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This is filed pursuant to Rule 497(e).
File Nos. 33-60560 and 811-07618.
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[LOGO] ALLIANCE MUNICIPAL INCOME FUND II
________________________________________________________________
c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the Prospectus, dated February 1, 2000, for the 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.........................
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
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____________________
(R): This registered service mark used under license from the
Owner, Alliance Capital Management L.P.
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_________________________________________________________________
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
designated "fundamental policies" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act") 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.
All of the Portfolios invest at least 65% of their total
assets in municipal securities and the State Portfolios invest at
least 65% of their total assets in the municipal securities of
the named state. These policies may not change without
shareholder approval. The average dollar weighted maturity of
the securities in each Portfolio will normally range between 10
and 30 years. In addition, each Portfolio will invest at least
80% of its net assets in municipal securities with interest that
is exempt from federal income tax. This policy is fundamental
for each Portfolio except the National Portfolio, Insured
National Portfolio, California Portfolio and New York Portfolios.
With respect to these Portfolios, this policy is not fundamental
but will not be changed without prior notice to shareholders.
National and Insured National Portfolios
The National Portfolio invests principally in a
diversified portfolio of municipal securities with interest that
is wholly exempt from federal income taxes except when received
by a shareholder who is subject to the AMT. The Insured National
Portfolio invests principally in a diversified portfolio of AMT-
Exempt bonds that also are insured securities. The National and
Insured National Portfolios may invest 25% or more of their total
assets in municipal securities whose issuers are located in the
same state.
The investment policies of the Insured National
Portfolio differ from those of the National Portfolio in two
respects:
- the National Portfolio is permitted to invest
without limit in AMT-Subject bonds and the Insured
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National Portfolio invests principally in AMT-
Exempt bonds; and
- as a matter of fundamental policy, the Insured
National Portfolio, under normal market conditions,
invests at least 65% of its total assets in insured
securities.
State Portfolios
Each of the State Portfolios is non-diversified and
invests principally in municipal securities with interest that is
wholly exempt from federal income tax. Substantially all the
interest from these securities is also exempt from state personal
income tax, or in the case of Florida, the Florida intangible
personal property tax. Florida currently imposes no income tax
on individuals. At least 65% and normally substantially all of
the total assets of each State Portfolio will be invested in
municipal securities of the named state. Each State Portfolio,
other than the Insured California Portfolio, may invest without
limit in AMT-Subject bonds.
California and Insured California Portfolios
As a matter of fundamental policy, at least 80% of the
California Portfolio's total assets normally will be invested in
municipal securities.
As a matter of fundamental policy, the Insured
California Portfolio normally invests at least 80% of its total
assets in municipal bonds, 80% of its total assets in AMT-Exempt
bonds and at least 65% of its total assets in insured securities.
Arizona, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio, Pennsylvania, and Virginia Portfolio.
Each Portfolio may invest in municipal securities issued by
governmental entities (for example, U.S. territories) outside the
named state if the municipal securities 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 up to 35% of its total assets in
securities whose interest payments are only federal tax-exempt.
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).
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Insurance Feature of the Insured National and
Insured California Portfolios
The Insured National Portfolio and Insured California
normally will invest at least 65% and 80%, respectively, of their
total assets in insured securities. Based upon the expected
composition of each of the Insured National Portfolio and Insured
California Portfolios, Alliance estimates that the annual
premiums for insurance will range from .12 to 1% to .75 of 1% of
the average net assets of each Portfolio. Although the insurance
feature reduces certain financial risks, the premiums for
insurance, which are paid from each of the Portfolio's assets,
will reduce their current yields. Insurance is not a substitute
for the basic credit of an issuer, but supplements the existing
credit and provides additional credit support. While insurance
for municipal securities held by the Insured National Portfolio
and Insured California Portfolio reduces credit risk by insuring
that the Portfolios will receive payment of principal and
interest, it does not protect against market fluctuations caused
by changes in interest rates or other factors.
The Insured Portfolio and Insured California Portfolio
may obtain insurance on their municipal securities or purchase
insured municipal securities covered by policies issued by any
insurer having a claims-paying ability rated A or higher by
Moody's, S&P, Duff & Phelps or Fitch. No more than 25% of each
Portfolio's total assets may be invested in insured municipal
securities covered by policies issued by insurers having a
claims-paying ability rated below AA by Moody's, S&P, Duff &
Phelps or Fitch.
The Portfolios will limit their investments in illiquid
securities to 15% (10% for the National Portfolio, Insured
National Portfolio, New York Portfolio, California Portfolio, and
Insured California Portfolio) of their net assets.
Alternative Minimum Tax
Under current federal income tax law, (1) interest on
tax-exempt municipal securities issued after August 7, 1986 which
are "specified private activity bonds," and the proportionate
share of any exempt-interest dividend paid by a regulated
investment company which receives interest from such specified
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
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finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage
projects, have provided, and may continue to provide, somewhat
higher yields than other comparable municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with taxing power
will be obligated with respect to AMT-Subject Bonds. AMT-Subject
Bonds are in most cases revenue bonds and do not generally have
the pledge of the credit or the taxing power, if any, of the
issuer of such bonds. AMT-Subject Bonds are generally limited
obligations of the issuer supported by payments from private
business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the
issuer of AMT-Subject Bonds is to make payments to bond holders
only out of and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject Bonds were
issued. Payment of the principal and interest on such revenue
bonds depends solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide
specific detail on each of these obligations in which Fund assets
may be invested.
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
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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
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 Michigan, and
from official statements made available in September 1998 with
respect to Massachusetts, August 1999 with respect to Minnesota
and New Jersey, September 1999 with respect to Florida and Ohio,
October 1999 with respect to Pennsylvania and November 1999 with
respect to Virginia 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
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addition, a number of factors may adversely affect the ability of
the issuers of municipal securities to repay their borrowings
that are unrelated to the financial or economic condition of a
state, and that, in some cases, are beyond their control.
Furthermore, issuers of municipal securities are generally not
required to provide ongoing information about their finances and
operations to holders of their debt obligations, although a
number of cities, counties and other issuers prepare annual
reports.
ARIZONA PORTFOLIO
The Arizona Portfolio seeks the highest level of current
income exempt from both federal income tax and State of Arizona
("Arizona" or the "State") personal income tax that is available
without assuming what the Fund's Adviser considers to be undue
risk to income or principal by investing in medium-quality,
intermediate and long-term debt obligations issued by the State,
its political subdivisions, agencies and instrumentalities the
interest on which, in the opinion of bond counsel to the issuer,
is exempt from federal income tax and Arizona personal income
tax. As a matter of fundamental policy, at least 65 percent 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 percent of its net assets in
municipal securities the interest on which is exempt from federal
income tax. Under normal market conditions, at least 65 percent
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.
The following is based on information obtained from the
Comprehensive Annual Financial Report of the State of Arizona
dated June 30, 1999 and the Arizona Department of Commerce,
Arizona Development Update, Fall 1999.
Economic Climate
Fueled by six consecutive years of substantial tax
reductions, Arizona's economy continues to be the envy of the
nation. Personal income taxes have been slashed by 31 percent
across the board, and in 1998 the state's corporate income tax
was reduced to 8 percent from 9 percent. From 1993 through 1997,
the strongest five-year period of job growth in Arizona history,
more than 400,000 private sector jobs were created. Arizona is
the second fastest growing state in the nation, with a projected
population of 6.1 million by 2010.
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Arizona's main economic sectors include services, trade
and manufacturing. Mining and agriculture are also significant
although they tend to be more capital intensive than labor
intensive. The single largest economic sector is services,
employing almost 615,538 people. Wholesale and retail trade
provide more than 495,987 jobs. Many of these jobs are directly
related to tourism, an industry that injects almost $12 billion
into the state's economy each year. Tourism generates more than
115,000 jobs and supports an additional 185,000 indirectly.
In 1998, manufacturing accounted for 216,641 jobs, or
approximately 10.5 percent of the state's employment and
generated 14.9 percent of wages and salaries. Arizona has been
particularly successful in attracting high-technology industries,
which have a total economic impact of $33 billion in Arizona.
Nearly 56 percent of all manufacturing employment is in this
section.
The construction sector, also very important to
Arizona's economy, accounted for 141,593 jobs or 6.89 percent of
the state's employment in 1998. This sector has experienced a
substantial increase in construction activity over the past few
years. The market grew from $5.5 billion in 1994 to $11.2
billion in 1998. This shows the increasing demand for commercial
space in Arizona.
Geographically, Arizona is the nation's sixth largest
state (113,417 square miles). The State is divided into fifteen
counties. Two of these counties, Maricopa County and Pima
County, are more urban in nature and are currently experiencing
strong population growth.
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,
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,
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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 ("RTC"). 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.
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 these
increases in per capita income, although Arizona still lags
behind, and is expected to continue to lag behind, the United
States average per capita income. Per capita personal income in
Arizona was $21,864 in 1998.
Arizona is likely to experience continued population
growth in the remainder of the 1990's. The current expansion
rate of more than 2 percent 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 percent expansion since 1993.
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 ("COPs") 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. As of
June 30, 1999, the State had $326.8 million in COPs outstanding
at year end. Principal and interest are covered by lease
payments out of current revenues or appropriations from the fund
responsible for utilization of the specific buildings.
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Arizona's 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
public universities in Arizona may issue debt for university
building projects payable from tuition and other fees. The
Arizona Power Authority and the University Medical Center may
also issue debt.
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 percent (or 30 percent
in the case of a unified school district) of such taxable
property and (b) any incorporated city or town of the State with
such assent may be allowed to become indebted up to a 20 percent
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
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expenditures cannot exceed the amount levied in a preceding year
by more than 2 percent. 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 percent individual income tax
reduction described above. In 1996, the Legislature reduced
property taxes by $200 million, in part by repealing the state
tax levy of $.47 per $100 assessed valuation.
The General Fund ended the June 30, 1999, fiscal year
with a total fund balance of $1.023 billion on a cash basis and
$1.290 billion on a GAAP basis. This compares to the prior
year's total fund balance of $981 million.
The State's enterprise funds are comprised of
governmental and quasi-governmental agencies that provide goods
and services to the public on a charge-for-service basis. One of
the largest enterprise funds is the lottery fund. The lottery
fund generated $268.3 million of operating revenues during
fiscal year 1999. The enterprise funds ended fiscal year 1999
with a combined equity of $151.2 million.
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
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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
In Ladewig vs. Waddell, the plaintiff challenges the
constitutionality of the deduction given for dividends received
from corporations doing most of their business in Arizona. The
Tax Court certified a class and found the tax to be
unconstitutional. Class certification and a statute of
limitations issue were appealed to the Court of Appeals and a
decision is pending. Potential outcome of the case cannot be
determined. The Court of Appeals may hold that only the
plaintiff is entitled to refunds due to the statute of
limitations. However, if class certification is affirmed, the
estimated potential loss to the State is $300 to $400 million.
In Kerr vs. Waddell, federal employees have claimed an
income tax refund on taxes paid to Federal employee
contributions. The Board of Tax Appeals granted these claims for
the years before 1991, but has denied the claim for later years.
The State did not appeal. The plaintiffs appealed for years
after 1990. The potential outcome cannot be determined. If this
case were to have an unfavorable outcome, the State could incur
losses ranging from $20 million to $100 million.
In Roosevelt Elementary School District No. 66 vs. Jane
Dee Hull, the plaintiffs allege the defendants failed to fully
fund the Building Renewal Fund established by the Students FIRST
legislation. A motion to dismiss has been filed on behalf of all
defendants. Briefing on that motion should be completed at the
end of January 2000. The potential outcome is uncertain at this
time. If the case were to have an unfavorable outcome, the State
may be required to provide approximately $56 million in
additional funding.
