,300,000) 2,300 2,300,000
TOTAL INVESTMENTS-96.0%
(cost $44,732,641) 47,336,537
Other assets less liabilities-4.0% 1,958,482
NET ASSETS-100% $ 49,295,019
# Unaudited.
* Moody's Rating.
(a) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
16
PENNSYLVANIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-98.0%
LONG TERM MUNICIPAL BONDS-85.1%
PENNSYLVANIA-82.5%
AAA Allegheny Cnty Arpt Rev
(Pittsburgh Int'l) FSA
Ser 92B AMT
6.625%, 1/01/22 $2,715 $ 2,921,258
BBB- Allegheny Cnty IDR (USX) Ser 96
6.10%, 1/15/18 3,000 3,118,800
A- Bradford Cnty IDR
Solid Waste Disp Rev
(Int'l Paper) Ser 95A AMT
6.60%, 3/01/19 2,500 2,753,500
BBB+ Cumberland Cnty
Municipal Auth Rev
(Presbyterian Homes Inc) Ser 96
6.00%, 12/01/26 4,000 4,084,320
A New Morgan IDR Solid Waste Disp Rev
(Browning-Ferris) Ser 94 AMT
6.50%, 4/01/19 4,000 4,306,320
BBB- Pennsylvania Econ Dev
(Macmillan Bloedel Clarion)
Ser 95 AMT
7.60%, 12/01/20 5,000 5,753,800
BBB Pennsylvania Econ Dev (Sun Co Inc)
Ser 94A AMT
7.60%, 12/01/24 1,965 2,240,513
AAA Pennsylvania Higher Ed
Student Loan AMBAC Ser 88D AMT
6.05%, 1/01/19 3,175 3,285,617
AA+ Pennsylvania Hsg Fin Agy
SFMR Ser 92 35D AMT
8.009%, 4/01/25(a) 9,500 10,121,110
AA+ Pennsylvania Hsg Fin Agy
SFMR Ser 94 41B AMT
6.65%, 4/01/25 5,000 5,333,600
AAA Pennsylvania Turnpike AMBAC Ser 94A
6.00%, 12/01/19 3,000 3,146,160
A- Philadelphia Hosp Rev
(Temple Univ) Ser 93A
6.625%, 11/15/23 3,250 3,473,372
AAA Pittsburgh Urban Redev SFMR
FHA/GNMA/FNMA Ser 97A AMT
6.25%, 10/01/28 1,200 1,255,092
AAA Pittsburgh Urban Redev SFMR
Ser 95A AMT
7.15%, 10/01/27 520 563,004
AA Potter Cnty Hosp Auth
(Charles Cole Memorial)
Asset Gty Ser 96
6.05%, 8/01/24 3,335 3,463,531
BBB+ Warren Cnty Hosp Auth
(Warren Gen) Ser 94A
7.00%, 4/01/19 2,200 2,377,738
-------------
58,197,735
PUERTO RICO-2.6%
BBB- Puerto Rico Port Auth (American Airlines)
Ser 96A AMT
6.25%, 6/01/26 1,725 1,833,882
TOTAL LONG TERM MUNICIPAL BONDS
(cost $56,062,965) 60,031,617
SHORT TERM MUNICIPAL NOTES-12.9%
A-1+ Delaware Valley Regl Fin
Auth Loc Govt Rev Ser C VRDN (b)
4.15%, 12/01/20 2,100 2,100,000
17
PENNSYLVANIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
A-1+ Emmaus GO
FSA Ser 96 VRDN (b)
4.05%, 12/01/28 $3,500 $ 3,500,000
Aaa* Pennsylvania Energy Dev
Auth (B&W Ebensburg)
Ser 88 VRDN (b) AMT
4.20%, 12/01/11 3,500 3,500,000
TOTAL SHORT TERM MUNICIPAL NOTES
(cost $9,100,000) 9,100,000
TOTAL INVESTMENTS-98.0%
(cost $65,162,965) 69,131,617
Other assets less liabilities-2.0% 1,380,513
NET ASSETS-100% $ 70,512,130
# Unaudited.
* Moody's Rating.
(a) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(b) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See Glossary of Terms on page 19.
See notes to financial statements.
18
VIRGINIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS# (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-97.2%
VIRGINIA LONG TERM MUNICIPAL BONDS-92.6%
A Alexandria MFHR
(Buckingham Village Apts)
Ser 96A AMT
6.15%, 1/01/29 $ 455 $ 471,385
A+ Giles Cnty IDR (Hoechst Celanese Corp)
Ser 96 AMT
6.45%, 5/01/26 435 475,916
AAA Harrisonburg MFHR (Greens of Salem Run)
FSA Ser 97 AMT
6.30%, 4/01/29 595 632,027
A Henrico Cnty IDR Solid Waste Rev
(Browning-Ferris) Ser 97A AMT
5.875%, 3/01/17 460 477,199
A- Isle of Wight Cnty Solid Waste Rev
(Union Camp Corp) Ser 94 AMT
6.55%, 4/01/24 325 355,459
A+ James City Cnty Solid Waste Rev
(Anheuser-Busch) Ser 97 AMT
6.00%, 4/01/32 460 476,666
AAA Newport News MFHR (Mennowood Cmntys)
GNMA Ser 96A
6.25%, 8/01/36 445 472,105
A2* Prince William Cnty Hosp Rev
(Potomac Hosp Corp) Ser 95
6.75%, 10/01/15 430 472,901
NR Staunton Ed Fac
(Mary Baldwin College) Ser 96
6.75%, 11/01/21 1,815 1,891,049
AAA Suffolk MFHR
(Prince William Commons)
FNMA Ser 96A AMT
6.50%, 6/01/29 455 484,320
AA Virginia Beach Hlth Care
(Sentara Bayside Hosp)
6.30%, 11/01/21 445 470,476
AA+ Virginia Hsg Dev Auth SFMR
(Commonwealth Mtg) Ser 94G AMT
7.125%, 7/01/22 2,240 2,355,046
TOTAL VIRGINIA LONG TERM MUNICIPAL BONDS
(cost $8,814,442) 9,034,549
SHORT TERM MUNICIPAL NOTE-4.6%
P-1* Bedford Cnty IDR (Nekoosa Pkg Corp)
Ser 95A VRDN (a) AMT
4.45%, 12/01/25
(cost $450,000) 450 450,000
TOTAL INVESTMENTS-97.2%
(cost $9,264,442) 9,484,549
Other assets less liabilities-2.8% 273,072
NET ASSETS-100% $ 9,757,621
# Unaudited.
* Moody's Rating.
(a) Variable Rate Demand Notes (VRDN) are instruments whose interest rates
change on a specific date (such as coupon date or interest payment date) or
whose interest rates vary with changes in a designated base rate (such as prime
interest rate). This instrument is payable on demand and is secured by letters
of credit or other credit support agreements from major banks.
See notes to financial statements.
Glossary of Terms:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax-Subject to
CGIC Capital Guaranty Insurance Company
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Administration
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
FSA Financial Security Assurance, Inc.
MBIA Municipal Bond Investors Assurance
GNMA Government National Mortgage Association
GO General Obligation
IDR Industrial Development Revenue
MFHR Multi-Family Housing Revenue
NR Rating not applied for
PCR Pollution Control Revenue
SFMR Single Family Mortgage Revenue
19
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSETTS
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investment in securities, at value
(cost: $17,444,283, $72,507,978, $22,064,371,
$15,369,055, $18,806,347, $69,538,092,
$44,732,641, $65,162,965, $9,264,442,
respectively) $17,932,170 $75,002,697 $22,702,356
Cash -0- -0- 114,303
Receivable for shares of beneficial interest sold 379,151 442,015 327,664
Interest receivable 304,060 1,387,633 396,767
Receivable due from Adviser 123,739 -0- 107,044
Receivable for investment securities sold -0- -0- 1,200,000
Other assets 14,849 10,679 10,624
Total assets 18,753,969 76,843,024 24,858,758
LIABILITIES
Due to custodian 102,248 1,543 -0-
Payable for investment securities purchased 1,000,000 8,550,000 -0-
Dividends payable 24,233 91,719 34,111
Distribution fee payable 8,865 45,413 13,852
Payable for shares of beneficial interest redeemed 2,000 41,134 235,781
Advisory fee payable -0- 1,508 -0-
Accrued expenses and other liabilities 85,896 53,630 69,131
Total liabilities 1,223,242 8,784,947 352,875
NET ASSETS $17,530,727 $68,058,077 $24,505,883
COMPOSITION OF NET ASSETS
Shares of beneficial interest, at par $ 16,266 $ 67,097 $ 21,900
Additional paid-in capital 16,707,137 70,749,224 23,436,817
Distributions in excess of net investment income (24,233) (91,719) (34,111)
Accumulated net realized gain (loss) on
investment transactions 343,670 (5,161,244) 443,292
Net unrealized appreciation of investments 487,887 2,494,719 637,985
$17,530,727 $68,058,077 $24,505,883
CLASS A SHARES
Net assets $ 9,224,832 $17,515,926 $ 9,461,448
Shares of beneficial interest outstanding 855,925 1,726,861 845,524
CLASS B SHARES
Net assets $ 6,530,863 $24,820,437 $ 7,229,832
Shares of beneficial interest outstanding 606,006 2,447,015 646,146
CLASS C SHARES
Net assets $ 1,775,032 $25,721,714 $ 7,814,603
Shares of beneficial interest outstanding 164,699 2,535,869 698,396
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share $10.78 $10.14 $11.19
Sales charge--4.25% of public offering price .48 .45 .50
Maximum offering price $11.26 $10.59 $11.69
CLASS B SHARES
Net asset value and offering price per share $10.78 $10.14 $11.19
CLASS C SHARES
Net asset value and offering price per share $10.78 $10.14 $11.19
</TABLE>
See notes to financial statements.
20
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 15,894,403 $ 19,780,536 $ 73,638,013 $ 47,336,537 $ 69,131,617 $ 9,484,549
-0- -0- 51,389 296,519 85,725 11,210
31,650 119,397 105,118 185,725 179,231 8,374
255,025 252,484 1,521,365 653,489 1,440,284 197,118
77,841 100,637 -0- 7,172 -0- 124,932
156,657 -0- 1,050,080 1,115,500 -0- -0-
7,966 10,072 10,072 10,535 13,682 9,441
16,423,542 20,263,126 76,376,037 49,605,477 70,850,539 9,835,624
86,662 141,355 -0- -0- -0- -0-
-0- -0- -0- -0- -0- -0-
21,367 26,544 95,883 63,456 96,781 12,981
9,654 13,820 52,307 35,691 43,266 5,866
8,435 14,933 136,267 143,212 114,064 2,000
-0- -0- 7,820 -0- 17,048 -0-
72,417 71,676 62,700 68,099 67,250 57,156
198,535 268,328 354,977 310,458 338,409 78,003
$ 16,225,007 $ 19,994,798 $ 76,021,060 $ 49,295,019 $ 70,512,130 $ 9,757,621
$ 15,419 $ 20,049 $ 74,857 $ 48,496 $ 68,239 $ 8,950
15,256,515 20,444,992 76,094,278 49,793,182 68,446,219 9,237,555
(21,367) (26,544) (95,883) (63,456) (96,781) (12,981)
449,092 (1,417,888) (4,152,113) (3,087,099) (1,874,199) 303,990
525,348 974,189 4,099,921 2,603,896 3,968,652 220,107
$ 16,225,007 $ 19,994,798 $ 76,021,060 $ 49,295,019 $ 70,512,130 $ 9,757,621
$ 5,836,154 $ 4,119,747 $ 16,309,352 $ 7,595,710 $ 24,948,296 $ 3,530,325
554,541 413,115 1,606,058 747,254 2,414,386 323,796
$ 5,300,345 $ 8,516,932 $ 38,307,684 $ 26,821,226 $ 30,078,121 $ 5,020,095
503,732 853,980 3,772,191 2,638,614 2,910,826 460,437
$ 5,088,508 $ 7,358,119 $ 21,404,024 $ 14,878,083 $ 15,485,713 $ 1,207,201
483,598 737,839 2,107,406 1,463,689 1,498,634 110,727
$10.52 $ 9.97 $10.15 $10.16 $10.33 $10.90
.47 .44 .45 .45 .46 .48
$10.99 $10.41 $10.60 $10.61 $10.79 $11.38
$10.52 $ 9.97 $10.16 $10.16 $10.33 $10.90
$10.52 $ 9.97 $10.16 $10.16 $10.33 $10.90
</TABLE>
21
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSSETTS
------------ ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 852,537 $ 4,180,751 $ 954,449
EXPENSES
Advisory fee 85,933 413,941 97,045
Distribution fee - Class A 20,379 45,848 16,048
Distribution fee - Class B 55,735 230,909 48,450
Distribution fee - Class C 13,828 278,572 53,327
Custodian 88,802 92,088 85,869
Administrative 55,000 55,000 55,000
Audit & legal 41,628 45,894 37,320
Transfer agency 28,822 45,240 25,800
Printing 9,342 11,777 2,404
Amortization of organizational expenses 8,921 14,662 7,132
Registration 5,373 1,918 7,502
Trustees' fees 2,459 2,459 2,459
Miscellaneous 4,390 7,111 3,771
Total expenses 420,612 1,245,419 442,127
Less: expenses waived and reimbursed by
Adviser (see Note B) (264,673) (405,299) (259,088)
Net expenses 155,939 840,120 183,039
Net investment income 696,598 3,340,631 771,410
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions 377,624 1,247,758 489,674
Net change in unrealized appreciation of
investments 238,359 1,354,893 391,030
Net gain on investments 615,983 2,602,651 880,704
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 1,312,581 $ 5,943,282 $ 1,652,114
</TABLE>
See notes to financial statements.
22
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 906,099 $ 1,171,979 $ 4,442,574 $ 2,914,876 $ 4,304,648 $ 476,768
91,349 117,961 464,240 290,778 421,262 49,263
17,587 10,998 43,523 19,085 69,378 8,679
42,552 81,010 378,572 252,445 300,896 39,933
44,984 71,069 219,135 149,184 141,862 9,957
85,928 88,100 89,264 89,057 97,949 77,711
55,000 55,000 55,000 55,000 55,000 55,000
40,406 40,366 55,084 46,130 51,575 34,977
26,655 27,172 64,060 44,546 61,392 25,900
4,601 6,340 15,805 15,331 21,425 1,614
5,694 13,823 13,823 14,450 18,750 5,727
4,243 1,976 1,094 1,121 3,948 1,280
2,459 2,459 2,459 2,459 2,459 2,459
4,332 6,144 7,747 5,963 5,059 4,431
425,790 522,418 1,409,806 985,549 1,250,955 316,931
(224,191) (273,599) (378,542) (352,951) (297,697) (229,195)
201,599 248,819 1,031,264 632,598 953,258 87,736
704,500 923,160 3,411,310 2,282,278 3,351,390 389,032
539,839 275,164 1,486,965 971,673 934,665 306,700
227,908 499,706 1,808,118 1,589,495 2,363,863 157,573
767,747 774,870 3,295,083 2,561,168 3,298,528 464,273
$ 1,472,247 $ 1,698,030 $ 6,706,393 $ 4,843,446 $ 6,649,918 $ 853,305
</TABLE>
23
STATEMENTS OF CHANGES IN NET ASSETS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSETTS
---------------------------- ---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 696,598 $ 390,371 $ 3,340,631 $ 3,233,449 $ 771,410 $ 464,239
Net realized gain on investment
transactions 377,624 45,864 1,247,758 1,662,326 489,674 227,868
Net change in unrealized
appreciation (depreciation) of
investments 238,359 83,969 1,354,893 (590,349) 391,030 132,436
Net increase in net assets from
operations 1,312,581 520,204 5,943,282 4,305,426 1,652,114 824,543
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (367,913) (172,713) (847,240) (732,184) (288,776) (125,448)
Class B (263,634) (192,483) (1,112,789) (1,058,719) (229,220) (129,553)
Class C (65,051) (25,175) (1,346,149) (1,442,546) (253,414) (209,238)
Distributions in excess of net
investment income
Class A (1,655) (10,334) -0- (14,102) (9,236) (3,990)
Class B (3,731) (11,517) -0- (20,392) (10,381) (4,120)
Class C (1,548) (1,507) -0- (27,785) (10,837) (6,654)
Net realized gain on investments
Class A (12,807) (18,449) -0- -0- (77,311) (12,500)
Class B (11,580) (25,982) -0- -0- (71,686) (13,699)
Class C (2,601) (3,713) -0- -0- (86,735) (30,280)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase (decrease) 6,630,877 4,233,239 (1,231,836) 2,240,362 12,483,327 5,472,421
Total increase 7,212,938 4,291,570 1,405,268 3,250,060 13,097,845 5,761,482
NET ASSETS
Beginning of year 10,317,789 6,026,219 66,652,809 63,402,749 11,408,038 5,646,556
End of year $17,530,727 $10,317,789 $68,058,077 $66,652,809 $24,505,883 $11,408,038
</TABLE>
See notes to financial statements.
24
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY
---------------------------- ---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 704,500 $ 579,134 $ 923,160 $ 873,763 $ 3,411,310 $ 3,494,083
Net realized gain on investment
transactions 539,839 310,017 275,164 566,704 1,486,965 926,101
Net change in unrealized
appreciation (depreciation)of
investments 227,908 (40,072) 499,706 (399,102) 1,808,118 (334,852)
Net increase in net assets from
operations 1,472,247 849,079 1,698,030 1,041,365 6,706,393 4,085,332
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (307,066) (284,490) (199,592) (157,583) (748,666) (747,181)
Class B (192,911) (137,182) (384,953) (381,606) (1,683,216) (1,724,184)
Class C (204,523) (157,462) (338,557) (334,574) (979,428) (1,022,718)
Distributions in excess of net
investment income
Class A (9,747) (16,370) (1,867) (6,547) (10,862) (53,494)
Class B (7,521) (7,894) (555) (15,854) (20,887) (123,442)
Class C (7,811) (9,061) -0- (13,899) (8,404) (73,220)
Net realized gain on investments
Class A (73,030) (83,366) -0- -0- -0- -0-
Class B (46,231) (44,698) -0- -0- -0- -0-
Class C (52,615) (49,542) -0- -0- -0- -0-
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase (decrease) 2,037,957 3,089,421 1,213,302 860,087 (4,431,769) 9,294,813
Total increase (decrease) 2,608,749 3,148,435 1,985,808 991,389 (1,176,839) 9,635,906
NET ASSETS
Beginning of year 13,616,258 10,467,823 18,008,990 17,017,601 77,197,899 67,561,993
End of year $16,225,007 $13,616,258 $19,994,798 $18,008,990 $76,021,060 $77,197,899
</TABLE>
See notes to financial statements.
25
STATEMENTS OF CHANGES IN NET ASSETS
(CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA VIRGINIA
---------------------------- ---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 2,282,278 $ 2,282,058 $ 3,351,390 $ 2,645,781 $ 389,032 $ 238,998
Net realized gain on investment
transactions 971,673 1,554,258 934,665 1,880,108 306,700 180,231
Net change in unrealized
appreciation (depreciation)
of investments 1,589,495 (1,132,174) 2,363,863 (602,626) 157,573 (28,212)
Net increase in net assets from
operations 4,843,446 2,704,142 6,649,918 3,923,263 853,305 391,017
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (345,718) (291,324) (1,258,375) (555,739) (155,809) (115,677)
Class B (1,189,291) (1,131,284) (1,421,685) (1,401,785) (186,794) (100,364)
Class C (703,427) (859,450) (671,330) (688,257) (46,429) (22,957)
Distributions in excess of net
investment income
Class A -0- (9,978) (30,406) (33,335) (12) (902)
Class B -0- (38,746) (39,276) (84,082) (1,795) (783)
Class C -0- (29,435) (16,414) (41,283) (515) (179)
Net realized gain on investments
Class A -0- -0- -0- -0- (59,025) (15,668)
Class B -0- -0- -0- -0- (85,912) (10,549)
Class C -0- -0- -0- -0- (22,732) (1,013)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase (decrease) (1,900,553) 3,381,831 1,759,900 12,089,059 3,021,558 3,148,417
Total increase 704,457 3,725,756 4,972,332 13,207,841 3,315,840 3,271,342
NET ASSETS
Beginning of year 48,590,562 44,864,806 65,539,798 52,331,957 6,441,781 3,170,439
End of year $49,295,019 $48,590,562 $70,512,130 $65,539,798 $9,757,621 $6,441,781
</TABLE>
See notes to financial statements.
26
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Municipal Income Fund II (the "Fund") which is a Massachusetts
Business Trust, 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"). 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% for purchases not exceeding $1,000,000. With
respect to purchases of $1,000,000 or more, Class A shares redeemed within one
year of purchase will be subject to a contingent deferred sales charge of 1%.
Class B shares are currently sold with a contingent deferred sales charge which
declines from 3% to zero depending on the period of time the shares are held.
Class B shares will automatically convert to Class A shares six years after the
end of the calendar month of purchase. Class C shares are subject to a
contingent deferred sales charge of 1% on redemptions made within the first
year after purchase. All three classes of shares have identical voting,
dividend, liquidation and other rights 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 at its fair value as determined in good faith by
the Fund's Adviser, Alliance Capital Management, L.P. 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, unless this method does not represent fair 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
$25,550 for the Michigan, $31,450 for the Massachusetts, $27,200 for the
Virginia and $41,750 for the Arizona 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 policy of each Portfolio to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its investment company taxable income and net realized gains, if applicable,
to its shareholders. Therefore, no provisions for federal income or excise
taxes are required.
4. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Interest income is accrued daily. Investment transactions are accounted for on
the date securities are purchased or sold. Investment gains and losses are
determined on the identified cost basis. The Fund amortizes premium and
accretes 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. INCOME AND EXPENSES
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each settled class of shares, based on the proportionate interest in
the Fund represented by the net assets of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees
than Class A shares.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
6. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Income and capital gains distribution are determined in accordance with federal
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. To the extent these differences are
permanent, such amounts are reclassified with the capital accounts based on
their federal tax basis treatment; temporary differences, do not require such
reclassification. During the current fiscal year, certain portfolios had
permanent differences, primarily due to distributions in excess of net
tax-exempt investment income which resulted in a net decrease in distributions
in excess of net investment income and a corresponding decrease in additional
paid-in capital for those portfolios. These reclassifications had no affect on
net assets.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P., (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. For the year ended September 30, 1997, the Adviser
voluntarily agreed to waive all or a portion of its advisory fees. The
aggregate amounts of such fee waivers were: Arizona Portfolio, $85,933; Florida
Portfolio, $350,299; Massachusetts Portfolio, $97,045; Michigan Portfolio,
$91,349; Minnesota Portfolio, $117,961; New Jersey Portfolio, $323,542; Ohio
Portfolio, $290,778; Pennsylvania Portfolio, $242,697; and Virginia Portfolio
$49,263.
Pursuant to the advisory agreement, the Adviser provides to each Portfolio
certain legal and accounting services. For the year ended September 30, 1997,
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: Arizona Portfolio, $178,740; Massachusetts
Portfolio, $162,043; Michigan Portfolio, $132,842; Minnesota Portfolio,
$155,638; Ohio Portfolio, $62,173 and Virginia Portfolio, $179,932. There was
no such reimbursement for the Florida Portfolio, New Jersey 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: Arizona Portfolio, $18,000; Florida Portfolio,
$24,556; Massachusetts Portfolio, $18,000; Michigan Portfolio, $18,000;
Minnesota Portfolio, $18,000; New Jersey Portfolio, $38,674; Ohio Portfolio,
$24,949; Pennsylvania Portfolio, $34,716; and Virginia Portfolio, $18,000.
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, 1997 were: Arizona Portfolio
$8,550; Florida Portfolio $6,676; Massachusetts Portfolio $6,544; Michigan
Portfolio $3,231; Minnesota Portfolio, $2,259; New Jersey Portfolio, $6,728;
Pennsylvania Portfolio, $6,672; and Virginia Portfolio, $2,344. The amount of
contingent deferred sales charges imposed upon redemptions by shareholders of
Class B shares for the same period were: Arizona Portfolio, $26,432; Florida
Portfolio, $24,195; Massachusetts Portfolio, $5,545; Michigan Portfolio,
$4,700; Minnesota Portfolio, $10,660; New Jersey Portfolio, $51,440; Ohio
Portfolio, $23,986; Pennsylvania Portfolio, $19,985; and Virginia Portfolio,
$6,835. The amount of contingent deferred sales charges imposed upon
redemptions by shareholders of Class C shares for the year ended September 30,
1997 were: Arizona Portfolio, 1,329; Florida Portfolio, $1,137; Massachusetts
Portfolio, $2,193; Michigan Portfolio, $2,053; Minnesota Portfolio, $1,172; New
Jersey Portfolio, $2,401; Ohio Portfolio, $2,176; Pennsylvania Portfolio,
$1,087; and Virginia Portfolio, $187.