The State is also a defendant in a number of other
pending lawsuits.
Year 2000
The State is currently addressing Year 2000 compliance
issues relating to its computer systems and other electronic
equipment. The State has identified 238 computer systems, 1,770
data exchanges and most of the electronic equipment groups that
are critical to its operations. These mission-critical systems
and equipment groups affect financial, public safety, public
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health and service and legal mandates of the State's operations.
Identified but not included in these mission-critical systems and
exchanges are the internal support systems that are essential to
the mission critical systems.
The State has completed the awareness and assessment
stages for its mission-critical systems and data exchanges. Most
of the electronic equipment groups are in the awareness and
assessment stage. Some of the computer systems are in the
validation/testing stage and several electronic groups are in the
remediation stage. The State has identified 123 mission-critical
computer systems that are Year 2000 compliant. Only a few of the
electronic equipment groups are Year 2000 compliant.
Because of the unprecedented nature of the Year 2000
issue, its effects and the success of related remediation efforts
will not be fully determinable until the Year 2000 and
thereafter. The State cannot assure that it is or will be Year
2000 ready, that the its remediation efforts will be successful
in whole or in part, or that parties with whom it does business
will be Year 2000 ready.
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 Florida intangible tax. As
a matter of fundamental policy at least 65 percent 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 percent of its net assets in
municipal securities the interest which is exempt from federal
income tax. Under normal market conditions, at least 65 percent
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 15, 1999, relating to
$200,000,000 State of Florida Full Faith and Credit, State Board
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of Education, Public Education Capital Outlay Refunding Bonds,
1999 Series C.
Economic Climate
As of April 1, 1998 Florida was the fourth most populous
state in the nation with an estimated population of 15.0 million.
The State's average annual population growth since 1990 has been
approximately 1.8 percent while the nation's average annual
growth rate for the same period was approximately 1.9 percent.
Reflecting population growth, Florida's total personal
income has also increased at a faster rate than both the U.S. and
other southeastern states. During the 1980's, Florida's per
capita personal income was practically the same as the U.S.
However, since 1989 Florida's per capita income has been
consistently slightly below that of the U.S. In 1981, it was
97.9 percent ($25,852) of the U.S. $26,412 average.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 growth has been as impressive as
its population growth. Since the last recession in 1992,
Florida's population has increased 11.7 percent, while employment
has increased 15.0 percent. Since 1992, Florida's nonfarm jobs
have increased 24.5 percent while U.S. nonfarm jobs increased
15.9 percent. Florida's economic assets, such as a desirable
climate, competitive wages, and low per capita taxes, have
attracted new businesses and created many new job opportunities.
Reflecting national trends, employment in agriculture, and
manufacturing are becoming relatively less important in Florida,
while employment in services is becoming more important.
In 1998, 14.9 percent of the nation's nonfarm jobs were
in manufacturing, but only 7.4 percent of Florida's nonfarm jobs
were in manufacturing. While the proporation of manufacturing
jobs has declined over time for both the nation and Florida,
Florida's proporation of manufacturing jobs has been about half
the nation's for many years. Manufacturing jobs generally pay
higher wages than service jobs, but some service jobs do pay well
and are generally less sensitive to the business cycle.
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. Tourism is also one
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of Florida's most important industries. Approximately 48.7
million people visited Florida in 1998.
Florida's dependency on the highly cyclical construction
and construction-related manufacturing sectors has declined over
time. For example, total contract construction employment as a
share of total non-farm employment reached a peak of over 10
percent in 1973. In the late 1980s, the share was roughly 7.2
percent, and in 1998, the share had edged downward to 5.3
percent. This trend is expected to continue as Florida's economy
grows and diversifies. Low interest rates and good economic
conditions led to a 5.1 percent increase in construction jobs and
a 11.1 percent increase in housing starts in 1998. In the long
run, the driving force behind Florida's construction industry is
the State's rapid population growth. While net migration to the
State is forecasted as to slow, it is expected to remain over 200
thousand persons a year during the next decade. Recent federal
tax reforms reducing capital gains on homes will encourage second
home preretirement purchases in Florida.
Florida's unemployment rate through much of the 1980's
tracked below the national average. Beginning with the recession
in the early 1990's, the trend reversed. In the current economic
expansion, Florida's unemployment rate has again been mostly
below the nation's. In 1998, Florida's unemployment rate was 4.3
percent, compared to 4.5 percent for the U.S.
Fiscal Matters
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, businesses 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
within the State budget, must be kept in balance from currently
available revenues each State fiscal Year.
For fiscal year 1998-99, the estimated General Revenue
plus Working Capital Fund and Budget Stabilization Fund monies
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available total $19,481.8 million, a 5.2 percent increase over
1997-98. The $17,779.5 million in estimated revenues represent a
5.0 percent increase over the analogous figure in 1997-98. With
combined General Revenue, Working Capital Fund, and Budget
Stabilization Fund appropriations at $18,222.0 million, including
a $100.9 million transfer to the Budget Stabilization Fund,
unencumbered reserves at the end of 1998-99 were estimated at
$1,360.7 million.
For fiscal year 1999-2000, the estimated General Revenue
plus Working Capital Fund and Budget Stabilization Fund monies
available total $20,133.9 million, a 3.3 percent increase over
1998-99. The $18,555.2 million in estimated revenues represent a
4.4 percent increase over the analogous figure in 1998-99.
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.
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.
Year 2000
The Governor's Office of Planning and Budgeting, the
Senate and the House of Representatives created a Year 2000 Task
Force in 1997 to provide direction to state agencies for
addressing potential year 2000 date change problems. The State
has allocated $81 million for the remediation of state agency
computer systems.
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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 Massachusetts personal
income tax. As a matter of fundamental policy at least 65
percent 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
percent of its net assets in municipal securities the interest on
which is exempt from federal income tax. Under normal market
conditions, at least 65 percent 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 of
The Commonwealth of Massachusetts, dated September 1, 1998,
relating to $500,000,000 General Obligation Bonds Bonds,
Consolidated Loan of 1999, Series C and the Commonwealth of
Massachusetts Information Statement, dated February 16, 1999 and
the Commonwealth of Massachusetts Information Supplement, dated
September 10, 1999.
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. While the total population of Massachusetts
has remained fairly stable in the last twenty years, significant
changes have occurred in the age distribution of the population:
dramatic growth in residents between the ages of 20 and 44 since
1980 is expected to lead to a population distributed more heavily
in the 65 and over-age group in 2015 and 2025. Just as the
working-age population has increased, income levels in
Massachusetts since 1980 have grown significantly more than the
national average, and a variety of measures of income show that
Massachusetts residents have significantly higher rates of annual
income than the national average. These high levels of income
have been accompanied by a significantly lower poverty rate and,
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with the exception of the recession of the early 1990s,
considerably lower unemployment rate in Massachusetts than in the
United States since 1980. While economic growth in Massachusetts
slowed considerably during the recession of 1990-1991, indicators
such as retail sales, housing permits, construction, and
employment levels suggest a strong and continued economic
recovery.
Per capita personal income for Massachusetts residents,
was $31,207 in 1997, as compared to the national average of
$25,298. 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.
The Massachusetts services sector, with 35.6 percent of
the non-agricultural work force in February 1998, is the largest
sector in the Massachusetts economy. Government employment
represents 13.3 percent of total non-agricultural employment in
Massachusetts. While total employment in construction,
manufacturing, trade, government, services, finance, insurance
and real estate declined between 1988 and 1992, the economic
recovery that began in 1993 has been accompanied by increased
employment levels. Since 1994, total employment levels in
Massachusetts have increased at yearly rates greater than 2.0
percent. In 1998, employment levels in every industry increased
or remained constant. The most rapid growth in 1997 came in the
construction sector and the services sector, which grew at rates
of 7.6 percent and 3.9 percent, respectively. Total non-
agricultural employment in Massachusetts grew at a rate of 1.9
percent in 1998.
While the Massachusetts Unemployment rate was
significantly lower than the National average between 1979 and
1989, economic recession of the early 1990s caused unemployment
rates in Massachusetts to rise significantly above the national
average. However, the economic recovery that began in 1993 has
caused unemployment rates in Massachusetts to decline faster than
the national average. As a result, since 1994 the unemployment
rate in Massachusetts has been below the national average. The
unemployment rate in Massachusetts has been consistently below
that of the United States over the past twelve months, remaining
near 4 percent before falling below 4 percent in October of 1997
and below 3 percent in February 1999.
Between 1982 and 1988, the economies of Massachusetts
and New England were among the strongest performers in the
nation, with growth rates considerable higher than those for the
national economy as a whole. Between 1989 and 1992, however,
both Massachusetts and New England experienced growth rates
significantly below the national average. Since then, the growth
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rates in Massachusetts and New England have improved relative to
the nation. In 1995 and 1996, the economics of both
Massachusetts and New England grew at a faster pace than the
nation as a whole. For 1996, Massachusetts Gross State Product
increased by 5.9 percent compared to 4.4 percent for the nation
as a whole.
The economy of Massachusetts remains diversified among
several industrial and non-industrial sectors. In 1996, the
three largest sectors of the economy (services, finance,
insurance, real estate, and manufacturing) contributed 65.7
percent of the total Massachusetts Gross State Product.
The risk for Massachusetts include a continued shortage
of skilled labor, low net population growth, which will further
constrain job creation, and the prominence of the financial
services industry in the economy coupled with a relatively high
proportion of non-wage income, both of which are sensitive to the
performance of the financial markets.
Financial Condition
Under its constitution, the Commonwealth may borrow
money (a) for defense or in anticipation of receipts from taxes
or other sources, any such loan to be paid out of the revenue of
the year in which the loan is made, or (b) by a two-thirds vote
of the members of each house of the Legislature present and
voting thereon.
Certain independent authorities and agencies within the
Commonwealth are statutorily authorized to issue bonds and notes
for which the Commonwealth is either directly, in whole or in
part, or indirectly liable. The Commonwealth's liabilities with
respect to these bonds and notes are classified as either
(a) Commonwealth-supported debt, (b) Commonwealth-guaranteed debt
or (c) indirect obligations.
Debt service expenditures of the Commonwealth in Fiscal
Year 1992 totaled $898.3 million, representing a 4.7 percent
decrease from Fiscal Year 1991. Debt service expenditures for
Fiscal Year 1994, Fiscal Year 1995, Fiscal Year 1996, Fiscal Year
1997 and Fiscal Year 1998 were $872.3 billion, $953.0 million,
$905.1 million, $997.6 million and $1.079.3 million,
respectively, and are projected to be $1,231.0 million for Fiscal
Year 1998. In January 1990, legislation was enacted which
imposes a 10 percent 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.
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In Fiscal Year 1998, legislation was approved to
construct a new convention center in Boston and to expand
existing facilities in Worcester and Springfield. The projects
will be financed with increases in certain taxes on hotels and
vehicle rentals, and the dedication of state taxes on new
businesses in Boston's Convention Center Finance District. These
new revenue sources will be sufficient to pay the interest on the
general obligation notes that will be sold to finance
construction. The notes will be permanently financed with
special obligation revenue bonds when construction of the new
facility is completed, which is scheduled for 2002.