28
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. 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 Class A shares and 1% of each Portfolio's average daily net
assets attributable to both Class B and Class C shares. 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 $ 737,147 $ 176,290
Florida 1,121,048 1,152,723
Massachusetts 654,399 605,448
Michigan 633,711 728,261
Minnesota 990,510 727,660
New Jersey 1,797,139 759,019
Ohio 1,490,274 762,570
Pennsylvania 1,276,781 680,204
Virginia 845,124 235,241
Such costs may be recovered from each Portfolio in future periods so long as
the Agreement is in effect. In accordance with the Agreement, there is no
provision for recovery of unreimbursed distribution costs incurred by the
Distributor beyond the current fiscal year for Class A shares. The Agreement
also provides that the Adviser may use its own resources to finance the
distribution of each Portfolio's shares.
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments
and U.S. government securities) for the year ended September 30, 1997 were as
follows:
PORTFOLIO PURCHASES SALES
- -------------- ------------ ------------
Arizona $ 32,012,466 $ 26,292,554
Florida 141,479,088 138,210,915
Massachusetts 31,281,233 20,575,225
Michigan 25,194,536 23,337,789
Minnesota 25,882,173 24,409,819
New Jersey 45,128,561 50,633,071
Ohio 48,093,498 51,547,216
Pennsylvania 58,633,704 56,627,335
Virginia 22,532,846 19,798,346
At September 30, 1997, the cost of investments 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 $ 17,445,084 $ 487,086 $ -0- $ 487,086
Florida 72,507,978 2,494,719 -0- 2,494,719
Massachusetts 22,065,936 636,420 -0- 636,420
Michigan 15,372,276 522,127 -0- 522,127
Minnesota 18,806,526 974,010 -0- 974,010
New Jersey 69,538,092 4,099,921 -0- 4,099,921
Ohio 44,732,641 2,603,896 -0- 2,603,896
Pennsylvania 65,177,919 3,953,698 -0- 3,953,698
Virginia 9,264,442 220,107 -0- 220,107
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
For Federal income tax purposes at September 30, 1997, the Fund had capital
loss carryforwards for the following Portfolios: $3,802,409 expiring in 2003,
and $349,704 expiring in 2004, for New Jersey Portfolio; $5,161,244 expiring in
2003, for Florida Portfolio; $2,755,099 expiring in 2003, and $332,000 expiring
in 2004, for Ohio Portfolio; $1,859,245 expiring in 2002, for Pennsylvania
Portfolio; and $924,729 expiring in 2003, and $492,981 expiring in 2004, 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. None of the portfolios had
post October losses.
NOTE E: 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 YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
ARIZONA PORTFOLIO 1997 1996 1997 1996
- ----------------- ------------- ----------- -------------- -------------
CLASS A
Shares sold 466,115 245,077 $ 4,910,624 $ 2,497,924
Shares issued in
reinvestment of
dividends and
distributions 9,889 7,348 104,166 75,448
Shares converted
from Class B 5,552 8,585 58,577 85,589
Shares redeemed (52,682) (65,056) (550,222) (660,264)
Net increase 428,874 195,954 $ 4,523,145 $ 1,998,697
CLASS B
Shares sold 234,439 222,576 $ 2,473,657 $ 2,277,718
Shares issued in
reinvestment of
dividends and
distributions 13,442 9,322 141,339 95,597
Shares converted
to Class A (5,552) (8,585) (58,577) (85,589)
Shares redeemed (139,836) (27,452) (1,453,909) (280,976)
Net increase 102,493 195,861 $ 1,102,510 $ 2,006,750
CLASS C
Shares sold 115,373 44,293 $ 1,209,064 $ 451,216
Shares issued in
reinvestment of
dividends and
distributions 3,226 2,349 33,997 24,160
Shares redeemed (22,676) (24,564) (237,839) (247,584)
Net increase 95,923 22,078 $ 1,005,222 $ 227,792
30
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
FLORIDA PORTFOLIO 1997 1996 1997 1996
- ----------------- ------------- ----------- -------------- -------------
CLASS A
Shares sold 401,472 519,985 $ 3,966,237 $ 5,045,697
Shares issued in
reinvestment of
dividends and
distributions 32,217 29,497 318,408 286,857
Shares converted
from Class B 51,926 22,916 510,238 219,737
Shares redeemed (228,010) (351,639) (2,248,140) (3,406,503)
Net increase 257,605 220,759 $ 2,546,743 $ 2,145,788
CLASS B
Shares sold 744,931 649,530 $ 7,338,616 $ 6,337,001
Shares issued in
reinvestment of
dividends and
distributions 50,066 44,597 495,099 434,054
Shares converted
to Class A (51,926) (22,916) (510,238) (219,737)
Shares redeemed (579,406) (544,509) (5,720,727) (5,277,524)
Net increase 163,665 126,702 $ 1,602,750 $ 1,273,794
CLASS C
Shares sold 676,267 594,748 $ 6,658,690 $ 5,803,084
Shares issued in
reinvestment of
dividends and
distributions 62,835 85,081 621,766 834,227
Shares redeemed (1,296,118) (800,351) (12,661,785) (7,816,531)
Net decrease (557,016) (120,522) $(5,381,329) $(1,179,220)
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MASSACHUSETTS SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
PORTFOLI 1997 1996 1997 1996
- --------------- ------------- ----------- -------------- -------------
CLASS A
Shares sold 705,271 172,711 $ 7,737,977 $ 1,833,733
Shares issued in
reinvestment of
dividends and
distributions 16,441 4,244 178,373 45,329
Shares converted
from Class B 36 -0- 397 -0-
Shares redeemed (172,200) (8,362) (1,883,762) (89,000)
Net increase 549,548 168,593 $ 6,032,985 $ 1,790,062
CLASS B
Shares sold 336,620 191,547 $ 3,677,110 $ 2,024,593
Shares issued in
reinvestment of
dividends and
distributions 14,320 5,666 155,377 60,463
Shares converted
to Class A (36) -0- (397) -0-
Shares redeemed (44,532) (24,584) (485,344) (264,300)
Net increase 306,372 172,629 $ 3,346,746 $ 1,820,756
CLASS C
Shares sold 386,133 371,867 $ 4,233,533 $ 3,967,597
Shares issued in
reinvestment of
dividends and
distributions 28,580 18,527 309,824 197,520
Shares redeemed (132,699) (217,586) (1,439,761) (2,303,514)
Net increase 282,014 172,808 $ 3,103,596 $ 1,861,603
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
MICHIGAN PORTFOLIO 1997 1996 1997 1996
- ------------------ ----------- ----------- -------------- -------------
CLASS A
Shares sold 160,589 101,489 $ 1,659,299 $ 1,014,340
Shares issued in
reinvestment of
dividends and
distributions 19,006 25,151 193,980 255,525
Shares converted
from Class B 28 8,229 286 81,522
Shares redeemed (230,129) (40,577) (2,348,441) (412,901)
Net increase(decrease) (50,506) 94,292 $ (494,876) $ 938,486
CLASS B
Shares sold 185,283 159,283 $ 1,897,940 $ 1,598,649
Shares issued in
reinvestment of
dividends and
distributions 13,545 9,868 138,387 100,283
Shares converted
to Class A (28) (8,229) (286) (81,522)
Shares redeemed (46,187) (49,958) (470,069) (499,250)
Net increase 152,613 110,964 $ 1,565,972 $ 1,118,160
CLASS C
Shares sold 176,811 250,006 $ 1,814,237 $ 2,504,024
Shares issued in
reinvestment of
dividends and
distributions 22,260 16,967 227,355 171,824
Shares redeemed (104,698) (163,569) (1,074,731) (1,643,073)
Net increase 94,373 103,404 $ 966,861 $ 1,032,775
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
MINNESOTA PORTFOLIO 1997 1996 1997 1996
- ------------------- ----------- ----------- -------------- -------------
CLASS A
Shares sold 105,934 92,916 $ 1,027,028 $ 881,265
Shares issued in
reinvestment of
dividends and
distributions 12,865 12,846 125,087 122,393
Shares converted
from Class B 11,080 387 107,249 3,685
Shares redeemed (47,164) (30,018) (460,217) (284,383)
Net increase 82,715 76,131 $ 799,147 $ 722,960
CLASS B
Shares sold 167,360 222,829 $ 1,631,577 $ 2,141,082
Shares issued in
reinvestment of
dividends and
distributions 26,821 28,415 260,796 270,706
Shares converted
to Class A (11,080) (387) (107,249) (3,685)
Shares redeemed (194,610) (154,177) (1,893,478) (1,473,158)
Net increase (decrease) (11,509) 96,680 $ (108,354) $ 934,945
CLASS C
Shares sold 167,292 123,688 $ 1,624,602 $ 1,186,392
Shares issued in
reinvestment of
dividends and
distributions 27,887 30,164 271,274 287,651
Shares redeemed (141,329) (238,952) (1,373,367) (2,271,861)
Net increase (decrease) 53,850 (85,100) $ 522,509 $ (797,818)
32
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
NEW JERSEY PORTFOLIO 1997 1996 1997 1996
- -------------------- ------------ ----------- -------------- -------------
CLASS A
Shares sold 469,608 625,486 $ 4,670,579 $ 6,081,158
Shares issued in
reinvestment of
dividends and
distributions 43,821 52,967 434,332 512,440
Shares converted
from Class B 25,334 10,942 250,480 110,519
Shares redeemed (530,123) (295,089) (5,236,167) (2,850,599)
Net increase 8,640 394,306 $ 119,224 $ 3,853,518
CLASS B
Shares sold 612,170 1,079,052 $ 6,103,109 $10,515,892
Shares issued in
reinvestment of
dividends and
distributions 106,709 109,643 1,057,759 1,062,642
Shares converted
to Class A (25,331) (10,942) (250,480) (110,519)
Shares redeemed (943,180) (749,409) (9,338,864) (7,256,786)
Net increase(decrease) (249,632) 428,344 $(2,428,476) $ 4,211,229
CLASS C
Shares sold 374,853 633,743 $ 3,722,963 $ 6,162,975
Shares issued in
reinvestment of
dividends and
distributions 67,711 78,732 671,448 763,028
Shares redeemed (657,468) (591,207) (6,516,928) (5,695,937)
Net increase(decrease) (214,904) 121,268 $(2,122,517) $ 1,230,066
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
OHIO PORTFOLIO 1997 1996 1997 1996
- -------------- ------------ ----------- -------------- -------------
CLASS A
Shares sold 278,619 254,120 $ 2,767,243 $ 2,463,924
Shares issued in
reinvestment of
dividends and
distributions 20,667 20,355 203,289 195,466
Shares converted
from Class B 13,783 6,776 138,710 64,703
Shares redeemed (195,949) (88,508) (1,909,329) (851,889)
Net increase 117,120 192,743 $ 1,199,913 $ 1,872,204
CLASS B
Shares sold 491,863 708,116 $ 4,851,011 $ 6,793,206
Shares issued in
reinvestment of
dividends and
distributions (85,785) 84,542 844,851 813,053
Shares converted
to Class A (13,783) (6,776) (138,710) (64,703)
Shares redeemed (561,173) (437,800) (5,501,504) (4,210,177)
Net increase 2,692 348,082 $ 55,648 $ 3,331,379
CLASS C
Shares sold 173,363 306,053 $ 1,711,532 $ 2,943,537
Shares issued in
reinvestment of
dividends and
distributions 51,701 58,817 509,274 566,008
Shares redeemed (551,175) (553,963) (5,376,920) (5,331,297)
Net decrease (326,111) (189,093) $(3,156,114) $(1,821,752)
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
PENNSYLVANIA SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
PORTFOLIO 1997 1996 1997 1996
- -------------- ------------- ----------- -------------- -------------
CLASS A
Shares sold 467,692 1,374,963 $ 4,681,081 $13,527,078
Shares issued in
reinvestment of
dividends and
distributions 84,710 22,540 852,355 220,725
Shares converted
from Class B 63,903 48,579 646,415 472,346
Shares redeemed (344,028) (208,292) (3,466,776) (2,034,747)
Net increase 272,277 1,237,790 $ 2,713,075 $12,185,402
CLASS B
Shares sold 577,688 533,742 $ 5,820,098 $ 5,244,693
Shares issued in
reinvestment of
dividends and
distributions 80,944 81,750 814,188 800,878
Shares converted
to Class A (63,903) (48,579) (646,415) (472,346)
Shares redeemed (771,304) (440,056) (7,750,943) (4,312,987)
Net increase(decrease) (176,575) 126,857 $(1,763,072) $ 1,260,238
CLASS C
Shares sold 288,667 325,151 $ 2,906,593 $ 3,213,975
Shares issued in
reinvestment of
dividends and
distributions 44,989 45,719 452,736 448,507
Shares redeemed (254,416) (511,735) (2,549,432) (5,019,063)
Net increase(decrease) 79,240 (140,865) $ 809,897 $(1,356,581)
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
VIRGINIA PORTFOLIO 1997 1996 1997 1996
- ------------------ ------------ ----------- -------------- -------------