Fiscal 2000
In late April, 1999 both houses of the Legislature
agreed on a consensus revenue estimate for fiscal 2000 of $14,850
billion. On May 8, 1999 the House of Representatives approved
its version of the fiscal 2000 budget, and on June 10, 1999 the
Senate approved its version. The House and Senate budgets
incorporate a variety of tax cuts, which differ in type and
amount in the two versions. The House budget provides for total
expenditures of approximately $20.725 billion, and the Senate
budget provides for total expenditure of approximately $20.829
billion. Both budgets appropriate $910 million for pensions, as
recommended by the Governor. The House budget also includes
"forwarding funding" legislation that would substantially modify
the state's funding mechanisms for the Massachusetts Bay
Transportation Authority; the Senate's budget does not address
the issue of MBTA funding. The House budget does not fund any
fiscal 2000 expenditures with moneys expected to be received from
the litigation settlement with the tobacco industry and instead
proposes the establishment of a trust fund to receive such moneys
which only investment earnings, and not the amounts received,
could be spent to fund certain health-related services and
programs. The Senate budget would fund approximately $75 million
of fiscal 2000 expenditures with moneys expected to be received
from the tobacco litigation settlement, contingent upon the
receipt of such moneys.
Although fiscal 2000 began on July 1, 1999, the
legislative conference committee appointed to reconcile the House
and Senate versions of the fiscal 2000 budget has not yet
completed its work. On June 30, 1999, Governor Cellucci approved
an interim budget to provide for the operations of state
government for the month of July. A second interim budget was
approved by the Governor on July 30, 1999, authorizing
expenditures for the operations of state government through
August. On August 26, 1999, the Governor approved a third
interim budget to provide for the operations of state government
through the month of September and the quarterly funding of local
aid payments to cities, towns and school districts. On June 28,
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1999, the Executive Office for Administration and Finance issued
an administrative bulletin to state agencies outlining conduct
under interim budgets. The bulletin advises agencies to continue
basic levels of services and operations in effect at the close of
the prior fiscal year during an interim budget and to minimize
discretionary obligations, including the expansion of new
programs and hiring of personnel.
Preliminary figures indicate that August, 1999 tax
revenues were approximately $1.046 billion, an increase of
approximately $26.2 million, or 2.6 percent over August, 1998.
The benchmark range through August forecast by the Department of
Revenue was $1.833 billion to $2.068 billion. Preliminary
figures indicate that year-to-date collections through August
totaled $1.982 billion, an increase of $62.1 million, or 3.2
percent, over the comparable period in fiscal 1999. Corporate
taxes are down $32 million, or 60 percent, compared to fiscal
1999.
Fiscal 1999
Acting Governor Cellucci approved the fiscal 1999 budget
on July 30, 1998. The Governor vetoed or reduced appropriations
totaling approximately $100.9 million. On July 31, 1998, the
Legislature overrode several of those vetoes, restoring
approximately $63.1 million in spending. After accounting for
the value of vetoes and subsequent overrides, the budget provided
for total appropriations of approximately $19.5 billion.
Governor Cellucci has approved four fiscal 1999 supplemental
appropriation bills totaling approximately $51 million, $41.1
million of which have funded collective bargaining costs. On
July 27, 1999, Governor Cellucci filed a supplemental budget
totaling approximately $190.1 million. The supplemental
recommendation includes approximately $22.8 million for ongoing
operations and programs and approximately $167.3 million for one-
time expenditures, including $50 million for local road and
bridge work and $15 million for Year 2000 compliance. The
Executive Office for Administration and Finance projects total
fiscal 1999 spending of $21.151 billion, a 6.0 percent increase
over total fiscal 1998 spending.
The fiscal 1999 appropriation for pension funding is
approximately $965.3 million. This amount is consistent with the
amount requested by the Acting Governor, but is approximately
$93.9 million less than the amount required by the initial 20-
year pension funding schedule developed at the time the fiscal
1998 budget was enacted.
The fiscal 1999 budget is based on a consensus tax
revenue forecast of $14.4 billion, as agreed by both houses of
the Legislature and the Secretary of Administration and Finance
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in May, 1998. The tax cuts incorporated into the budget, valued
by the Department of Revenue at $990 million in fiscal 1999 had
the effect of reducing the consensus forecast of $13.41 billion.
Tax collections in January 1999 totaled $1.565 billion, an
increase of $144.1 million, or 10.1 percent, over January 1,
1998. Year-to-date tax collections through January, 1999 totaled
$8.251 billion, an increase of $685.9 million, or 9.1 percent,
over the same period in fiscal 1998. On August 19, 1998 the
Executive Office for Administration and Finance raised the fiscal
1999 tax estimate by $200 million to $13.61 billion. The year-
to-date benchmark range through January, based on the $13.61
annual estimate, was $7.969 billion to $8.146 billion. The
fiscal 1999 tax estimate was raised again, to $14.0 billion, in
the Governor's budget submission filed on January 27, 1999.
Medicaid
The Medicaid program provides health care to low-income
children and families, the disabled, and the elderly. The
program, which is administered by the Division of Medical
Assistance (an agency within the Executive Office of Health and
Human Services), is 50 percent funded by federal reimbursements.
Beginning in fiscal 1999, payments for some children's benefits
are 65 percent federally reimbursable under the federal
Children's Health Insurance Program (CHIP) for states.
During fiscal years 1994, 1995, 1996 and 1998, Medicaid
expenditures were $3.313 billion, $3.398 billion, $3.416 billion,
$3.456 billion and $3.666 billion, respectively. The average
annual growth rate from fiscal 1994 to fiscal 1998 was 2.0
percent. Fiscal 1998 Medicaid expenditures increased
approximately 6.1 percent from fiscal 1997. This amount includes
$165 million for an eligibility expansion of Medicaid benefits to
recipients between 100 percent - 133 percent of the federal
poverty level and $38.5 million in outpatient medical services to
recipients of Emergency Aid to the Elderly, Disabled and
Children, transferred to Medicaid from the Department of
Transitional Assistance. The Executive Office for Administration
and Finance projects fiscal 1999 expenditures to be $3.893
billion, an increase of 6.2 percent over fiscal 1998. This
amount includes $340 million in spending attributable to
recipients above 100 percent of the federal poverty level through
the health care expansion.
The Division of Medical Assistance has implemented a
number of savings and cost control initiatives including managed
care, utilization review, and the identification of third party
liabilities. In spite of increasing caseloads, Massachusetts has
managed a substantial reduction in the Medicaid growth rate in
expenditures over the last six years. From fiscal 1994 through
fiscal 1998, per capital costs have decreased an average of 0.7
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percent annually over the five-year period. Beginning in fiscal
1998, the state expanded eligibility for the Medicaid program,
resulting in a total of 833,512 members at the end of fiscal 1998
or a 23.3 percent increase over the average caseload of fiscal
1997.
Local Aid
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 percent of the
full and fair cash value of real estate and personal property
therein and (ii) 2.5 percent 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 percent 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 1999, approximately 21.5 percent of
Massachusetts' budget is estimated to be allocated to Local Aid.
Local Aid payments to cities, towns and regional school districts
take the form of both direct and indirect assistance. Direct
Local Aid consists of general revenue sharing funds and specific
program funds sent directly to local governments and regional
school districts as reported on the so-called "cherry street"
prepared by the Department of Revenue, excluding certain person
funds and nonappropriated funds.
Litigation
There are pending in courts within the Commonwealth
various suits in which the Commonwealth is a party. In the
opinion of the Attorney General, 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
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Commonwealth that would affect materially its financial
condition.
Year 2000
In June 1997, the Executive Office for Administration
and Finance established a Year 2000 Program Management Office
within its Information Technology Division. The purpose of the
office is to ensure accurate monitoring of the Commonwealth's
progress in achieving year 2000 compliance, i.e., remediating or
replacing and redeploying affected systems, as well as to
identify risk areas and risk mitigation activities and serve as a
resource for all state agencies and departments.
Legislation approved by the Acting Governor on
August 10, 1998 appropriated $20.4 million for expenditure by the
Information Technology Division to achieve year 2000 compliance
for the six Executive Offices and other departments that report
directly to the Governor. This amount, together with previously
and subsequently appropriated amounts and expenditures at the
departmental level from existing funds, is anticipated to be
sufficient to meet most of the remediation efforts for such
Executive Offices and departments. The Secretary of
Administration and Finance is to report quarterly to the
Legislature on the progress being made to address the year 2000
compliance efforts, and to assess the sufficiency of funding
levels.
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
Michigan personal income tax. As a matter of fundamental policy
at least 65 percent 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 percent of
its net assets in municipal securities the interest on which is
exempt from federal income tax. Under normal market conditions,
at least 65 percent of the Michigan Portfolio's total assets will
be invested in income-producing securities (including zero coupon
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securities). Shares of the Michigan Portfolio are available only
to Michigan residents.
The following is based on information obtained from
Michigan Financial Focus, dated March 1999 and the State of
Michigan comprehensive Annual Financial Report dated September
30, 1998.
Economic Climate
As of 1999 begins, the U.S. economy and consumer
confidence remain strong. Forecasts indicate that the national
economy will continue to grow, but at a slower rate than its 1998
pace. The gross domestic product is expected to increase at the
rate of 2.0 percent in 1999 and 1.9 percent in 2000. Car and
light truck sales are expected to remain steady at 15.0 million
units sold in 1999 and 14.9 million units sold in 2000. The U.S.
unemployment rate is expected to be 4.8 percent in 1999 before
rising to 5.1 percent in 2000.
Michigan's economy will continue to benefit from
anticipated moderate growth in employment of 1.6 percent in 1999
and 1.1 percent in 2000. In addition, the year 2000 is expected
to be the seventh straight year in which Michigan's unemployment
rate will be below the national average. The inflation rate, as
measured by the Detroit Consumer Price Index, is projected to be
1.7 percent in calendar year 1999 and 2.1 percent in calendar
year 2000.
Michigan continued to excel in 1998 by setting several
records. During the year, more men and women had jobs than at
any time in Michigan's history. The unemployment rate continued
to set record lows and job growth continued to increase, which is
evidenced in the 760,000 jobs that have been created since 1991.
As a result of continued growth in the state's economy,
Michigan personal income is expected to grow 3.8 percent in 1999
and 3.6 percent in 2000. Adjusting for anticipated inflation in
Michigan, increases in purchasing power of 2.1 percent and 1.4
percent are expected for 1999 and 2000, respectively.
The unemployment rate in Michigan averaged 3.8 percent
in 1998 while the U.S. average unemployment rate was 4.5 percent.
This was the fifth consecutive year that the Michigan
unemployment rate has been below the national average. The
latest unemployment rate (3.8 percent) was the lowest since the
1970s and the seventh consecutive year that Michigan's employment
rate has declined.
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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 percent. 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
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.
Total revenue and other sources of funds for general
governmental operations for fiscal year 1998 were $32.9 billion.
The two largest revenue components include taxes of $20.6 billion
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and revenues from the federal government comprising another $7.7
billion.
Expenditures and other uses of funds for governmental
operations totaled $32.4 billion, or $3,298 per person, of which
$11.5 billion supports K-12 and higher education and $6.8 billion
supports health services.
Michigan's "Rainy Day Fund," formally referred to as the
Counter-Cyclical Budget and Economic Stabilization Fund, was
established in 1977 to serve as the state's "savings" account.
The fund balance has increased from $20 million in 1992 to $1.0
billion today.
In 1998, $212 million of the fund was transferred to the
School Aid Fund, which supports K-12 education throughout the
state. This amount was transferred to cover the initial payment
of a special education litigation settlement.
Maintaining a healthy reserve in the Rainy Day Fund
improves the state's credit rating, which helps reduce borrowing
costs and spurs economic growth. In addition, the fund provides
a safeguard to protect critical programs for Michigan's citizens
should the state experience an economic downturn.
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 percent 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 percent to 6 percent, the State
income tax was decreased from 4.6 percent to 4.4 percent, the
cigarette tax was increased from $.25 to $.75 per pack and an
additional tax of 16 percent of the wholesale price began to be
imposed on certain other tobacco products. A .75 percent real
estate transfer tax became effective January 1, 1995. Beginning
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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 percent or the
rate of inflation. When property is subsequently sold, its
assessed value will revert to the current assessment level of 50
percent of true cash value. Under Proposal A, much of the
additional revenue generated by the new taxes will be dedicated
to the State School Aid Fund. Proposal A shifts significant
portions of the cost of local school operations from local school
districts to the State and raises additional State revenues to
fund these additional State expenses. These additional revenues
will be included within the State's constitutional revenue
limitations and may impact the State's ability to raise
additional revenues in the future.
Litigation
The State is party to various legal proceedings seeking
damages, injunctive, or other relief. In addition to routine
litigation, certain of these proceedings could, if unfavorably
resolved from the point of view of the State, 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 State is also a
party to various legal proceedings which, if resolved in the
State's favor, would result in contingency gains to the State's
General Fund balance, but without material effect upon fund
balance. The ultimate dispositions and consequences of all of
these proceedings are not presently determinable, but such
ultimate dispositions and consequences of any single proceeding
or all legal proceedings collectively should not themselves,
except as listed below, in the opinion of the Attorney General of
the State and the Department of Management and Budget have a
material adverse effect on the State's financial position.
10th Judicial Circuit, et al v. State of Michigan, et al: On
August 22, 1994, the Ingham Circuit and Probate Courts, together
with the 55th District Court, filed suits in the Court of Claims
and Ingham County Circuit Court against the State of Michigan and
Ingham County entitled, 30th Judicial Circuit, et al v. Governor,
et al for declaratory and injunctive relief, and for damages, due
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to the alleged failure of the State Court Administrative Office
to properly calculate Ingham County's reimbursement under MCL
600.9947; MSA 27A.9947, the court funding statute. The 39th
Judicial Circuit, et al v. Governor, et al has been dismissed by
stipulation of the parties because the plaintiffs are raising the
same claims as members of a class action captioned as 10th
Judicial Circuit, et al v. State of Michigan, et al (Saginaw
Circuit Court No. 94-2936-AA-1/Court of Claims No. 94-15534-CM).
Plaintiffs assert that the amount in controversy exceeds 5
million dollars. The case is currently pending final class
certification.
Durant v. State of Michigan (Durant II): On May 14, 1998, more
than 100 Michigan school districts and individuals filed suit in
the Michigan Court of Appeals, asserting that the current version
of the State School Aid Act, 1996 PA 142, violates the Headlee
Amendment, Const. 1963, Art. 9, Sections 25-34, in much the same
manner as prior versions of the act were ruled unconstitutional
by the Michigan Supreme Court in Durant v. State Board of
Education, 456 Mich. (1977). In their original complaint, the
Durant II plaintiffs alleged that the state underfunded the
special education, special education transportation, and school
lunch programs provided by those school districts during the
1997-1998 and 1998-1999 fiscal years. The Durant II plaintiffs
sought declaratory, monetary, and injunctive relief, as well as
costs and attorney fees. On June 11, 1998, the Michigan Court of
Appeals dismissed this suit on technical grounds, without
prejudice however, to the timely filing of a new complaint. On
September 29, 1998, the Michigan Supreme Court reversed the June
11, 1998 Order of the Michigan Court of Appeals and remanded
Durant II to the Michigan Court of Appeals. The Michigan Supreme
Court directed the Michigan Court of Appeals to resolve
expeditiously certain issues by the Durant II plaintiffs.
On October 30, 1998, the school districts moved to amend their
complaint to challenge the newly-enacted amendments to the State
School Aid Act, 1998 PA 339, to add claims for the 1999-2000
fiscal year and to add a new count for mandamus against the state
treasurer. On December 2, 1998, the Court of Appeals granted the
Durant II plaintiffs' motion to amend the complaint and
established a briefing schedule. The case remains pending in the
Court of Appeals and is expected to proceed in an expedited
fashion.
Year 2000
The State of Michigan established the Year 2000 Project
Office within the Department of Management and Budget with a
mission to lead, support, and facilitate achievement of year 2000
compliance throughout the state's executive branch, ensuring
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uninterrupted service to Michigan's citizens when January 1,
2000, arrives.
The State identified over 700 critical computer
applications, primarily within the executive branch, that are
critical to conducting the state's operation and that need to be
year 2000 compliant. As of January 1999, the state had validated
and tested 94 percent of the critical computer applications
including public safety, health safety, tax collections,
investment activities, and timely payment of our obligations.
The legislature appropriated $55.5 million to assist
state agencies in obtaining external resources to address year
2000 issues. As of September 30, 1998, the state had expended
$18.3 million of the appropriation. The state is committed to
ensuring that it is able to correctly process date and/or date-
related information prior to, during, and after January 1, 2000.
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
Minnesota personal income tax. As a matter of fundamental policy
at least 65 percent 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 percent of its net assets in municipal securities the interest
on which is exempt from federal income tax. Under normal market
conditions, at least 65 percent 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 23, 1999, relating to
$185,000,000 State of Minnesota General Obligation State Various
Purpose Bonds and State Refunding Bonds and the Financial Report,
dated November 1999, issued by the State (the "Financial
Report").
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Economic Climate
Minnesota's population grew from 4,085,000 in 1980 to
4,725,000 in 1998. The state's population growth rate from 1997
to 1998 was 0.80 percent. In comparison, United States
population grew at an annual compound rate of 1.0 percent during
this period. Minnesota population is currently forecast to grow
at an annual compounded rate of 0.8 percent through 2010.
In 1998, 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 percent, lagging behind the nation,
whose growth increased by 20.1 percent. While the importance of
the agricultural sector in the State has decreased, manufacturing
has been a strong sector, with Minnesota employment growth
outperforming that of the United States in both the 1980-1990 and
1990-1998 periods . In the durable goods industries, the State's
employment in 1998 was highly concentrated in the industrial
machinery, instrument and miscellaneous categories. Of
particular importance is the industrial machinery category in
which 30.9 percent of the State's durable goods employment was
concentrated in 1998, as compared to 19.7 percent 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 1998, 29.2 percent of
Minnesota's non-durable goods employment was concentrated in food
and kindred industries and 16.8 percent in paper and allied
industries. This compares to 22.3 percent and 8.9 percent,
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 once was. Mining employment, primarily in
the iron ore or taconite industry, dropped from 17.3 thousand
employed in 1979 to 8.1 thousand employed in 1998. 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.
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Since 1980, State per capita personal income has been
within five percentage points of national per capita personal
income. In 1998, Minnesota per capita personal income was 102.8
percent of its US counterpart. During the period 1980 to 1990,
Minnesota ranked first in growth of personal income and second
during the period 1990 to 1998 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 1990-1998 period,
Minnesota non-agricultural employment increased 20.2 percent,
while regional employment increased 15.0 percent.
From January 1997 through the first five months of 1999,
the State's monthly unemployment rate was generally less than the
national unemployment rate, averaging 3.3 percent in 1997 and 2.5
percent in 1998, as compared to the national averages of 4.9
percent and 4.5 percent, respectively. As of May 1999,
Minnesota's unemployment rate was 2.0 percent, while the national
unemployment rate was 4.0 percent.
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 1999, the Governor submitted a proposed
budget to the legislature for the 1999-2001 biennium (the
"Current Biennium"). The proposed budget was based on the
November 1998 forecast of Accounting General Fund revenues and
expenditures.
In February 1999, the Department of Finance prepared a
revised forecast of revenues and expenditures, and on the basis
of this forecast, the Governor provided supplemental budget
recommendations to the legislature in March 1999. 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, and also
exercised his authority to veto certain items of appropriation.
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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.
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 $622 million.
A revenue and expenditure forecast for the Current
Biennium was prepared in November 1998. Accounting General Fund
resources for the Current Biennium were forecast to be $27.625
billion and Accounting General Fund expenditures were forecast to
be $22.648 billion, resulting in a projected Unreserved
Accounting General Fund balance of $4.977 billion. That balance
included a Cash Flow Account of $350 million, a Budget Reserve
Account of $613 million, and Dedicated Reserves of $133 million,
resulting in a projected Unrestricted Accounting General Fund
balance of $3.880 billion.
On May 8, 1998, the State entered into a settlement of a
lawsuit which it had initiated against several tobacco companies.
The settlement requires the defendant tobacco companies to pay to
the State an amount of $6.1 billion over a period of 25 years.
This settlement will produce additional annual calendar year
revenue to the State ranging from a low of approximately $204
million to a high of approximately $418 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
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an office of rural health to ensure that the health care needs of
all Minnesotans are being met.
The program is not part of the Accounting General Fund.
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
Health Care Access Fund. Program revenues are derived from
dedication of insurance premiums paid by individuals, and
permanent taxes including a 2 percent gross revenue tax on
hospitals, health care providers and wholesale drug distributors,
a 2 percent use tax on prescription drugs and a 1 percent gross
premium tax on nonprofit health service plans and HMO's. For
calendar years 1998 and 1999, these permanent taxes have been
temporarily lowered to 1.5 percent and to zero, respectively.
The provider tax will continue at 1.5 percent until calendar year
2002, while the gross premium tax may be returned to previous
levels or revised depending on the Health Care Access Fund's
annual fund balance. The Commissioners of Finance and Revenue
will determine the necessary tax level, to be effective for
calendar year 2000, in September 1999.
School District Credit Enhancement Program. In 1993,
the Legislature established a school district credit enhancement
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 June 1998, during the Current Biennium the total amount of
principal and interest coming due as of August 1, 1999 is about
$643 million, with the maximum amount of principal and interest
payable in any one month being $216 million.
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.
Jesse Lee Brown and Ronald Bergeron v. State of
Michigan. Plaintiffs are Medicaid and GAMC recipients who
suffered tobacco-related illnesses during the period January 1,
1978 and December 31, 1996. Plaintiffs claim rights to a share
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of the settlement proceeds in State of Minnesota et al. v.
Phillip Morris Incorporated, et al. Plaintiffs have claimed that
they are entitled to the difference between the amount of the
tobacco trial settlement and the amount of moneys expended to
treat smoking-related illnesses, but not less than one-third of
the end recovery. This would amount to between $2.05 billion and
$4.86 billion. The State has moved to dismiss the case for
failure to state a claim upon which relief could be granted, and
to sanction the attorneys for bringing a frivolous suit. The
motion to dismiss was heard on September 16, 1998, and the case
is under advisement.
Eveleth Taconite Company and Eveleth Mines LLC v.
Commissioner. Tax Court. The taxpayers in this and four other
such cases contend that a 1994 recodification of a 1993 provision
allowing a specific exemption for replacement equipment purchased
by the taconite industry, without regard to the expansion of a
facility (at a time when replacement requirement was otherwise
fully taxable), rendered their repair and replacement parts
exempt as well. The Commission determined that parts purchased
by the taconite industry were subject to a specific reduced rate
rather than a complete exemption. The aggregate amount in all of
these cases could exceed $10 million dollars.
Independent School District No. 625, Saint Paul,
Minnesota v. State of Minnesota. Ramsey County District Court.
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, 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 and injunctive relief. While it is impossible at
this point to accurately predict the state's exposure in this
case, especially since the District has not quantified the
additional resources it seeks, it is possible that the state
could be ordered to pay in excess of $10 million to the District.
Minneapolis Branch of the NAACP v. State of Minnesota
and Xiong v. State. Hennepin County District Court. In
September 1995, 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
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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. The Metropolitan Council is no
longer a defendant in the plaintiffs' state court action. The
suit, which is being brought as a class action, seeks a
declaratory judgment that the defendants have violated the law,
and injunction requiring them to obey the law and to provide the
students an adequate and desegregated education, and an award of
attorney fees. 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. While
the complaint does not request monetary damages, it does request
injunctive relief that could force the state to spend a
substantial sum of money for additional funding of various items
for the Minneapolis schools, and increased busing expenses.