CLASS A
Shares sold 106,838 71,182 $ 1,119,910 $ 740,685
Shares issued in
reinvestment of
dividends and
distributions 12,492 8,689 131,306 90,991
Shares converted
from Class B -0- 103 -0- 1,094
Shares redeemed (27,670) (28,103) (291,141) (294,511)
Net increase 91,660 51,871 $ 960,075 $ 538,259
CLASS B
Shares sold 168,891 226,100 $ 1,787,325 $ 2,369,231
Shares issued in
reinvestment of
dividends and
distributions 19,801 7,632 208,051 79,869
Shares converted
to Class A -0- (103) -0- (1,094)
Shares redeemed (44,556) (33,245) (465,272) (345,773)
Net increase 144,136 200,384 $ 1,530,104 $ 2,102,233
CLASS C
Shares sold 54,662 59,047 $ 578,928 $ 615,683
Shares issued in
reinvestment of
dividends and
distributions 6,070 2,054 63,771 21,491
Shares redeemed (10,711) (12,272) (111,320) (129,249)
Net increase 50,021 48,829 $ 531,379 $ 507,925
34
FINANCIAL HIGHLIGHTS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
ARIZONA PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
JUNE 1,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.29 $ 9.77 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .57(c) .55(c) .56 .20
Net realized and unrealized gain (loss)
on investment transactions .48 .14 .53 (.23)
Net increase (decrease) in net asset
value from operations 1.05 .69 1.09 (.03)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.57) (.55) (.56) (.20)
Distributions in excess of net
investment income -0- (.03) (.01) -0-
Distributions from net realized gains (.02) (.08) -0- -0-
TOTAL DIVIDENDS AND DISTRIBUTIONS (.59) (.66) (.57) (.20)
Net asset value, end of period $10.78 $10.32 $10.29 $ 9.77
TOTAL RETURN
Total investment return based on
net asset value (d) 10.54% 6.84% 11.56% (.35)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $9,225 $4,409 $2,379 $930
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .78% .78% .78% .78%(e)
Expenses, before waivers/reimbursements 2.71% 3.69% 4.88% 7.71%(e)
Net investment income, net of waivers
/reimbursements 5.42% 5.33% 5.56% 5.82%(e)
Portfolio turnover rate 193% 244% 85% 81%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
JUNE 1,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.29 $ 9.77 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .50(c) .47(c) .49 .18
Net realized and unrealized gain (loss)
on investment transactions .48 .14 .53 (.24)
Net increase (decrease) in net asset
value from operations .98 .61 1.02 (.06)
LESS: DIVIDENDS AND DISTRIBUTIONS
DIVIDENDS FROM NET INVESTMENT INCOME (.50) (.47) (.49) (.17)
Distributions in excess of net
investment income -0- (.03) (.01) -0-
Distributions from net realized gains (.02) (.08) -0- -0-
Total dividends and distributions (.52) (.58) (.50) (.17)
Net asset value, end of period $10.78 $10.32 $10.29 $ 9.77
TOTAL RETURN
Total investment return based on net
asset value (d) 9.80% 6.10% 10.78% (.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $6,531 $5,199 $3,166 $1,677
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.48% 1.48% 1.48% 1.48%(e)
Expenses, before waivers/reimbursements 3.40% 4.40% 5.58% 8.41%(e)
Net investment income, net of waivers
/reimbursements 4.73% 4.62% 4.89% 5.13%(e)
Portfolio turnover rate 193% 244% 85% 81%
</TABLE>
See footnote summary on page 52.
35
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
ARIZONA PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------
JUNE 1,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.30 $ 9.77 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .50(c) .47(c) .49 .17
Net realized and unrealized gain (loss)
on investment transactions .48 .13 .54 (.23)
Net increase (decrease) in net asset
value from operations .98 .60 1.03 (.06)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.50) (.47) (.49) (.17)
Distributions in excess of net
investment income -0- (.03) (.01) -0-
Distributions from net realized gains (.02) (.08) -0- -0-
Total dividends and distributions (.52) (.58) (.50) (.17)
Net asset value, end of period $10.78 $10.32 $10.30 $ 9.77
TOTAL RETURN
Total investment return based on net
asset value (d) 9.80% 6.00% 10.89% (.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $1,775 $710 $481 $485
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.48% 1.48% 1.48% 1.48%(e)
Expenses, before waivers/reimbursements 3.39% 4.41% 5.58% 8.41%(e)
Net investment income, net of waivers
/reimbursements 4.70% 4.61% 4.90% 4.70%(e)
Portfolio turnover rate 193% 244% 85% 81%
</TABLE>
See footnote summary on page 52.
36
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
FLORIDA PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.73 $ 9.58 $ 8.89 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .55(c) .54(c) .55 .55 .16
Net realized and unrealized gain (loss)
on investment transactions .41 .16 .69 (1.35) .25
Net increase (decrease) in net asset
value from operations .96 .70 1.24 (.80) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.55) (.54) (.55) (.55) (.16)
Distributions in excess of net
investment income -0- (.01) -0- -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.55) (.55) (.55) (.56) (.16)
Net asset value, end of period $10.14 $ 9.73 $ 9.58 $ 8.89 $10.25
TOTAL RETURN
Total investment return based on
net asset value (d) 10.14% 7.45% 14.44% (8.03)% 4.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $17,516 $14,297 $11,956 $8,227 $4,145
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .73% .73% .73% .38% -0-%(e)
Expenses, before waivers/reimbursements 1.35% 1.33% 1.33% 1.27% 1.30%(e)
Net investment income, net of waivers
/reimbursements 5.58% 5.52% 5.91% 5.70% 5.44%(e)
Portfolio turnover rate 204% 237% 146% 185% 82%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.74 $ 9.58 $ 8.89 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .48(c) .47(c) .47 .48 .14
Net realized and unrealized gain (loss)
on investment transactions .40 .17 .70 (1.35) .25
Net increase (decrease) in net asset
value from operations .88 .64 1.17 (.87) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.47) (.47) (.48) (.14)
Distributions in excess of net
investment income -0- (.01) (.01) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.48) (.48) (.48) (.49) (.14)
Net asset value, end of period $10.14 $ 9.74 $ 9.58 $ 8.89 $10.25
TOTAL RETURN
Total investment return based on net
asset value (d) 9.24% 6.78% 13.56% (8.72)% 3.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $24,820 $22,235 $20,660 $18,048 $9,588
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.43% 1.43% 1.42% 1.08% .61%(e)
Expenses, before waivers/reimbursements 2.05% 2.03% 2.03% 1.98% 2.00%(e)
Net investment income, net of waivers
/reimbursements 4.87% 4.81% 5.22% 4.99% 4.74%(e)
Portfolio turnover rate 204% 237% 146% 185% 82%
</TABLE>
See footnote summary on page 52.
37
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
FLORIDA PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.74 $9.58 $8.89 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .49(c) .47(c) .47 .48 .14
Net realized and unrealized gain (loss)
on investment transactions .39 .17 .70 (1.35) .25
Net increase (decrease) in net asset
value from operations .88 .64 1.17 (.87) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.47) (.47) (.48) (.14)
Distributions in excess of net
investment income -0- (.01) (.01) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.48) (.48) (.48) (.49) (.14)
Net asset value, end of period $10.14 $9.74 $9.58 $8.89 $10.25
TOTAL RETURN
Total investment return based on
net asset value (d) 9.23% 6.78% 13.56% (8.72)% 3.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $25,722 $30,121 $30,787 $42,405 $28,249
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.43% 1.43% 1.42% 1.08% .61%(e)
Expenses, before waivers/reimbursements 2.03% 2.02% 2.03% 1.97% 2.00%(e)
Net investment income, net of waivers
/reimbursements 4.89% 4.81% 5.27% 4.97% 4.74%(e)
Portfolio turnover rate 204% 237% 146% 185% 82%
</TABLE>
See footnote summary on page 52.
38
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MASSACHUSETTS PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
MAR. 29,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.85 $10.50 $10.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .58(c) .60(c) .58 .31
Net realized and unrealized gain on
investment transactions .57 .44 .41 .11
Net increase in net asset value
from operations 1.15 1.04 .99 .42
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.58) (.59) (.58) (.30)
Distributions in excess of net
investment income (.03) (.02) (.03) -0-
Distributions from net realized gains (.20) (.08) -0- -0-
Total dividends and distributions (.81) (.69) (.61) (.30)
Net asset value, end of period $11.19 $10.85 $10.50 $10.12
TOTAL RETURN
Total investment return based on net
asset value (d) 11.14% 10.25% 10.19% 4.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $9,461 $3,211 $1,337 $565
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .72% .62% .60% .60%(e)
Expenses, before waivers/reimbursements 2.40% 3.15% 6.44% 13.20%(e)
Net investment income, net of waivers
/reimbursements 5.40% 5.62% 5.67% 5.98%(e)
Portfolio turnover rate 134% 246% 155% 146%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
MAR. 29,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.84 $10.49 $10.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .51(c) .52(c) .52 .27
Net realized and unrealized gain on
investment transactions .58 .45 .39 .11
Net increase in net asset value from
operations 1.09 .97 .91 .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.52) (.52) (.26)
Distributions in excess of net
investment income (.03) (.02) (.02) -0-
Distributions from net realized gains (.20) (.08) -0- -0-
Total dividends and distributions (.74) (.62) (.54) (.26)
Net asset value, end of period $11.19 $10.84 $10.49 $10.12
TOTAL RETURN
Total investment return based on net
asset value (d) 10.52% 9.52% 9.32% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $7,230 $3,683 $1,754 $725
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.42% 1.32% 1.30% 1.30%(e)
Expenses, before waivers/reimbursements 3.07% 3.85% 7.14% 13.90%(e)
Net investment income, net of waivers
/reimbursements 4.73% 4.93% 4.90% 5.13%(e)
Portfolio turnover rate 134% 246% 155% 146%
</TABLE>
See footnote summary on page 52.
39
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MASSACHUSETTS PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------
MAR. 29,1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.84 $10.49 $10.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .51(c) .52(c) .52 .25
Net realized and unrealized gain on
investment transactions .58 .45 .39 .13
Net increase in net asset value from
operations 1.09 .97 .91 .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.52) (.52) (.26)
Distributions in excess of net
investment income (.03) (.02) (.02) -0-
Distributions from net realized gains (.20) (.08) -0- -0-
Total dividends and distributions (.74) (.62) (.54) (.26)
Net asset value, end of period $11.19 $10.84 $10.49 $10.12
TOTAL RETURN
Total investment return based on net
asset value (d) 10.52% 9.52% 9.32% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $7,815 $4,514 $2,556 $774
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.42% 1.31% 1.30% 1.30%(e)
Expenses, before waivers/reimbursements 3.09% 3.84% 7.14% 13.90%(e)
Net investment income, net of waivers
/reimbursements 4.75% 4.88% 4.85% 4.00%(e)
Portfolio turnover rate 134% 246% 155% 146%
</TABLE>
See footnote summary on page 52.