Since the complaint alleges that the segregation of the
Minneapolis schools is at least partially the result of housing
practices and policies that have caused disproportionate
concentrations of poor and minority students in select areas, it
is possible that the relief the plaintiff 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 denied the state's motion to dismiss
as to the state and certain principal named defendants but the
district court did grant the motion to dismiss as to certain
other state officials. The district court denied the plaintiffs'
motion for partial summary judgment. The state, in response to
the District Court's denial of its motion to dismiss, filed an
appeal to and petition for accelerated review by the Minnesota
Supreme Court. In January of 1997, the Minnesota Supreme Court
dismissed the state's appeal as premature. In May of 1997, the
state filed a motion with the district court seeking judgment on
the pleadings for lack of subject matter jurisdiction which the
district court denied. The parties are also evaluating a
possible alternative dispute resolution process. In the
meantime, district court proceedings are continuing. The Xiong
case, filed in February 1998, also challenges the adequacy of the
education provided in the Minneapolis Public Schools. Although
the plaintiffs are different, this case is brought by the same
attorneys as the NAACP case and alleges essentially the same
claims. Some of the claims are now based on events that happened
since the filing of the NAACP case. A motion to consolidate the
Xiong case with NAACP has been granted.
Rural America Bank - Ada f/k/a First Bank of Ada, et al.
v. Commissioner of Revenue. Ramsey County District Court. The
taxpayer claimed they were entitled to refunds pursuant to the
Court's decision in Cambridge State Bank, et al. v. Commissioner
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of Revenue, 514 N.W.2d 565 (Minn. 1994) in which the Court struck
down a provision of the franchise tax law which taxed interest
income from federal obligations. The Court of Appeals upheld the
District Court's decision that the Commissioner must pay the
refunds. The State's potential liability from this test case is
estimated to be approximately $25 million.
YEAR 2000
The State records receipts and makes payments from the
State's accounting system. This system is managed by the
Commissioner. The Department of Finance acknowledged in 1995
that the State's accounting system was not Year 2000 (Y2K)
compliant and that the systems vendor, American Management
Systems, Inc. ("AMS"), would deliver a compliant version upgrade
in the future. In mid-1997, State technical staff, along with
AMS, began a $6.5 million project to install the new compliant
version of the accounting software. The State implemented the
new software version on November 30, 1998. The testing of the
new compliant version to date has been very positive.
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. As a
matter of fundamental policy at least 65 percent 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 percent 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 percent of its net assets in municipal securities the interest
on which is exempt from federal income tax. Under normal market
conditions, at least 65 percent of the New Jersey Portfolio's
total assets will be invested in income-producing securities
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(including zero coupon securities). Shares of the New Jersey
Portfolio are available only to New Jersey residents.
The following is based on information obtained from an
Official Statement, dated August 1, 1999, relating to
$428,390,000 State of New Jersey General Obligation Bonds,
consisting of $349,770,000 State of New Jersey General Obligation
Bonds, Refunding Bonds (Series F) (Tax-Exempt) and $78,620,000
General Obligation Bonds, Refunding Bonds (Series G) (Taxable for
Federal Income Tax Purposes).
Economic Climate
New Jersey is the ninth largest state in population and
the fifth smallest in land area. With an average of 1,094
persons per square mile, it is the most densely populated of all
the states. Between 1980 and 1990 the annual population growth
rate was .51 percent and between 1990 and 1998 the growth rate
accelerated to .58 percent. While this rate of growth compared
favorably with other Middle Atlantic States, it was less than the
national rate of increase. New Jersey is located at the center
of the megalopolis which extends from Boston to Washington, and
which includes over one-fifth of the country's population. The
extensive facilities of the Port Authority of New York and New
Jersey, the Delaware River Port Authority and the South Jersey
Port Corporation across the Delaware River from Philadelphia
augment the air, land and water transportation complex which has
influenced much of the State's economy. This central location in
the northeastern corridor, the transportation and port facilities
and proximity to New York City make the State an attractive
location for corporate headquarters and international business
offices. A number of Fortune Magazine's top 500 companies
maintain headquarters or major facilities in New Jersey, and many
foreign-owned firms have located facilities in the State.
The State's economic base is diversified, consisting of
a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial
agriculture. Since 1976, casino gambling in Atlantic City has
been an important State tourist attraction.
During 1998 a continuation of the national business
expansion, a strong business climate in New Jersey and positive
developments in surrounding metropolitan areas were major sources
of State economic growth.
Average employment in 1998 increased by 76.5 thousand
jobs compared to 1997. Job gains were spread across a number of
industries with particularly strong growth in business services
(20,900) and in wholesale and retail trade (18,000).
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For the last decade, New Jersey's job growth has been
concentrated in five clusters of economic activity -- high
technology, health, financial, entertainment and logistics. One
of every three of the State's workers are in these sectors, and
as a whole these sections accounted for a 19 percent increase in
employment over the past decade compared to a four percent
employment growth for all other State industries.
Personal income in New Jersey, spurred by strong labor
markets increased by 5.4 percent in 1998, a rate comparable to
the national rate of increase. As a result, retail sales rose by
an estimated 6.2 percent. Low inflation, now less than 2
percent, continues to benefit New Jersey consumer and businesses
and low interest rates boost housing and consumer durable
expenditures. Home building had its best year of the decade.
Joblessness fell in terms of both its absolute level and
its rate, and by the end of 1998, New Jersey's unemployment rate
was at or below that of the nation.
The outlook for 1999/2000 is for continued, although
more moderate economic growth. Job gains in the State may be
constrained at times by labor shortages in skilled technical
areas, will be in the 50,000 range and personal income growth
will slow to an average of 4.3 percent.
Major caveats and uncertainties in the economic forecast
for 1999/2000 have increased. The national conditions in energy,
agriculture and manufactured exports, particularly to Asian
markets, are threats to the U.S. economy. However, these areas
of economic activity are under-represented in New Jersey and
hence the State has been able to avoid the immediate and direct
effects of those problems.
Other areas of concern include possible significant
shifts in consumer and investor confidence, unstable and
potentially deflationary international economic conditions, and
the prospect of leaner profits for U.S. corporations. In
addition, the restructuring of major industries will continue
spurred by the imperative of cost containment, globalization of
competition, and deregulation. Thus, 1999/2000 contains more
risk than the recent past, but the momentum and measures of the
State's economic health are favorable.
The New Jersey outlook is based largely on expected
national economic performance and on recent State strategic
policy actions aimed at infrastructure improvements, effective
education and training of our workforce, and those maintaining a
competitive business climate. Investments in each of these
policy areas are seen as vital to maintaining the long-term
health of the State's economy.
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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 fiscal year ended June 30, 1998, the
undesignated fund balances for all funds were projected to be
$1.26 billion, an increase of $150.3 million from fiscal year
1997. The undesignated fund balances for all funds are estimated
to be $1.11 billion for fiscal year 1999. Revenues for the
General Fund, in which the largest part of the financial
operations of the state is accounted for, were $11.17 billion for
fiscal year 1998 and are estimated to be $11.46 billion in fiscal
year 1999.
State Indebtedness
The New Jersey Sports and Exposition Authority (the
"Sports Authority") has issued guaranteed bonds of which
$99,519,000 were outstanding as of June 30, 1999. The State
believes that the revenue of the Sports Authority will be
sufficient to provide for the payment of debt service on these
obligations without recourse to the State's guarantee.
Legislation enacted in 1992 by the State authorizes the
Sports Authority to issue bonds for various purposes payable from
State appropriations. Pursuant to this legislation, the Sports
Authority and the State Treasure have entered into an agreement
(the "State Contract") pursuant to which the Sports Authority
will undertake certain projects, including the refunding of
certain outstanding bonds of the Sports Authority, and the State
Treasurer will credit to the Sports Authority amounts from the
General Fund sufficient to pay debt service and other costs
related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being
made by the State Legislature. As of June 30, 1999 there were
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approximately $571,360,000 aggregate principal amount of Sports
Authority bonds outstanding, the debt service on which is payable
from amounts credited to the Sports Authority Fund pursuant to
the State Contract.
In July 1984, the State created the New Jersey
Transportation Trust Fund Authority (the "TTFA"), an
instrumentality of the State organized and existing under the New
Jersey Transportation Trust Fund Authority Act of 1984, as
amended (the "TTFA Act") for the purpose of funding a portion of
the State's share of the cost of improvements to the State's
transportation system. Pursuant to the TTFA Act, the principal
amount of the TTFA's bonds, notes or other obligations which may
be issued in any fiscal year generally may not exceed $700
million plus amounts carried over from prior fiscal years, except
that pursuant to legislation adopted in June 1999 the amount of
such debt has been increased to $900 million for Fiscal Year
2000. These bonds are special obligations of the TTFA payable
from the payments made by the State pursuant to a contract
between the TTFA, the State Treasurer and the Commissioner of
Transportation. As of June 30, 1999, there were approximately
$3,738,030,000 aggregate principal amount of TTFA issues
outstanding including $347,655,000 grant anticipation notes
issued by the New Jersey Transit Corporation ("NJT"). To the
extent these notes are not paid by NJT, these notes are payable
by the TTFA pursuant to a Standby Deficiency Agreement entered
into by the TTFA and the Trustee for the notes. The Standby
Deficiency Agreement was issued on a parity with all bonds issued
by the TTFA.
Pursuant to legislation, the New Jersey Economic
Development Authority (the "EDA") has authority to issue Economic
Recovery Bonds, state Pension Funding Bonds and Market Transition
Bonds. The Economic Recovery Bonds have been issued pursuant to
legislation earmarked in 1992 to finance various economic
development purposes. Pursuant to that legislation, EDA and the
State Treasurer have entered into an agreement (the "ERF
Contract") through which EDA has agreed to undertake the
financing of certain projects and the State Treasurer has agreed
to credit to the Economic Recovery Fund from the General Fund
amounts equivalent to payments due to the State under an
agreement with the port Authority of New York and New Jersey.
The payment of all amounts under the ERF Contract is subject to
and dependent upon appropriations being made by the State
Legislature. As of June 30, 1999 there were approximately
$224,572,868 aggregate principal amount of Economic Recovery Fund
Bonds outstanding.
Legislation enacted in June 1997 authorizes the EDA to
issue bonds to pay a portion of the State's unfunded accrued
pension liability for the State's retirement systems (the
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"Unfunded Accrued Pension Liability"), which, together with
amounts derived from the revaluation of pension assets pursuant
to companion legislation enacted at the same time, will be
sufficient to fully fund the Unfunded Accrued Pension Liability.
The Unfunded Accrued Pension Liability represents pension
benefits earned in prior years which, pursuant to standard
actuarial practices, are not yet fully funded. On June 30, 1999,
the EDA issued $2,797,004,765 aggregate principal amount of State
Pension Funding Bonds. The EDA and the State Treasurer have
entered into an agreement which provides for the payment to the
EDA of monies sufficient to pay debt service on the bonds. Such
payments are subject to and dependent upon appropriations being
made by the State Legislature.
The Market Facility Bonds have been issued pursuant to
legislation enacted June 1994 to pay the current and anticipated
liabilities and expenses of the market transmission facility,
which issued private passenger automobile insurance policies for
drivers who could not be insured by private insurance companies
on a voluntary basis. As of June 30, 1999, there were
approximately $640,055,000 aggregate principal amount of Market
Transition Bonds outstanding.