40
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MICHIGAN PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FEBRUARY 25,
YEAR ENDED SEPTEMBER 30, 1994(a) TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 $10.10 $ 9.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .53(c) .52(c) .52 .33
Net realized and unrealized gain (loss)
on investment transactions .55 .22 .78 (.65)
Net increase (decrease) in net asset
value from operations 1.08 .74 1.30 (.32)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.53) (.52) (.52) (.33)
Distributions in excess of net
investment income (.02) (.03) (.03) -0-
Distributions from net realized gains (.13) (.17) -0- -0-
Total dividends and distributions (.68) (.72) (.55) (.33)
Net asset value, end of period $10.52 $10.12 $10.10 $ 9.35
TOTAL RETURN
Total investment return based on net
asset value (d) 11.05% 7.54% 14.40% (3.24)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $5,836 $6,123 $5,158 $2,473
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .96% .96% 1.36% .93%(e)
Expenses, before waivers/reimbursements 2.46% 2.77% 3.43% 3.97%(e)
Net investment income, net of waivers
/reimbursements 5.24% 5.21% 5.27% 5.83%(e)
Portfolio turnover rate 161% 242% 151% 222%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
FEBRUARY 25,
YEAR ENDED SEPTEMBER 30, 1994(a) TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 $10.10 $ 9.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .46(c) .45(c) .45 .29
Net realized and unrealized gain (loss)
on investment transactions .55 .22 .78 (.65)
Net increase (decrease) in net asset
value from operations 1.01 .67 1.23 (.36)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.45) (.45) (.29)
Distributions in excess of net
investment income (.02) (.03) (.03) -0-
Distributions from net realized gains (.13) (.17) -0- -0-
Total dividends and distributions (.61) (.65) (.48) (.29)
Net asset value, end of period $10.52 $10.12 $10.10 $ 9.35
TOTAL RETURN
Total investment return based on net
asset value (d) 10.30% 6.80% 13.58% (3.65)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $5,300 $3,553 $2,424 $1,722
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.66% 1.66% 2.06% 1.63%(e)
Expenses, before waivers/reimbursements 3.23% 3.48% 4.12% 4.67%(e)
Net investment income, net of waivers
/reimbursements 4.53% 4.51% 4.57% 4.93%(e)
Portfolio turnover rate 161% 242% 151% 222%
</TABLE>
See footnote summary on page 52.
41
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MICHIGAN PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------
FEBRUARY 25,
YEAR ENDED SEPTEMBER 30, 1994(a) TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.12 $10.10 $ 9.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .46(c) .45(c) .45 .29
Net realized and unrealized gain (loss)
on investment transactions .55 .22 .78 (.65)
Net increase (decrease) in net asset
value from operations 1.01 .67 1.23 (.36)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.45) (.45) (.29)
Distributions in excess of net
investment income (.02) (.03) (.03) -0-
Distributions from net realized gains (.13) (.17) -0- -0-
Total dividends and distributions (.61) (.65) (.48) (.29)
Net asset value, end of period $10.52 $10.12 $10.10 $ 9.35
TOTAL RETURN
Total investment return based on net
asset value (d) 10.30% 6.80% 13.58% (3.65)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $5,089 $3,940 $2,886 $2,778
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.66% 1.66% 2.06% 1.63%(e)
Expenses, before waivers/reimbursements 3.20% 3.48% 4.13% 4.67%(e)
Net investment income, net of waivers
/reimbursements 4.55% 4.50% 4.69% 4.92%(e)
Portfolio turnover rate 161% 242% 151% 222%
</TABLE>
See footnote summary on page 52.
42
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MINNESOTA PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.58 $9.49 $9.19 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .53(c) .53(c) .53 .55 .15
Net realized and unrealized gain (loss)
on investment transactions .39 .11 .32 (1.09) .28
Net increase (decrease) in net asset
value from operations .92 .64 .85 (.54) .43
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.53) (.53) (.53) (.55) (.15)
Distributions in excess of net
investment income -0- (.02) (.02) -0- -0-
Total dividends and distributions (.53) (.55) (.55) (.55) (.15)
Net asset value, end of period $9.97 $9.58 $9.49 $ 9.19 $10.28
TOTAL RETURN
Total investment return based on
net asset value (d) 9.93% 6.95% 9.63% (5.35)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $4,120 $3,165 $2,414 $2,125 $994
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .75% .72% .71% .09% -0-%(e)
Expenses, before waivers/reimbursements 2.22% 2.19% 2.30% 2.12% 1.89%(E)
Net investment income, net of waivers
/reimbursements 5.44% 5.54% 5.71% 5.71% 5.20%(e)
Portfolio turnover rate 131% 195% 117% 143% 61%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.58 $9.49 $9.18 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .46(c) .46(c) .46 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .39 .11 .33 (1.10) .28
Net increase (decrease) in net asset
value from operations .85 .57 .79 (.62) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.46) (.46) (.48) (.13)
Distributions in excess of net
investment income -0- (.02) (.02) -0- -0-
Total dividends and distributions (.46) (.48) (.48) (.48) (.13)
Net asset value, end of period $9.97 $9.58 $9.49 $ 9.18 $10.28
TOTAL RETURN
Total investment return based on net
asset value (d) 9.13% 6.15% 8.90% (6.15)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $8,517 $8,291 $7,299 $6,150 $2,665
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.46% 1.42% 1.42% .80% .43%(e)
Expenses, before waivers/reimbursements 2.91% 2.89% 3.02% 2.83% 2.59%(E)
Net investment income, net of waivers
/reimbursements 4.75% 4.82% 4.97% 5.00% 4.50%(e)
Portfolio turnover rate 131% 195% 117% 143% 61%
</TABLE>
See footnote summary on page 52.
43
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
MINNESOTA PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.58 $9.50 $9.19 $10.27 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .46(c) .46(c) .46 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .39 .10 .33 (1.08) .27
Net increase (decrease) in net asset
value from operations .85 .56 .79 (.60) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.46) (.46) (.48) (.13)
Distributions in excess of net
investment income -0- (.02) (.02) -0- -0-
Total dividends and distributions (.46) (.48) (.48) (.48) (.13)
Net asset value, end of period $9.97 $9.58 $9.50 $ 9.19 $10.27
TOTAL RETURN
Total investment return based on
net asset value (d) 9.13% 6.03% 8.89% (5.95)% 4.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $7,358 $6,553 $7,305 $9,489 $6,697
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.45% 1.41% 1.41% .79% .43%(e)
Expenses, before waivers/reimbursements 2.89% 2.88% 3.00% 2.82% 2.59%(e)
Net investment income, net of waivers
/reimbursements 4.76% 4.82% 5.05% 4.90% 4.50%(e)
Portfolio turnover rate 131% 195% 117% 143% 61%
</TABLE>
See footnote summary on page 52.
44
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
NEW JERSEY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $9.65 $9.07 $10.29 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .51(c) .51(c) .54 .55 .15
Net realized and unrealized gain (loss)
on investment transactions .44 .11 .59 (1.22) .29
Net increase (decrease) in net asset
value from operations .95 .62 1.13 (.67) .44
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.54) (.55) (.15)
Distributions in excess of net
investment income (.01) (.04) (.01) -0- -0-
Total dividends and distributions (.52) (.55) (.55) (.55) (.15)
Net asset value, end of period $10.15 $9.72 $9.65 $ 9.07 $10.29
TOTAL RETURN
Total investment return based on
net asset value (d) 10.01% 6.57% 12.91% (6.67)% 4.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $16,309 $15,520 $11,612 $9,257 $6,679
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .82% .82% .82% .20% -0-%(e)
Expenses, before waivers/reimbursements 1.34% 1.35% 1.35% 1.33% 1.29%(e)
Net investment income, net of waivers
/reimbursements 5.16% 5.26% 5.73% 5.65% 5.37%(e)
Portfolio turnover rate 61% 132% 86% 171% 47%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $9.66 $9.07 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .44(c) .44(c) .47 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .45 .10 .60 (1.21) .28
Net increase (decrease) in net asset
value from operations .89 .54 1.07 (.73) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.44) (.45) (.47) (.48) (.13)
Distributions in excess of net
investment income (.01) (.03) (.01) -0- -0-
Total dividends and distributions (.45) (.48) (.48) (.48) (.13)
Net asset value, end of period $10.16 $9.72 $9.66 $ 9.07 $10.28
TOTAL RETURN
Total investment return based on net
asset value (d) 9.32% 5.66% 12.15% (7.28)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $38,308 $39,099 $34,695 $30,459 $15,637
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.53% 1.53% 1.53% .91% .63%(e)
Expenses, before waivers/reimbursements 2.04% 2.05% 2.06% 2.03% 1.99%(E)
Net investment income, net of waivers
/reimbursements 4.45% 4.56% 5.03% 4.96% 4.67%(e)
Portfolio turnover rate 61% 132% 86% 171% 47%
</TABLE>
See footnote summary on page 52.
45
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
NEW JERSEY PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $9.66 $9.07 $10.28 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .44(c) .44(c) .47 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .45 .10 .60 (1.21) .28
Net increase (decrease) in net asset
value from operations .89 .54 1.07 (.73) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.44) (.45) (.47) (.48) (.13)
Distributions in excess of net
investment income (.01) (.03) (.01) -0- -0-
Total dividends and distributions (.45) (.48) (.48) (.48) (.13)
Net asset value, end of period $10.16 $9.72 $9.66 $ 9.07 $10.28
TOTAL RETURN
Total investment return based on net
asset value (d) 9.32% 5.66% 12.14% (7.28)% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $21,404 $22,579 $21,255 $26,472 $21,193
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.52% 1.52% 1.52% .90% .63%(e)
Expenses, before waivers/reimbursements 2.03% 2.04% 2.06% 2.02% 1.99%(e)
Net investment income, net of waivers
/reimbursements 4.47% 4.56% 5.09% 4.93% 4.67%(e)
Portfolio turnover rate 61% 132% 86% 171% 47%
</TABLE>
See footnote summary on page 52.
46
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
OHIO PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.61 $9.53 $9.06 $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .54(c) .52(c) .54 .55 .15
Net realized and unrealized gain (loss)
on investment transactions .54 .11 .48 (1.19) .26
Net increase (decrease) in net asset
value from operations 1.08 .63 1.02 (.64) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.53) (.53) (.54) (.55) (.15)
Distributions in excess of net
investment income -0- (.02) (.01) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.53) (.55) (.55) (.56) (.15)
Net asset value, end of period $10.16 $9.61 $9.53 $ 9.06 $10.26
TOTAL RETURN
Total investment return based on
net asset value (d) 11.60% 6.72% 11.63% (6.44)% 4.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $7,596 $6,054 $4,170 $2,810 $1,050
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .75% .75% .75% .04% -0-%(e)
Expenses, before waivers/reimbursements 1.52% 1.48% 1.51% 1.42% 1.32%(e)
Net investment income, net of waivers
/reimbursements 5.49% 5.47% 5.74% 5.67% 5.30%(e)
Portfolio turnover rate 104% 182% 108% 161% 55%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.61 $9.54 $9.06 $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .48(c) .46(c) .47 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .53 .09 .49 (1.19) .26
Net increase (decrease) in net asset
value from operations 1.01 .55 .96 (.71) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.46) (.47) (.48) (.13)
Distributions in excess of net
investment income -0- (.02) (.01) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.46) (.48) (.48) (.49) (.13)
Net asset value, end of period $10.16 $9.61 $9.54 $ 9.06 $10.26
TOTAL RETURN
Total investment return based on
net asset value (d) 10.80% 5.82% 10.88% (7.13)% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $26,821 $25,334 $21,821 $20,267 $8,952
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.46% 1.46% 1.46% .74% .17%(e)
Expenses, before waivers/reimpursements 2.22% 2.18% 2.21% 2.13% 2.02%(E)
Net investment income, net of waivers
/reimbursements 4.81% 4.77% 5.08% 4.95% 4.60%(e)
Portfolio turnover rate 104% 182% 108% 161% 55%
</TABLE>
See footnote summary on page 52.
47
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
OHIO PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.61 $9.54 $9.06 $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .47(c) .46(c) .47 .48 .13
Net realized and unrealized gain (loss)
on investment transactions .54 .09 .49 (1.19) .26
Net increase (decrease) in net asset
value from operations 1.01 .55 .96 (.71) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.46) (.47) (.48) (.13)
Distributions in excess of net
investment income -0- (.02) (.01) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.46) (.48) (.48) (.49) (.13)
Net asset value, end of period $10.16 $9.61 $9.54 $ 9.06 $10.26
TOTAL RETURN
Total investment return based on
net asset value (d) 10.80% 5.82% 10.88% (7.13)% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $14,878 $17,203 $18,874 $26,294 $19,894
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.45% 1.45% 1.45% .74% .17%(e)
Expenses, before waivers/reimbursements 2.20% 2.16% 2.20% 2.12% 2.02%(e)
Net investment income, net of waivers
/reimbursements 4.81% 4.78% 5.14% 4.89% 4.60%(e)
Portfolio turnover rate 104% 182% 108% 161% 55%
</TABLE>
See footnote summary on page 52.