The authorizing legislation for certain State entities
provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such
legislation, a designated official is required to certify any
deficiency in a debt service reserve fund maintained to meet
payments of principal of and interest on the obligations, and a
State appropriation in the amount of the deficiency is to be
made. However, the State legislature is not legally bound to
make such an appropriation. Bonds issued pursuant to authorizing
legislation of this type are sometimes referred to as "moral
obligation" bonds. There is no statutory limitation on the
amount of "moral obligation" bonds which may be issued by
eligible State entities. "Moral obligation" bonded indebtedness
issued by State entities as of June 30, 1998 stood at an
aggregate principal amount of $658,084,000 Of this total,
$372,859,400 was issued by the New Jersey Housing and Mortgage
Finance Agency. This Agency has never had a deficiency in a debt
service reserve fund that required the State to appropriate funds
to meet its "moral obligation," and it is anticipated to earn
sufficient revenues which will continue to be sufficient to cover
debt service on its bonds. The Higher Education Assistance
Authority and the South Jersey Port Corporation issued moral
obligation indebtedness in aggregate principal amounts of
$298,550,000 and $76,675,000, respectively. It is anticipated
that the Higher Education Assistance Authority's revenues will be
sufficient to cover debt service on its bonds. However, the
State has periodically provided the South Jersey Port Corporation
with funds to cover all debt service and property tax
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requirements, when earned revenues are anticipated to be
insufficient to cover these obligations.
Litigation
At any given time, there are various numbers of claims
and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are
primarily paid out of the fund created pursuant to the New Jersey
Claims Act. The State does not formally estimate its reserve
representing potential exposure for these claims and cases. The
State is unable to estimate its exposure for these claims and
cases and intends to defend these suits vigorously. Among them
are suit challenging: (a) the State's compliance with the Clear
Water Act and Resource Conservation Act at Liberty State Park;
(b) the constitutionality of annual A-901 hazard and solid waste
licensure renewals fees collected by the Department of
Environmental Protection and Energy; (c) the State's compliance
with the court order in Abbot v. Burke to close the spending gap
between poor urban and wealthy school districts; (d) the
constitutionality of the State's system of funding for its
schools; (e) the use of monies collected under the Fair
Automobile Insurance Reform Act of 1990 through assessments on
insurers licensed or admitted to write property and casualty
insurance in the State; (f) violations of the Americans with
Disabilities Act of 1990 and discrimination charges against the
State Department of Corrections; (g) the spousal impoverishment
provisions of the Medicare Catastrophic Coverage Act; (h)
Medicaid hospital reimbursement since 1995; (i) efforts to
revitalize Atlantic City through the design and construction of a
highway and tunnel; (j) the funding mechanisms, including the
gross receipts tax, the parking tax and the Atlantic City fund,
for the Casino Reinvestment Development Authority; (k) nonpayment
of Medicare co-insurance and deductibles by the State Medicaid
program from 1988 to February 10, 1995; (l) the Camden country
solid waste procurement process; (m) the constitutionality, under
the State constitution, of the "family cap" provisions of the
State Work First New Jersey; and (n) the $10 per adjusted
hospital admission charges imposed by New Jersey law.
YEAR 2000
A well-established standard in the computer industry
governing traditional programming practices is expected to result
in many computer systems being unable to recognize dates beyond
the year 1999. As a result, computers worldwide may begin to
malfunction by producing erroneous data or failing completely as
the year 2000 draws near. The State has implemented a plan to
address the Year 2000 data processing problem and to ensure the
continuation of government operations into the Year 2000 and
beyond. Planning for the Year 2000 commenced in 1997 with the
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requirement that the various State departments submit
comprehensive three year action plans identifying all Year 2000
impacts, strategies and timeframes for addressing these impacts
and estimates of cost. In addition, external parties have been
requested to submit their plans for addressing the Year 2000
problem in order to fulfill their contractual and fiduciary
responsibilities to the State.
As of May 31, 1999, the testing, validation and
implementation of 83 percent of all centrally maintained State
systems was complete. Departmental systems are in varying stages
of implementation. The total estimated cost to the State to
achieve Year 2000 compliance is $120 million of which
approximately $81.1 million of expenditures were incurred as of
May 31, 1999.
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 Ohio personal income tax. As a
matter of fundamental policy, at least 65 percent 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 percent of its net assets in municipal securities the
interest on which is exempt from federal income tax. Under
normal market conditions, at least 65 percent of the Ohio
Portfolio's total assets will be invested in income-producing
securities (including zero coupon securities). Shares of the
Ohio Portfolio are available only to Ohio residents.
The following is based on information obtained from an
Official Statement, dated September 15, 1999, relating to
$120,000,000 State of Ohio Full Faith and Credit, General
Obligation Infrastructure Improvement Bonds, Series 1999.
Economic Climate
Ohio's 1998 estimated population of 11,209,500 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
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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's employment in recent
years, consistent with national trends, has been in the non-
manufacturing area. In 1997 Ohio ranked seventh in the nation
with an estimated $320.5 billion in gross state product,
(estimated to be $341 billion in 1998); was third in
manufacturing with a value of $83.9 billion and second in durable
goods with a value of $54.8 billion. Manufacturing was 26.2
percent of Ohio's gross state product, compared to 18.0 percent
of that total being from the service sector. Ohio is the eighth
largest exporting state, with 1998 merchandise exports totaling
an estimated $27.1 billion. In addition, agriculture and
"agribusiness" continue as important elements of the Ohio
economy.
Ohio continues as a major "headquarters" state. Of the
top 500 corporations (industrial and service) based on 1998
revenues reported in 1999 by Fortune, 27 had headquarters in
Ohio, placing Ohio tied for fifth as a corporate "headquarters"
state.
Payroll employment in Ohio, in the diversifying
employment base, showed a steady upward trend until 1979, then
decreased until 1982. It increased through the summer of 1993
after a slight decrease early in 1992, then decreased slightly,
and reached a new high in 1998. Growth in recent years has been
concentrated among non-manufacturing industries, with
manufacturing employment tapering off since its 1969 peak. The
"non-manufacturing" sector employees approximately 80 percent of
all non-agricultural payroll workers in Ohio.
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.
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The last complete fiscal biennium (1998-99) ended with a General
Revenue Fund ("GRF") fund balance of $976,778,000.
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.
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
percent of GRF revenues for the then preceding fiscal year. The
State has encountered (and planned for) some monthly GRF cash
flow deficiencies in all recent Fiscal Years. For example, GRF
cash flow deficiencies have ranged from occurring in 10 months in
Fiscal Year 1992 (the highest being $743,140,000) to four months
in Fiscal Years 1995 and 1997 (the highest being $565,741,000).
The GRF had cash flow deficiencies in five months in Fiscal Year
1998 (the highest being $742,059,000), and in six months in
Fiscal Year 1999 (the highest being $497,677,000).
Cash flow deficiencies have been and are expected by OBN
to be within the TOF limitations discussed above. Often, the GRF
balancing steps described above ameliorated cash flow
deficiencies in later months of a Fiscal Year, significantly
assisting in producing the positive year-end GRF balances.
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. As part of
its response, the General Assembly has increased State funding
for public schools.
Under the current financial structure, local school
districts in Ohio receive a major portion (state-wide aggregate
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for Fiscal Year 1998 was approximately 47 percent of their
operating moneys from State subsidy appropriations (the primary
portion known as the Foundation Program) distributed in
accordance with statutory formulas that take into account both
local needs and local taxing capacity School districts also
rely heavily upon receipts from locally voted taxes. A number of
the State's 611 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.
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.
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 12 cities and
villages. The situations in 10 cities and 10 villages have been
resolved and the procedures terminated. Only the cities of East
Cleveland and Uhrichsville and four villages remain under the
procedure. No municipalities are currently on preliminary
"fiscal watch" status. A recent amendment to the fiscal
emergency legislation extended its potential application to
counties and townships.
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 percent 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.
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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.
Year 2000
Major offices of the State have had under way efforts
and programs to identify and assess, and remediate when
necessary, potential Year 2000 problems, including those relating
to data processing systems and other systems and equipment
critical to continued and uninterrupted State agency operations.
In addition to significant review and activity undertaken by OBM,
and the State Treasurer and State Auditor offices, a Year 2000
Competency Center has been operating in the Division of Computer
Services in the Department of Administrative Services, serving
cabinet-level agencies.
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 percent 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 percent of its net assets in municipal securities the
interest on which is exempt from federal income tax. Under
normal market conditions, at least 65 percent 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 October 1, 1999, relating to the issuance of $397,000,000
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Commonwealth of Pennsylvania General Obligation Bonds, Second
Series of 1999.
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.
Non-agricultural employment in Pennsylvania over the ten
years ending in 1998 increased at an annual rate of 0.75 percent.
This rate compares to a 0.29 percent rate for the Middle Atlantic
region and 1.72 percent for the U.S. during the period 1989
through 1998. For the five years ending with 1998, employment
in the Commonwealth has increased 7.0 percent. The growth in
employment experienced in Pennsylvania during this period is
higher than the 2.7 percent growth in the Middle Atlantic
region.
Non-manufacturing employment in Pennsylvania has
increased in recent years to 82.8 percent of total employment in
1998. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth.
Manufacturing, contributing 17.2 percent of 1998 non-agricultural
employment, has fallen behind both the services sector and the
trade sector as the largest single source of employment within
the Commonwealth. In 1998, the services sector accounted for
32.3 percent of all non-agricultural employment while the trade
sector accounted for 22.4 percent.
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 7.0 percent in 1991 and 7.6 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
August 1999, the most recent month for which data is available,
the seasonally adjusted unemployment rate for the Commonwealth
was 4.5 percent, compared to 4.2 percent for the United States.
Personal income in the Commonwealth for 1998 was $321.5
billion, an increase of 4.1 percent over the previous year.
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During the same period, national personal income increased at a
rate of 5.0 percent. Based on the 1998 personal income
estimates, per capita income for 1998 is at $26,792 in the
Commonwealth, compared to per capita income in the United States
of $26,412.
Financial Condition
Pennsylvania utilizes the fund method of accounting.
The General Fund, the Commonwealth's largest and principal
operating fund, receives all tax revenues, non-tax revenues and
federal grants and entitlements that are not specified by law to
be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the
General Fund. Debt service on all obligations, except that
issued for highway purposes or for the benefit of other special
revenue funds, is payable from the General Fund.
Financial information for the General Fund is maintained
on a budgetary basis of accounting. Since 1984 the Commonwealth
has also prepared annual financial statements in accordance with
generally accepted accounting principles (GAAP).
Fiscal 2000 Budget (Budgetary Basis)
The General Fund budget for the 2000 fiscal year was
approved by the General Assembly in May 1999. The adopted budget
includes estimated spending from Commonwealth revenues of
$19,016.5 million and estimated revenues (net of estimated tax
refunds and enacted tax changes) of $18,699.9 million. Funds to
cover the $361.6 million difference between estimated revenues
and projected spending will be obtained from a draw down of the
projected fiscal 1999 year-end balance. The level of proposed
spending represents an increase of 3.8 percent over the spending
authorized for fiscal 1999 of $18,367.5 million. Enacted tax
changes effective for fiscal 2000 total a net reduction of $380.2
million for the General Fund.
The estimate of Commonwealth revenues for fiscal 1999 is
based on an economic forecast for real gross domestic product to
grow at a 1.4 percent rate from the second quarter of 1999 to the
second quarter of 2000. Growth of real gross domestic product is
expected to be restrained by a slowing of the rate of consumer
spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling
capacity utilization and profits. Slowing economic growth is
expected to cause the unemployment rate to rise through the
fiscal year but inflation is expected to remain quite moderate.
Trends for the Pennsylvania economy are expected to maintain
their close association with national economic trends. Personal
income growth is anticipated to remain slightly below that of the
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U.S. while the Pennsylvania unemployment rate is anticipated to
be very close to the national rate.
Commonwealth revenues (excluding the estimated cost of
enacted tax reductions) are projected to increase by 2.8 percent
over fiscal 1999 receipts. Tax revenues are expected to rise by
3.2 percent, led by a 11 percent increase in the gross receipts
tax. This large increase represents the receipt of the revenue
neutral reconciliation charge enacted as a part of the electric
deregulation legislation in 1996 that is intended to cover tax
revenue losses to Pennsylvania from electricity deregulation.
The structure of the revenue neutral reconciliation charge causes
it to recover revenue losses with an approximate one year lag.
Projected increases for the sales and use tax and the personal
income tax are estimated at 3.2 percent and 3.3 percent
respectively. Non-tax Commonwealth revenues are estimated to
total $324 million, a l7.4 percent reduction from fiscal 1999.
The largest items accounting for the reduction are lower receipts
from sale of state property and lower investment earnings.
Appropriations from Commonwealth funds increase by 3.8
percent over fiscal 1999 appropriations. Program areas that have
been proposed to receive funding increases above the 2.9 percent
average include corrections (4 percent), basic education (3
percent), special education (6.2 percent), and medical assistance
(6.1 percent).
The fiscal 2000 budget continues the Governor's emphasis
on tax cuts targeted to making Pennsylvania competitive for
attracting new employment opportunities and retaining existing
jobs. Enacted tax cuts for fiscal 2000 total an estimated $380.2
million in the General Fund. The major components of the tax
reductions and their estimated fiscal 2000 General Fund cost are:
(i) reduce the tax rate for the capital stock and franchise taxes
by one mill to 10.99 mills ($91.6 million); (ii) repeal the gross
receipts tax on regulated gas companies ($78.4 million); (iii)
lower the current $300 minimum capital stock and franchise tax to
$200 ($16.2 million); (iv) raise the annual cap on net operating
loss credits per taxpayer from $1 million to $2 million ($35.5
million); (v) increase the weighting from 50 percent to 60
percent of the sales factor used in the apportionment formula to
calculate Pennsylvania taxable income for corporate net income
purposes ($31.5 million); and (vi) restructure the public utility
realty tax ($54.6 million); and (vii) expand the income limit to
qualify for personal income tax forgiveness by $500 to $6,500 per
dependent ($7.5 million). Most major changes are effective
January 1, 1999 except for the repeal of gross receipts tax on
natural gas companies which is to be effective when the state gas
utility industry is deregulated. The retroactive nature of tax
reductions did not affect fiscal 1999 revenues, but is expected
to result in a fiscal 2000 revenue reduction that is expected to
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be higher than that estimated to occur in fiscal 2001 from these
tax changes.
Fiscal 1999 Financial Results (Budgetary Basis)
The 1999 fiscal year ended with an unappropriated
surplus (prior to the transfer to the Tax Stabilization Reserve
Fund) of $702.9 million, an increase of $214.2 million from June
30, 1998. Transfers to the Tax Stabilization Reserve Fund total
$255.4 million for fiscal year 1999 consisting of $105.4 million
representing the statutory 15 percent of the fiscal year-end
unappropriated surplus and an additional $150 million from the
unappropriated surplus authorized by the General Assembly. The
$447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9 percent)
above estimate and $61.0 million of non-tax revenue (18.4
percent) above estimate. Higher than anticipated appropriation
lapses also contributed to the higher surplus. A portion of the
higher revenues and appropriation lapses were used for
supplemental fiscal 1999 appropriations totaling $357.8 million.
Of this amount, $200 million was appropriated for general
obligation debt service above current needs; $59 million to
accrue the fourth quarterly Commonwealth contribution to the
School Employees' Retirement System; and $90 million to the
Public Welfare department to pay additional medical assistance
costs estimated to occur in the 1999 fiscal year. These
supplemental appropriations represent expected one-time
obligations. Including the supplemental appropriations and net
of appropriation lapses, expenditures for fiscal 1999 totaled
$18,144.9 million, a 5.9 percent increase over expenditures
during fiscal 1998.
Revenues from taxes for the fiscal year rose 3.9 percent
after tax reductions enacted with the 1999 fiscal year budget
that were estimated to be $241.0 million for the fiscal year.
The sales and use tax represented the largest portion of the
above-estimate of revenues. Receipts from this tax were $331.3
million, or 5.3 percent above the estimated and final taxpayer
filings, boosted receipts $299.5 million, or 4.7 percent above
estimate for the fiscal year. Taxes paid through employee
withholding were slightly below estimate. For the fiscal year,
personal income tax receipts were 7.2 percent above those of the
prior fiscal year. Among the taxes paid by corporations, only
capital stock and franchise tax receipts exceeded estimates.
Revenues from this tax were $144.5 million (15.1 percent) over
estimate. The corporate net income tax and the various selective
business taxes all recorded receipts below estimate. In
aggregate, they were a net $68.5 million below estimate. Non-tax
revenues, led by interest earnings due to higher investable
balances, were $61.0 million (18.4 percent) above estimate. Non-
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tax revenues, led by interest earnings due to higher investable
balances, were $61.0 million (18.4 percent) above estimate. The
major components of the enacted tax reductions and their
estimated fiscal 1999 cost were: (i) reduce the capital stock and
franchise tax rate from 12.75 mills to 11.99 mills ($72.5
million); (ii) increase the eligibility income limit for
qualification for personal income tax forgiveness ($57.1
million); (iii) eliminate personal income tax on gains from the
sale of an individual's residence ($30.0 million); (iv) extend
the time period from three to ten years over which net operating
loss deductions may be taken for the corporate net income tax
($17.8 million); (v) expand various sales tax exemptions ($40.4
million); and (vi) reduce various other miscellaneous items
($23.2 million).
Appropriations enacted for fiscal 1999 when the budget
was originally adopted were 4.1 percent ($713.2 million) above
the appropriations enacted for fiscal 1998 (including
supplemental appropriations). Major increases in expenditures
budgeted for fiscal 1999 at that time included: (i) $249.5
million in direct support of local school district education
costs (local school districts will also benefit from an estimated
$104 million of reduced contributions by school districts to
their worker's retirement costs from a reduced employer
contribution rate); (ii) $60.4 million for higher education,
including scholarship grants; (iii) $56.5 million to fund the
correctional system, including $21 million to operate a new
correctional facility; (iv) $121.1 million for long-term care
medical assistance costs; (v) $14.4 million for technology and
Year 2000 investments; (vi) $55.9 million to fund the first
year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (v) $20 million to
replace bond funding for equipment loans for volunteer fire and
rescue companies. The balance of the increase is spread over
many departments and program operations. In May 1999, along with
the adoption of the fiscal 2000 budget, supplemental fiscal 1999
appropriations totaling $357.8 million were enacted. Of this
amount, $200 million was appropriated for general obligation debt
service that will be available for possible use to retire
outstanding debt; $59 million to accrue the fourth quarter
Commonwealth contribution to the School Employees' Retirement
System; and $90 million for the Public Welfare department to pay
additional medical assistance costs anticipated to occur in
fiscal 1999. With these additional amounts, total appropriations
for fiscal 1999 represent a 6.2 percent increase over fiscal 1998
appropriations. Appropriation lapses of $222.6 million and
additional Commonwealth revenues above budget estimates provided
the funding for the additional appropriations. Appropriation
lapses in fiscal 1998 and 1997 were $161.8 million and $200.6
million respectively.
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Reserves for tax refunds for fiscal 1999 were raised
during the fiscal year to $644.0 million, a $39.2 million
increase over the budget as enacted. Reserves for tax refunds
for fiscal 1999 are $266.0 million below the reserve established
for fiscal 1998.
Fiscal 1998 Financial Results (Budgetary Basis)
Operations during the 1998 fiscal year increased the
unappropriated balance of Commonwealth revenues during that
period by $86.4 million to $488.7 million at June 30, 1998 (prior
to reserves for transfer to the Tax Stabilization Reserve Fund).
Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the
Tax Stabilization Reserve Fund for fiscal 1998 operations will
total $223.3 million consisting of $73.3 million representing the
required transfer of fifteen percent of the ending unappropriated
surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget.
With these transfers, the balance in the Tax Stabilization
Reserve Fund will exceed $664 million and represent 3.7 percent
of fiscal 1998 revenue.
Commonwealth revenues (prior to tax refunds) during the
fiscal year totaled $18,123.2 million, $676.1 million (3.0
percent) above the estimate made at the time the budget was
enacted. Tax revenue received in fiscal 1998 grew 4.8 percent
over tax revenues received during fiscal 1997. This rate of
increase includes the effect of legislated tax reductions that
affected receipts during both fiscal years and therefore
understates the actual underlying rate of growth of tax revenue
during fiscal 1998. Receipts from the personal income tax
produced the largest single component of higher revenues during
fiscal 1998. Personal income tax collections were $416.6 million
over estimate representing an 8.5 percent increase over fiscal
1997 receipts. Receipts of the sales and use tax were $6.2
million over estimate representing a 1.9 percent increase
although receipts from non-motor vehicle sales were 0.7 percent
below estimate. Sales tax receipts on motor vehicle sales were
above estimate and offset the shortfall in non-motor vehicle
sales tax receipts. Collections of all corporate taxes exceeded
their estimate for the fiscal year, led by the capital stock and
franchise tax and the corporate net income tax, which were over
estimate by 7.8 percent and 2.7 percent respectively. Receipts
from the utility property tax, a state corporate tax, were below
estimate by $102.3 million or 30.8 percent. This shortfall was
due in large part to the recent deregulation of the electric
industry in Pennsylvania. Utility property revenues support in-
lieu of property tax payments to school districts and local
municipalities in Pennsylvania. Non-tax revenues were $27.5
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million (8.6 percent) over estimate, mostly due to greater than
anticipated interest earnings for the fiscal year.
Reserves established during fiscal 1998 for tax refunds
totaled $910 million. This amount is a $370 million increase
over tax refund reserves for fiscal 1997 representing an increase
of 68.5 percent. The fiscal 1998 amount includes a one-time
addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999.
Expenditures from all fiscal 1998 appropriations of
Commonwealth revenues totaled $17,229.8 million (excluding pooled
financing expenditures and net of current year lapses). This
amount represents an increase of 4.5 percent over fiscal 1997
appropriation expenditures. Lapses of appropriation authority
during the fiscal year totaled $161.8 million including $58.8
million from fiscal 1998 appropriations. These appropriation
lapses were used to fund $120.5 million of supplemental fiscal
1998 appropriations. Of the total fiscal 1998 supplemental
appropriations, an amount of $111.6 million was made to the
Department of Public Welfare, mostly for the medical assistance
program.
City of Philadelphia
Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census.
The Pennsylvania Intergovernmental Cooperation Authority
("PICA") was created by Commonwealth legislation in 1991 to
assist Philadelphia, the Commonwealth's largest city, in
remedying its fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make
factual findings and recommendations to Philadelphia concerning
its budgetary and fiscal affairs. This financial assistance has
included the refunding of certain city general obligation bonds,
funding of capital projects and the liquidation of the cumulative
general fund balance deficit of Philadelphia as of June 30, 1992,
of $224.9 million. At this time, Philadelphia is operating under
a five-year fiscal plan approved by PICA on June 15, 1999.
No further bonds are to be issued by PICA for the
purpose of financing a capital project or deficit as the
authority for such bond sales expired December 31, 1994. PICA'S
authority to issue debt for the purpose of financing a cash flow
deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,014.1
million in special revenue bonds outstanding as of June 30, 1999.
Neither the taxing power nor the credit of the Commonwealth is
pledged to pay debt service on PICA's bonds.
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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.