48
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
PENNSYLVANIA PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.85 $9.64 $9.18 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .55(c) .49(c) .54 .56 .16
Net realized and unrealized gain (loss)
on investment transactions .49 .28 .48 (1.06) .25
Net increase (decrease) in net asset
value from operations 1.04 .77 1.02 (.50) .41
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.55) (.53) (.54) (.56) (.16)
Distributions in excess of net
investment income (.01) (.03) (.02) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.56) (.56) (.56) (.57) (.16)
Net asset value, end of period $10.33 $9.85 $9.64 $ 9.18 $10.25
TOTAL RETURN
Total investment return based on net
asset value (d) 10.85% 8.17% 11.53% (5.02)% 4.12%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $24,948 $21,104 $8,721 $7,149 $4,170
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .95% 1.00% 1.00% .45% -0-%(e)
Expenses, before waivers/reimbursements 1.40% 1.45% 1.47% 1.46% 1.31%(e)
Net investment income, net of waivers
/reimbursements 5.44% 5.40% 5.78% 5.73% 5.67%(e)
Portfolio turnover rate 85% 185% 114% 156% 75%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.86 $9.65 $9.18 $10.25 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .47(c) .46(c) .47 .49 .14
Net realized and unrealized gain (loss)
on investment transactions .49 .24 .49 (1.06) .25
Net increase (decrease) in net asset
value from operations .96 .70 .96 (.57) .39
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.46) (.47) (.49) (.14)
Distributions in excess of net
investment income (.02) (.03) (.02) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.49) (.49) (.49) (.50) (.14)
Net asset value, end of period $10.33 $9.86 $9.65 $ 9.18 $10.25
TOTAL RETURN
Total investment return based on net
asset value (d) 9.95% 7.38% 10.78% (5.72)% 3.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $30,078 $30,440 $28,559 $25,637 $12,173
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.66% 1.71% 1.71% 1.16% .40%(e)
Expenses, before waivers/reimbursements 2.09% 2.15% 2.17% 2.16% 2.01%(e)
Net investment income, net of waivers
/reimbursements 4.72% 4.69% 5.09% 5.01% 4.97%(e)
Portfolio turnover rate 85% 185% 114% 156% 75%
</TABLE>
See footnote summary on page 52.
49
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
PENNSYLVANIA PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 25,1993(a)
YEAR ENDED SEPTEMBER 30, TO
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.86 $9.65 $9.18 $10.24 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .47(c) .46(c) .47 .49 .14
Net realized and unrealized gain (loss)
on investment transactions .49 .24 .49 (1.05) .24
Net increase (decrease) in net asset
value from operations .96 .70 .96 (.56) .38
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.47) (.46) (.47) (.49) (.14)
Distributions in excess of net
investment income (.02) (.03) (.02) -0- -0-
Distributions from net realized gains -0- -0- -0- (.01) -0-
Total dividends and distributions (.49) (.49) (.49) (.50) (.14)
Net asset value, end of period $10.33 $9.86 $9.65 $ 9.18 $10.24
TOTAL RETURN
Total investment return based on net
asset value (d) 9.95% 7.37% 10.78% (5.63)% 3.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $15,486 $13,996 $15,052 $18,198 $13,541
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.65% 1.70% 1.70% 1.15% .40%(e)
Expenses, before waivers/reimbursements 2.10% 2.14% 2.17% 2.15% 2.01%(e)
Net investment income, net of waivers
/reimbursements 4.73% 4.69% 5.09% 4.99% 4.97%(e)
Portfolio turnover rate 85% 185% 114% 156% 75%
</TABLE>
See footnote summary on page 52.
50
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
VIRGINIA PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
APR. 29, 1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.58 $10.29 $ 9.69 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .57(c) .57(c) .56 .24
Net realized and unrealized gain (loss)
on investment transactions .57 .37 .61 (.31)
Net increase (decrease) in net asset
value from operations 1.14 .94 1.17 (.07)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.57) (.57) (.56) (.24)
Distributions in excess of net
investment income -0- -0- (.01) -0-
Distributions from net realized gains (.25) (.08) -0- -0-
Total dividends and distributions (.82) (.65) (.57) (.24)
Net asset value, end of period $10.90 $10.58 $10.29 $ 9.69
TOTAL RETURN
Total investment return based on net
asset value (d) 11.32% 9.39% 12.46% (.71)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $3,530 $2,455 $1,855 $1,249
Ratio to average net assets of:
Expenses, net of waivers/reimbursements .67% .67% .67% .57%(e)
Expenses, before waivers/reimbursements 3.57% 5.18% 8.96% 12.29%(e)
Net investment income, net of waivers
/reimbursements 5.39% 5.39% 5.59% 5.62%(e)
Portfolio turnover rate 258% 298% 128% 65%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
APR. 29, 1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.57 $10.29 $ 9.69 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .50(c) .50(c) .49 .22
Net realized and unrealized gain (loss)
on investment transactions .58 .36 .61 (.32)
Net increase (decrease) in net asset
value from operations 1.08 .86 1.10 (.10)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.50) (.50) (.49) (.21)
Distributions in excess of net
investment income -0- -0- (.01) -0-
Distributions from net realized gains (.25) (.08) -0- -0-
Total dividends and distributions (.75) (.58) (.50) (.21)
Net asset value, end of period $10.90 $10.57 $10.29 $ 9.69
TOTAL RETURN
Total investment return based on
net asset value (d) 10.70% 8.57% 11.67% (1.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $5,020 $3,345 $1,193 $224
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.37% 1.37% 1.37% 1.27%(e)
Expenses, before waivers/reimbursements 4.29% 5.88% 9.66% 12.99%(e)
Net investment income, net of waivers
/reimbursements 4.68% 4.70% 4.80% 4.97%(e)
Portfolio turnover rate 258% 298% 128% 65%
</TABLE>
See footnote summary on page 52.
51
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD
VIRGINIA PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------
APR. 29, 1994(a)
YEAR ENDED SEPTEMBER 30, TO
------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.57 $10.29 $ 9.70 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .50(c) .50(c) .49 .21
Net realized and unrealized gain (loss)
on investment transactions .58 .36 .60 (.30)
Net increase (decrease) in net asset
value from operations 1.08 .86 1.09 (.09)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.50) (.50) (.49) (.21)
Distributions in excess of net
investment income -0- -0- (.01) -0-
Distributions from net realized gains (.25) (.08) -0- -0-
Total dividends and distributions (.75) (.58) (.50) (.21)
Net asset value, end of period $10.90 $10.57 $10.29 $ 9.70
TOTAL RETURN
Total investment return based on net
asset value (d) 10.70% 8.58% 11.56% (.91)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $1,207 $642 $122 $43
Ratio to average net assets of:
Expenses, net of waivers/reimbursements 1.37% 1.37% 1.37% 1.27%(e)
Expenses, before waivers/reimbursements 4.25% 5.88% 9.66% 12.99%(e)
Net investment income, net of waivers
/reimbursements 4.66% 4.73% 4.81% 4.67%(e)
Portfolio turnover rate 258% 298% 128% 65%
</TABLE>
(a) Commencement of operations.
(b) Net of fee waived and expenses reimbursed by the Adviser.
(c) Based on average shares.
(d) 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.
(e) Annualized.
52
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 statements 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, 1997, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, 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, 1997, the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended, and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
New York, New York
November 4, 1997
FEDERAL TAX INFORMATION (UNAUDITED)
_______________________________________________________________________________
In accordance with Federal tax law, the following table represents each
portfolio's designation of "exempt-interest dividends" and long-term capital
gain distributions paid during the fiscal year ended September 30, 1997.
As required by Federal tax law rules, shareholders will receive notification of
their portion of each portfolio's taxable ordinary dividends (if any) and
capital gain distributions (if any) paid for the 1997 calendar year on Form
1099-DIV which will be mailed by January 31, 1998.
EXEMPT-INTEREST LONG-TERM CAPITAL
PORTFOLIO DIVIDENDS GAIN DISTRIBUTIONS
- --------- --------------- ------------------
Arizona 703,532 26,988
Florida 3,303,035 --
Massachusetts 798,463 55,295
Michigan 754,791 103,126
Minnesota 923,515 --
New Jersey 3,446,602 --
Ohio 2,238,436 --
Pennsylvania 3,418,684 --
Virginia 391,354 46,947
53
<PAGE>
________________________________________________________________
APPENDIX A: BOND AND COMMERCIAL PAPER RATINGS
________________________________________________________________
Standard & Poor's Bond Ratings
A Standard & Poor's municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to
a specific obligation. Debt rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt
rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
a debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest
and to repay principal for debt in this category than for higher
rated categories.
Debt rated "BB," "B," "CCC" or "CC" is regarded, on
balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal are in
arrears.
The ratings from "AAA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Bond Ratings
Excerpts from Moody's description of its municipal bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations;
Baa - considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C - protection of
A-1
<PAGE>
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
A-2
<PAGE>
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.
A-3
<PAGE>
Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds with
higher ratings.
Fitch Commercial Paper and
Certificate of Deposit Ratings
Fitch Commercial Paper Ratings are assigned at the
request of an issuer to debt obligations with an original
maturity not in excess of 270 days. The ratings reflect Fitch
current appraisal of the degree of assurance of timely payment of
such debt. Fitch compensated for this service by an annual fee
paid by the issuer under a contractual agreement which specifies
among other things that ratings may be changed or withdrawn at
any time if, in Fitch's sole judgment, changing circumstances
warrant such action.
Fitch Certificate of Deposit ratings are assigned at the
request of the issuer to deposits with maturities of up to three
years. Ratings apply to uninsured principal and interest and
reflect only those credit characteristics inherent in
certificates of deposit. Such ratings should be considered only
in the context of ratings assigned to certificates of deposit and
not to ratings which may be assigned to non-deposit liabilities.
Ratings for CDs with maturities over 3 years will be assigned
bond rating symbols. For definitions refer to page 1 of the
Rating Register.
Fitch commercial paper ratings are grouped into four
categories, two of which are defined below:
Fitch-1 (Highest Grade) Commercial paper assigned
this rating is regarded as having the
strongest degree of assurance for timely
payment.
Fitch-2 (Very Good Grade) issues assigned this
rating reflect an assurance of timely
payment only slightly less in degree than
the strongest issues.
Fitch Investment Note Ratings
Fitch investment Note Ratings are grouped into four
categories with the indicated symbols. The ratings on notes with
maturities generally up to three years reflect Fitch's current
appraisal of the degree of assurance of timely payment, whatever
the source.
A-4
<PAGE>
FIN-1 -- Notes assigned this rating are regarded as
having the strongest degree of assurance
for timely payment.
FIN-2 -- Notes assigned this rating reflect a
degree of assurance for timely payment
only slightly less in degree than the
highest category.
A plus symbol may be used in the three highest
categories to indicate relative standing. The Note Ratings will
usually correspond with Bond Ratings, although certain security
enhancements or market access may mean that notes will not track
bond.
Further Rating Distinctions
While ratings provide an assessment of the obligor's
capacity to pay debt service, it should be noted that the
definition of obligor expands as layers of security are added. If
municipal securities are guaranteed by third parties then the
"underlying" issuers as well as the "primary" issuer will be
evaluated during the rating process. In some cases, depending on
the scope of the guaranty, such as bond insurance, bank letters
of credit or collateral, the credit enhancement will provide the
sole basis for the rating given.
Minimum Rating(s) Requirements
For minimum rating(s) requirements for the Portfolios'
securities, please refer to "Description of Portfolio(s):
Municipal Securities -Further Information" in the Prospectuses.
A-5
<PAGE>
_________________________________________________________________
APPENDIX B: FUTURES CONTRACTS AND RELATED OPTIONS
_________________________________________________________________
Futures Contracts
Each Portfolio may enter into contracts for the purchase
or sale for future delivery of municipal securities or U.S.
Government Securities, or contracts based on financial indices
including any index of municipal securities or U.S. Government
Securities. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, a Portfolio must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1/2% 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.
B-1
<PAGE>
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
B-2
<PAGE>
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.
B-3
<PAGE>
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security which is deliverable upon exercise of the futures
contract or securities comprising an index. If the futures price
at expiration of the option is below the exercise price, a
Portfolio that has written a call will retain the full amount of
the option premium which provides a partial hedge against any
decline that may have occurred in its portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security which is
deliverable upon the exercise of futures contract or securities
comprising an index. If the futures price at the expiration of
the option is higher than the exercise price, a Portfolio that
has written a put will retain the full amount of the option
premium which provides a partial hedge against any increase in
the price of securities which it intends to purchase. If a put
or call option a Portfolio has written is exercised, that
Portfolio will incur a loss which will be reduced by the amount
of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may
purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases
an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
B-4
<PAGE>
_________________________________________________________________
APPENDIX C: OPTIONS ON MUNICIPAL AND U.S. GOVERNMENT SECURITIES
_________________________________________________________________
Options on Municipal and U.S. Government Securities
Each Portfolio will only write "covered" put and call
options on municipal securities and U.S. Government Securities,
unless such options are written for cross-hedging purposes. The
manner in which such options will be deemed "covered" is
described in the Prospectus under the heading "Investment
Policies and Restrictions--Additional Investment Policies-
- -Options on Municipal and U.S. Government Securities."
The writer of an option may have no control when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
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
C-1
<PAGE>
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.
C-2
<PAGE>
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.
C-3
<PAGE>
Each Portfolio may purchase call options to hedge
against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Portfolio.
C-4
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. Exhibits
(a) Agreement and Declaration of Trust of the
Registrant - Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No.
10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
(b) By-laws of the Registrant - Incorporated by
reference to Exhibit 2 to Post-Effective
Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File
Nos. 33-60560 and 811-07618) filed with the
Securities and Exchange Commission on
January 30, 1998.
(c) Not applicable.
(d) (1) Advisory Agreement between the
Registrant and Alliance Capital Management
L.P. - Incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 10 to
the Registrant's Registration Statement on
Form N-1A (File Nos. 33-60560 and 811-
07618) filed with the Securities and
Exchange Commission on January 30, 1998.
(2) Amended Advisory Agreement to
reflect the Arizona Portfolio,
Massachusetts Portfolio, Michigan Portfolio
and Virginia Portfolio - Incorporated by
reference to Exhibit 5(b) to Post-Effective
Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File
Nos. 33-60560 and 811-07618) filed with the
Securities and Exchange Commission on
January 30, 1998.
(e) (1) Distribution Services Agreement
between the Registrant and Alliance Fund
Distributors, Inc. - Incorporated by
reference to Exhibit 6(a) to Post-Effective
Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File
C-
<PAGE>
Nos. 33-60560 and 811-07618) filed with the
Securities and Exchange Commission on
January 30, 1998.
(2) Amendment to Distribution Services
Agreement between the Registrant and
Alliance Fund Distributors, Inc. -
Incorporated by reference to Exhibit 6(d)
to Post-Effective Amendment No 9 to
Registrant's Registration Statement on Form
N-1A (File Nos. 33-6051 and 811-07618)
filed with the Securities and Exchange
Commission on February 1, 1997.
(3) Selected Dealer Agreement between
Alliance Fund Distributors, Inc. and
selected dealers offering shares of
Registrant - Incorporated by reference to
Exhibit 6(c) to Post-Effective Amendment
No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
(4) Selected Agent Agreement between
Alliance Fund Distributors, Inc. and
selected agents making available shares of
Registrant - Incorporated by reference to
Exhibit 6(d) to Post-Effective Amendment
No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
(f) Not applicable.
(g) Custodian Contract with The Bank of New
York as assigned to Registrant -
Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form
N-1A (File Nos. 33-60560 and 811-07618)
filed with the Securities and Exchange
Commission on January 30, 1998.
(h) Transfer Agency Agreement between
Registrant and Alliance Fund Services, Inc
- Incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 10 to the
C-
<PAGE>
Registrant's Registration Statement on Form
N-1A (File Nos. 33-60560 and 811-07618)
filed with the Securities and Exchange
Commission on January 30, 1998.
(i) (1) Opinion and Consent of Seward &
Kissel - Incorporated by reference to
Exhibit 10(a) to Post-Effective Amendment
No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
(2) Opinion and Consent of Sullivan &
Worchester - Incorporated by reference to
Exhibit 10(b) to Post-Effective Amendment
No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
(j) Not applicable.
(k) Not applicable.
(l) Not applicable.
(m) Rule 12b-1 Plan - See Exhibit (e)(1)
hereto.
(n) Not applicable.
(o) Amended and Restated Rule 18f-3 Plan -
Incorporated by reference to Exhibit 18(b)
to Post-Effective Amendment No 9 to
Registrant's Registration Statement on Form
N-1A (File Nos. 33-6051 and 811-07618)
filed with the Securities and Exchange
Commission on February 1, 1997.
Other Exhibit:
Powers of Attorney of Ruth S. Block, John
D. Carifa, David H. Dievler, James M.
Hester, Clifford L. Michel , William H.
Foulk, Jr., Donald J. Robinson and John H.
Dobkin. - Incorporated by reference to
Other Exhibit to Post-Effective Amendment
No. 10 to the Registrant's Registration
C-
<PAGE>
Statement on Form N-1A (File Nos. 33-60560
and 811-07618) filed with the Securities
and Exchange Commission on January 30,
1998.
ITEM 24. Persons Controlled by or under Common Control with
Registrant
None.
ITEM 25. Indemnification
It is the Registrant's policy to indemnify its trustees
and officers, employees and other agents as set forth in Article
VIII and Article III of Registrant's Agreement and Declaration of
Trust, filed as Exhibit (a) in response to Item 23 and Section 10
of the proposed Distribution Services Agreement filed as
Exhibit (e)(1), all as set forth below. The liability of the
Registrant's trustees and officers is dealt with in Article VIII
of Registrant's Agreement and Declaration of Trust, as set forth
below. The Adviser's liability for any loss suffered by the
Registrant or its shareholders is set forth in Section 4 of the
proposed Advisory Agreement filed as Exhibit (d) in response to
Item 23 of this Registration Statement, as set forth below.
Article VIII of Registrant's Agreement and Declaration
of Trust reads as follows:
"Section 8.1. Trustees, Shareholders, etc. Not
Personally Liable; Notice. The Trustees and
officers of the Trust, in incurring any debts,
liabilities or obligations, or in taking or
omitting any other actions for or in connection
with the Trust, are or shall be deemed to be acting
as Trustees or officers of the Trust and not in
their own capacities. No Shareholder shall be
subject to any personal liability whatsoever in
tort, contract or otherwise to any other Person or
Persons in connection with the assets or the
affairs of the Trust or of any Portfolio, and
subject to Section 8.4 hereof, no Trustee, officer,
employee or agent of the Trust shall be subject to
any personal liability whatsoever in tort,
contract, or otherwise, to any other Person or
Persons in connection with the assets or affairs of
the Trust or of any Portfolio, save only that
arising from his own willful misfeasance, bad
faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office or
the discharge of his functions. The Trust (or if
the matter relates only to a particular Portfolio,
C-
<PAGE>
that Portfolio) shall be solely liable for any and
all debts, claims, demands, judgments, decrees,
liabilities or obligations of any and every kind,
against or with respect to the Trust or such
Portfolio in tort, contract or otherwise in
connection with the assets or the affairs of the
Trust or such Portfolio, and all Persons dealing
with the Trust or any Portfolio shall be deemed to
have agreed that resort shall be had solely to the
Trust Property of the Trust or the Portfolio Assets
of such Portfolio, as the case may be, for the
payment or performance thereof.
The Trustees shall use their best efforts to ensure
that every note, bond, contract, instrument,
certificate or undertaking made or issued by the
Trustees or by any officers or officer shall give
notice that this Declaration of Trust is on file
with the Secretary of The Commonwealth of
Massachusetts and shall recite to the effect that
the same was executed or made by or on behalf of
the Trust or by them as Trustees or Trustee or as
officers or officer, and not individually, and that
the obligations of such instrument are not binding
upon any of them or the Shareholders individually
but are binding only upon the assets and property
of the Trust, or the particular Portfolio in
question, as the case may be, but the omission
thereof shall not operate to bind any Trustees or
Trustee or officers or officer or Shareholders or
Shareholder individually, or to subject the
Portfolio Assets of any Portfolio to the
obligations of any other Portfolio.
SECTION 8.2. Trustees' Good Faith Action; Expert
Advice; No Bond or Surety. The exercise by the
Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. Subject
to Section 8.4 hereof, a Trustee shall be liable
for his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee,
and for nothing else, and shall not be liable for
errors of judgement or mistakes of fact or law.
Subject to the foregoing, (i) the Trustees shall
not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent,
employee, consultant, Investment Adviser,
Administrator, Distributor or Principal
Underwriter, Custodian or Transfer Agent, Dividend
Disbursing Agent, Shareholder Servicing Agent or
C-
<PAGE>
Accounting Agent of the Trust, nor shall any
Trustee be responsible for the act or omission of
any other Trustee; (ii) the Trustees may take
advice of counsel or other experts with respect to
the meaning and operation of this Declaration of
Trust and their duties as Trustees, and shall be
under no liability for any act or omission in
accordance with such advice or for failing to
follow such advice; and (iii) in discharging their
duties, the Trustees, when acting in good faith,
shall be entitled to rely upon the books of account
of the Trust and upon written reports made to the
Trustees by any officer appointed by them, any
independent public accountant, and (with respect to
the subject matter of the contract involved) any
officer, partner or responsible employee of a
Contracting Party appointed by the Trustees
pursuant to Section 5.2 hereof. The Trustees as
such shall not be required to give any bond or
surety or any other security for the performance of
their duties.
SECTION 8.3. Indemnification of Shareholders. If
any Shareholder (or former Shareholder) of the
Trust shall be charged or held to be personally
liable for any obligation or liability of the Trust
solely by reason of being or having been a
Shareholder and not because of such Shareholder's
acts or omissions or for some other reason, the
Trust (upon proper and timely request by the
Shareholder) shall assume the defense against such
charge and satisfy any judgment thereon, and the
Shareholder or former Shareholder (or the heirs,
executors, administrators or other legal
representatives thereof, or in the case of a
corporation or other entity, its corporate or other
general successor) shall be entitled (but solely
out of the assets of the Portfolio of which such
Shareholder or former Shareholder is or was the
holder of Shares) to be held harmless from and
indemnified against all loss and expense arising
from such liability.
SECTION 8.4. Indemnification of Trustees,
Officers, etc. Subject to the limitations set
forth hereinafter in this Section 8.4, the Trust
shall indemnify (from the assets of the Portfolio
or Portfolios to which the conduct in question
relates) each of its Trustees and officers
(including Persons who serve at the Trust's request
as directors, officers or trustees of another
C-
<PAGE>
organization in which the Trust has any interest as
a shareholder, creditor or otherwise [hereinafter,
together with such Person's heirs, executors,
administrators or personal representative, referred
to as a "Covered Person"]) against all liabilities,
including but not limited to amounts paid in
satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred
by any Covered Person in connection with the
defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any
court or administrative or legislative body, in
which such Covered Person may be or may have been
involved as a party or otherwise or with which such
Covered Person may be or may have been threatened,
while in office or thereafter, by reason of being
or having been such a Trustee or officer, director
or trustee, except with respect to any matter as to
which it has been determined that such Covered
Person (i) did not act in good faith in the
reasonable belief that such Covered Person's action
was in or not opposed to the best interests of the
Trust or (ii) had acted with willful misfeasance,
bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such
Covered Person's office (either and both of the
conduct described in clauses (i) and (ii) of this
sentence being referred to hereafter as "Disabling
Conduct"). A determination that the Covered Person
is entitled to indemnification may be made by (i) a
final decision on the merits by a court or other
body before whom the proceeding was brought that
the Covered Person to be indemnified was not liable
by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding
against a Covered Person for insufficiency of
evidence of Disabling Conduct, or (iii) a
reasonable determination, based upon a review of
the facts, that the indemnitee was not liable by
reason of Disabling Conduct by (a) a vote of a
majority of a quorum of Trustees who are neither
"interested persons" of the Trust as defined in
Section 2(a)(19) of the 1940 Act nor parties to the
proceeding, or (b) an independent legal counsel in
a written opinion. Expenses, including
accountants' and counsel fees so incurred by any
such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as
fines or penalties), may be paid from time to time
by the Portfolio or Portfolios to which the conduct
C-
<PAGE>
in question related in advance of the final
disposition of any such action, suit or proceeding;
provided, that the Covered Person shall have
undertaken to repay the amounts so paid to such
Portfolio or Portfolios if it is ultimately
determined that indemnification of such expenses is
not authorized under this Article 8 and (i) the
Covered Person shall have provided security for
such undertaking, (ii) the Trust shall be insured
against losses arising by reason of any lawful
advances, or (iii) a majority of a quorum of the
disinterested Trustees, or an independent legal
counsel in a written opinion, shall have
determined, based on a review of readily available
facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered
Person ultimately will be found entitled to
indemnification.
SECTION 8.5. Compromise Payment. As to any matter
disposed of by a compromise payment by any such
Covered Person referred to in Section 8.4 hereof,
pursuant to a consent decree or otherwise, no such
indemnification either for said payment or for any
other expenses shall be provided unless such
indemnification shall be approved (i) by a majority
of a quorum of the disinterested Trustees or (ii)
by an independent legal counsel in a written
opinion. Approval by the Trustees pursuant to
clause (i) or by independent legal counsel pursuant
to clause (ii) shall not prevent the recovery from
any Covered Person of any amount paid to such
Covered Person in accordance with either of such
clauses as indemnification if such Covered Person
is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the
reasonable belief that such Covered Person's action
was in or not opposed to the best interests of the
Trust or to have been liable to the Trust or its
Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered
Person's office.
SECTION 8.6 Indemnification Not Exclusive, etc.
The right of indemnification provided by this
Article 8 shall not be exclusive of or affect any
other rights to which any such Covered Person may
be entitled. As used in this Article 8, a
"disinterested" Person is one against whom none of
the actions, suits or other proceedings in
C-
<PAGE>
question, and no other action, suit or other
proceeding on the same or similar grounds is then
or has been pending or threatened. Nothing
contained in this Article 8 shall affect any rights
to indemnification to which personnel of the Trust,
other than Trustees and officers, and other Persons
may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain
liability insurance on behalf of any such Person.
SECTION 8.7. Liability of Third Persons Dealing
with Trustees. No person dealing with the Trustees
shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by
the Trustees or to see to the application of any
payments made or property transferred to the Trust
or upon its order."
Article III of Registrant's Agreement and
Declaration of Trust reads, in pertinent part, as
follows:
"Without limiting the foregoing and to the extent
not inconsistent with the 1940 Act or other
applicable law, the Trustees shall have power and
authority:
(s) Indemnification. In addition to the
mandatory indemnification provided for in
Article 8 hereof and to the extent
permitted by law, to indemnify or enter
into agreements with respect to
indemnification with any Person with whom
this Trust has dealings, including, without
limitation, any independent contractor, to
such extent as the Trustees shall
determine."
The Advisory Agreement between the Registrant and
Alliance Capital Management L.P. provides that Alliance Capital
Management L.P. will not be liable under such agreements for any
mistake of judgment or in any event whatsoever except for lack of
good faith and that nothing therein shall be deemed to protect
Alliance Capital Management L.P. against any liability to the
Registrant or its security holders to which it would otherwise be
subject by reason of wilful misfeasance, bad faith or gross
negligence in the performance of its duties thereunder, or by
reason of reckless disregard of its duties and obligations
thereunder.
C-
<PAGE>
The Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. provides that the
Registrant will indemnify, defend and hold Alliance Fund
Distributors, Inc., and any person who controls it within the
meaning of Section 15 of the Securities Act of 1933 (the
"Securities Act"), free and harmless from and against any and all
claims, demands, liabilities and expenses which Alliance Fund
Distributors, Inc. or any controlling person may incur arising
out of or based upon any alleged untrue statement of a material
fact contained in the Registrant's Registration Statement,
Prospectus or Statement of Additional Information or arising out
of, or based upon any alleged omission to state a material fact
required to be stated in any one of the foregoing or necessary to
make the statements in any one of the foregoing not misleading.
The foregoing summaries are qualified by the entire text
of Registrant's Agreement and Declaration of Trust, the Advisory
Agreement between Registrant and Alliance Capital Management L.P.
and the Distribution Services Agreement between Registrant and
Alliance Fund Distributors, Inc. which are filed herewith as
Exhibits (a), (d) and (e)(1), respectively, in response to Item
23 and each of which are incorporated by reference herein.
Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a trustee, officer or the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
In accordance with Release No. IC-11330 (September 2,
1980), the Registrant will indemnify its trustees, officers,
investment manager and principal underwriters only if (1) a final
decision on the merits was issued by the court or other body
before whom the proceeding was brought that the person to be
indemnified (the "indemnitee") was not liable by reason or
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office
("disabling conduct") or (2) a reasonable determination is made,
C-
<PAGE>
based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct, by (a) the vote of a
majority of a quorum of the trustees who are neither "interested
persons" of the Registrant as defined in section 2(a)(19) of the
Investment Company Act of 1940 nor parties to the proceeding
("disinterested, non-party trustees"), or (b) an independent
legal counsel in a written opinion. The Registrant will advance
attorneys fees or other expenses incurred by its trustees,
officers, investment adviser or principal underwriters in
defending a proceeding, upon the undertaking by or on behalf of
the indemnitee to repay the advance unless it is ultimately
determined that he is entitled to indemnification and, as a
condition to the advance, (1) the indemnitee shall provide a
security for his undertaking, (2) the Registrant shall be insured
against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of disinterested, non-party trustees of the
Registrant, or an independent legal counsel in a written opinion,
shall determine, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
The Registrant participates in a joint
trustees/directors and officers liability insurance policy issued
by the ICI Mutual Insurance Company. Coverage under this policy
has been extended to directors, trustees and officers of the
investment companies managed by Alliance Capital Management L.P.
Under this policy, outside trustees and directors are covered up
to the limits specified for any claim against them for acts
committed in their capacities as trustee or director. A pro rata
share of the premium for this coverage is charged to each
investment company and to the Adviser.
ITEM 26. Business and Other Connections of Adviser.
The descriptions of Alliance Capital Management
L.P. under the caption "Management of the Fund" in
the Prospectus and in the Statement of Additional
Information constituting Parts A and B,
respectively, of this Registration Statement are
incorporated by reference herein.
The information as to the directors and officers of
Alliance Capital Management Corporation, the
general partner of Alliance Capital Management
L.P., set forth in Alliance Capital Management
L.P.'s Form ADV filed with the Securities and
Exchange Commission on April 21, 1988 (File No.
801-32361) and amended through the date hereof, is
incorporated by reference.
C-
<PAGE>
ITEM 29. Principal Underwriters
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale
of shares of the Registrant, also acts as Principal
Underwriter for the following registered investment
companies:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance International Premier Growth
Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust,
Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
Alliance Utility Income Fund, Inc.
Alliance Variable Products Series Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
(b) The following are the Directors and Officers of
Alliance Fund Distributors, Inc., the principal
place of business of which is 1345 Avenue of the
Americas, New York, New York, 10105.
C-
<PAGE>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Michael J. Laughlin Director & Chairman
John D. Carifa Director
Robert L. Errico Director & President
Geoffrey L. Hyde Director & Senior
Vice President
Dave H. Williams Director
David D. Conine Executive Vice
President
Richard K. Saccullo Executive Vice
President
Edmund P. Bergan, Jr. Senior Vice Secretary
President, General
Counsel & Secretary
Richard A. Davies Senior Vice President
& Managing Director
Robert H. Joseph, Jr. Senior Vice President
& Chief Financial Officer
Anne S. Drennan Senior Vice President
& Treasurer
Karen J. Bullot Senior Vice President
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Bradley F. Hanson Senior Vice President
Richard E. Khaleel Senior Vice President
C-
<PAGE>
Stephen R. Laut Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Ryne A. Nishimi Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Joseph F. Sumanski Senior Vice President
Peter J. Szabo Senior Vice President
Nicholas K. Willett Senior Vice President
Richard A. Winge Senior Vice President
Gerard J. Friscia Vice President & Controller
Jamie A. Atkinson Vice President
Benji A. Baer Vice President
Kenneth F. Barkoff Vice President
Casimir F. Bolanowski Vice President
Michael E. Brannan Vice President
Timothy W. Call Vice President
Kevin T. Cannon Vice President
John R. Carl Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Richard W. Dabney Vice President
Stephen J. Demetrovits Vice President
John F. Dolan Vice President
C-
<PAGE>
John C. Endahl Vice President
Sohaila S. Farsheed Vice President
Shawn C. Gage Vice President
Andrew L. Gangolf Vice President and Assistant
Assistant General Secretary
Counsel
Mark D. Gersten Vice President Treasurer and
Chief
Financial
Officer
Joseph W. Gibson Vice President
John Grambone Vice President
George C. Grant Vice President
Charles M. Greenberg Vice President
Alan Halfenger Vice President
William B. Hanigan Vice President
Scott F. Heyer Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Scott Hutton Vice President
Richard D. Keppler Vice President
Gwenn M. Kessler Vice President
Donna M. Lamback Vice President
Henry Michael Lesmeister Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Jerry W. Lynn Vice President
Christopher J. MacDonald Vice President
C-
<PAGE>
Michael F. Mahoney Vice President
Shawn P. McClain Vice President
Jeffrey P. Mellas Vice President
Thomas F. Monnerat Vice President
Christopher W. Moore Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Nicole Nolan-Koester Vice President
John C. O'Connell Vice President
John J. O'Connor Vice President
James J. Posch Vice President
Domenick Pugliese Vice President and Assistant
Assistant General Secretary
Counsel
Bruce W. Reitz Vice President
Karen C. Satterberg Vice President
John P. Schmidt Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Teris A. Sinclair Vice President
Scott C. Sipple Vice President
Elizabeth Smith Vice President
Martine H. Stansbery, Jr. Vice President
Andrew D. Strauss Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Thomas J. Vaughn Vice President
C-
<PAGE>
Martha D. Volcker Vice President
Patrick E. Walsh Vice President
Mark E. Westmoreland Vice President
William C. White Vice President
David E. Willis Vice President
Emilie D. Wrapp Vice President and Assistant
Assistant General Secretary
Counsel
Patrick Look Assistant Vice
President & Assistant
Treasurer
Michael W. Alexander Assistant Vice President
Richard J. Appaluccio Assistant Vice President
Charles M. Barrett Assistant Vice President
Robert F. Brendli Assistant Vice President
Maria L. Carreras Assistant Vice President
John P. Chase Assistant Vice President
Russell R. Corby Assistant Vice President
Jean A. Cronin Assistant Vice President
John W. Cronin Assistant Vice President
Terri J. Daly Assistant Vice President
Ralph A. DiMeglio Assistant Vice President
Faith C. Deutsch Assistant Vice President
John E. English Assistant Vice President
Duff C. Ferguson Assistant Vice President
James J. Hill Assistant Vice President
Theresa Iosca Assistant Vice President
Erik A. Jorgensen Assistant Vice President
C-
<PAGE>
Eric G. Kalender Assistant Vice President
Edward W. Kelly Assistant Vice President
Michael Laino Assistant Vice President
Nicholas J. Lapi Assistant Vice President
Kristine J. Luisi Assistant Vice President
Kathryn Austin Masters Assistant Vice President
Richard F. Meier Assistant Vice President
Mary K. Moore Assistant Vice President
Richard J. Olszewski Assistant Vice President
Catherine N. Peterson Assistant Vice President
Rizwan A. Raja Assistant Vice President
Carol H. Rappa Assistant Vice President
Clara Sierra Assistant Vice President
Gayle S. Stamer Assistant Vice President
Eileen Stauber Assistant Vice President
Vincent T. Strangio Assistant Vice President
Marie R. Vogel Assistant Vice President
Wesley S. Williams Assistant Vice President
Matthew Witschel Assistant Vice President
Christopher J. Zingaro Assistant Vice President
Mark R. Manley Assistant Secretary
(c) Not applicable.
ITEM 28. Location of Accounts and Records.
The majority of the accounts, books and other documents
required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the Rules thereunder are maintained as
follows: journals, ledgers, securities records and other original
records are maintained principally at the offices of Alliance
C-
<PAGE>
Fund Services, Inc., 500 Plaza Drive, Secaucus, New Jersey 07094,
and at the offices of State Street Bank and Trust Company, the
Registrant's Custodian, 225 Franklin Street, Boston,
Massachusetts 02110. All other records so required to be
maintained are maintained at the offices of Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York, New York
10105.
ITEM 29. Management Services.
Not applicable.
ITEM 30. Undertakings
The Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's latest
report to shareholders, upon request and without charge.
The Registrant undertakes to provide assistance to
shareholders in communications concerning the removal of any
Trustee of the Fund in accordance with Section 16 of the
Investment Company Act of 1940.
C-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in The City of New York
and the State of New York, on the 30th day of November, 1998.
ALLIANCE MUNICIPAL INCOME FUND II
by \S\John D. Carifa
-------------------------
John D. Carifa
Chairman and President
Pursuant to the requirements of the Securities Act of
l933, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
Signature Title Date
Principal
Executive Officer
\S\John D. Carifa Chairman and November 30, 1998
John D. Carifa President
Principal Financial
and Accounting Officer
\S\Mark D. Gersten Treasurer and November 30, 1998
Mark D. Gersten Chief Financial
Officer
All of the Trustees
David H. Dievler
Ruth S. Block
John D. Carifa
John H. Dobkin
William H. Foulk, Jr.
James M. Hester
Clifford L. Michel
Donald J. Robinson
by \S\Edmund P. Bergan, Jr. November 30, 1998
(Attorney-in-fact)
Edmund P. Bergan, Jr.
C-
<PAGE>
Index to Exhibits
Page
None.
C-21
00250151.BA9