Net outstanding general obligation debt totaled $4,924.5
million at June 30, 1999, a decrease of $197.0 million from
June 30, 1998. Over the 10-year period ending June 30, 1999,
total outstanding general obligation debt increased at an annual
rate of 0.5 percent. Within the most recent 5-year period,
outstanding general obligation debt has decreased at an annual
rate of 0.6 percent.
Certain state-created organizations have statutory
authorization to issue debt for which state appropriations to pay
debt service thereon are not required. The debt of these
organizations is funded by assets of, or revenues derived from
the various projects financed and is not a statutory or moral
obligation of the Commonwealth. However, some of these
organizations are indirectly dependent upon Commonwealth
operating appropriations. In addition, the Commonwealth may
choose to take action to financially assist these organizations.
Litigation
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:
Dom Giordano v. Tom Ridge, Governor, et. al.
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In February 1999, Dom Giordano, a taxpayer of the
Commonwealth of Pennsylvania, filed a petition for review
requesting that the Commonwealth Court of Pennsylvania declare
that Chapter 5 (relating to sports facilities financing) of the
Capital Facilities Debt Enabling Act (enacted by Act 1999-1)
violates Article VIII, Sections 7 & 8, of the Pennsylvania
Constitution. The Commonwealth Court dismissed the petitioner's
action with prejudice. The petitioner has appealed the
Commonwealth Court's ruling to the Supreme Court.
Powell v. Ridge
In March 1998, suit was brought in federal court
challenging the Commonwealth's system for funding public
education as violating the Civil Rights Act of 1964 in that it
has the effect of discriminating on the basis of race. The
plaintiffs asked the court to declare the funding system to be
illegal, to enjoin the defendants from violating the regulation
in the future, to award counsel fees and costs, and to grant such
other relief as the court might find just and proper.
The court ultimately found that the plaintiffs had
failed to state a claim under the applicable statutes and
dismissed the action in its entirety with prejudice. An appeal
is expected. In August 1999, the U.S.Court of Appeals for the
Third Circuit reversed the District Court's dismissal of the
action and remanded the case for further proceedings including
the filing of an answer. The defendants and legislator-
intervenors have filed petitions for writ of certioria with the
Supreme Court.
County of Allegheny v. Commonwealth of Pennsylvania
In December 1987, the Supreme Court of Pennsylvania held
in County of Allegheny v. Commonwealth of Pennsylvania, that the
statutory scheme for county funding of the judicial system is in
conflict with the Pennsylvania Constitution. However, the
Supreme Court of Pennsylvania stayed its judgment to afford the
General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the
prior system of county funding shall remain in place until this
is done.
The Court appointed retired Justice Frank J. Montemuro,
Jr. as special master to devise and submit a plan for
implementation. The Interim Report of the Master recommended a
four phase transition to state funding of a unified judicial
system, during each of which specified court employees would
transfer into the state payroll system. Phase I recommended that
the General Assembly provide for an administrative structure of
local court administrators to be employed by the Administrative
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Office of Pennsylvania Courts, a state agency. Numbering
approximately 165 people statewide, local court administrators
are employees of the counties in which they work. On April 22,
1998, the General Assembly enacted the General Appropriation Act
of 1998, including an appropriation to the Supreme Court of
approximately $12 million for funding county court
administrators. This appropriation was designed to enable the
Commonwealth to implement Phase I. Release of the funding was
delayed until substantive legislation could be enacted to
facilitate the employees' transfer to State employment. A
similar appropriation was made by the General Appropriation Act
of 1999. Thereafter, on June 22, 1999, the Governor approved Act
1999-12 under which approximately 165 county-level court
administrators are to become employees of the Commonwealth. Act
12 also triggered the release of the appropriations that had been
made for this purpose in 1998 and 1999.
Bank Shares Tax Litigation
In November 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 (Act No.
1989-21) and related legislation. In 1995 Fidelity and the
Commonwealth agreed to a settlement of the issues raised by
Fidelity. Under a separate Settlement Agreement the Commonwealth
settled with the intervening banks, referred to as "New Banks,"
in connection with issues concerning the New Bank Tax Credit law
which were raised in an appeal to the Pennsylvania Supreme Court.
Other banks have also filed petitions that are currently
pending with the Commonwealth Court. One of these banks, Royal
Bank of Pennsylvania, has filed a Stipulation of Acts with the
Court and in effect is proceeding forward on behalf of all the
other banks. These appeals raise the issues that were advanced
by Fidelity, although not brought to final resolution by the
Pennsylvania Supreme Court. In January 1998, a panel of the
Commonwealth Court ruled in favor of the Commonwealth, finding no
constitutional violation. Royal Bank filed exceptions. On July
30, 1998, the Commonwealth Court, en banc, denied those
exceptions. On May 25, 1999, the Pennsylvania Supreme Court
affirmed per curium the Commonwealth Court's decision and order.
No petition for certiorari was filed. Therefore, the Royal Bank
litigation has ended. However, the vast majority of the
remaining banks have exceptions pending before the Commonwealth
Court or appeals pending before the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools
("PARSS") v. Ridge
In 1999, an association of rural and small schools,
several individual school districts, and a group of parents and
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students, filed suit against the Governor and the Secretary of
Education. The litigation challenges the constitutionality of
the Commonwealth's system for funding local school districts.
The litigation consists of two parallel cases, one in the
Commonwealth Court, and one in the United States District Court
for the Middle District of Pennsylvania. The federal court case
has been stayed indefinitely, pending resolution of the state
court case.
Commonwealth Court held that Pennsylvania's system for
funding public schools is constitutional under both the education
clause and the equal protection clause of the Pennsylvania
Constitution. On October 1, 1999, the Supreme Court of
Pennsylvania affirmed the Commonwealth Court's decision. The
parallel federal action remains pending.This litigation
challenges the constitutionality of the
Yesenia Marrero, et al. v. Commonwealth, et al.
In February 1997, five residents of the City of
Pennsylvania, on their own behalf and on behalf of their school-
aged children, jointed by the City of Philadelphia, the School
District of Philadelphia, and two non-profit organizations,
ASPIRA, Inc. of Pennsylvania and the Philadelphia Branch of the
NAACP, filed in the Commonwealth Court of Pennsylvania a civil
action for declaratory judgment against the Commonwealth of
Pennsylvania, the General Assembly of Pennsylvania, the presiding
officers of the General Assembly, the Governor of Pennsylvania,
the State Board of Education, the Department of Education and the
Secretary of Education.
Citing the Education Clause of the Constitution of
Pennsylvania, as well as provisions of the Declaration of Rights
under the Pennsylvania Constitution, the petitioners claim, Inter
alia, that Pennsylvania's "statutory education financing system
is unconstitutional as applied to the School District [of
Philadelphia]"; that "[t]he system of funding public education
violates the constitutional mandate to provide a thorough and
efficient system of public education in the City [of
Philadelphia]"; that "[t]he scheme for financing public education
precludes the Commonwealth from providing the constitutionally
required 'thorough and efficient system of public education' in
the circumstances faced by the School District [of
Philadelphia]"; and that "Defendants have failed to provide the
School District [of Philadelphia] with the resources and other
assistance necessary to provide all of its students with the
quality of education to which they are [c]onstitutionally
entitled." In March 1998, Commonwealth Court dismissed the case
on the grounds that the issues presented are not justiciable. On
October 1, 1999 the Supreme Court of Pennsylvania affirmed
Commonwealth Court's order.
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Pennsylvania Human Relations Commission v.School
District of Philadelphia, et al. v. Commonwealth of
Pennsylvania, et al.
In November 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."
In February 1996, the School District of Philadelphia
filed a third-party complaint against the Commonwealth of
Pennsylvania asking Commonwealth Court to require the
Commonwealth to supply such funding as is necessary for full
compliance with the remedial Orders of the Commonwealth Court.
In addition, a group of intervenors filed a third-party complaint
against the Commonwealth of Pennsylvania and the City of
Philadelphia requesting Commonwealth Court to require the
Commonwealth and the City to supply such additional funding as is
necessary for the District to comply with the orders.
By order dated April 30, 1996, Judge Doris A. Smith of
Commonwealth Court overruled the Commonwealth's and the City's
preliminary objections seeking dismissal of the claims against
them. The Commonwealth and the City thereafter filed answers to
the complaints, asserting numerous defenses. The Commonwealth
also asserted a cross-claim against the City of Philadelphia
claiming that if any party is liable, sole liability rests with
the City; in the alternative, the Commonwealth argued that if it
is held to be liable, it has a right to indemnity or contribution
against the City.
The Supreme Court of Pennsylvania assumed extraordinary
plenary jurisdiction. In May 1999, the Supreme Court of
Pennsylvania directed that the Commonwealth, the Governor, the
City of Philadelphia and the Mayor of Philadelphia be dismissed
from the case. The Court then remanded the original matter -- an
enforcement action by the Pennsylvania Human Relations Commission
against the School District of Philadelphia to eliminate racial
de facto segregation in the public school system -- to
Commonwealth Court for further proceedings. No appeal has been
filed or is expected. Thus, the Commonwealth and the Governor
are no longer parties to this case.
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Ridge v. State Employees' Retirement Board
In 1993 and in 1995, Joseph H. Ridge, former judge of
the Allegheny Court of Common Please filed suit in the
Commonwealth Court alleging that the State Employees' Retirement
Board's use of gender distinct actuarial factors for benefits
based upon his pre-August 1, 1983 services violates Article 1,
Section 26 (equal protection) and Article 1, Section 28 (equal
rights) of the Pennsylvania Constitution. He seeks "topped up"
benefits equal to those that a similarly situated female would be
receiving. Due to the constitutional nature of the claim, it is
possible that a decision adverse to the State Employees'
Retirement Board would be applicable to other members of the
State Employees' Retirement System and Public School Employees'
Retirement System who accrued service between the effective date
of the state constitutional provisions and before August 1, 1983,
and who have received, are receiving, or will receive benefits
less than those received by other members of the systems because
of their sex or the sex of their survivor annuitants.
The Commonwealth Court granted the State employees'
Retirement Board's preliminary objections to Judge Ridge's claims
for punitive damages, attorneys fees and compensatory damages
other than a recalculation of his pension benefits should he
prevail. In 1996, the Commonwealth Court heard oral argument en
banc, denied Judge Ridge's motion for judgment on the pleadings.
The case is currently in discovery.
Rite Aid of Pennsylvania, Inc. v. Houston
In March 1997, Rite Aid of Pennsylvania, Inc. (Rite Aid)
filed in the U.S. District Court for the Eastern District of
Pennsylvania a civil action against the Secretary of Public
Welfare (Secretary). In its complaint, Rite Aid alleged that in
promulgating regulations on October 1, 1995 governing payment
rates for prescription drugs and related services provided to
recipients of benefits under the Pennsylvania Medical Assistance
Program (Medicaid), the Secretary violated various provisions of
Title XIX of the Social Security Act (commonly known as the
Medicaid Act) and regulations of the U.S. Department of Health
and Human Services, as well as provisions of state law and
federal constitutional due process.
In August 1998, the District Court declared that the
pharmacy reimbursement rates made effective after October 1,
1995, were adopted by the Secretary in violation of section
1396(a)(30)(A) of the Medicaid Act and enjoined the Secretary
from using those rates to reimburse for any prescription drugs
and related services provided to Medicaid recipients on and after
October 1, 1998. The court held that the Secretary acted
arbitrarily and capriciously by failing to consider whether the
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revised rates were consistent with the statutory standards of
efficiency, economy, and quality of case.
The Secretary appealed the District Court's orders. On
March 22, 1999, the U.S. Court of Appeals for the Third Circuit
reversed the District Court's order and remanded for further
proceedings. The Court of Appeals held that the Secretary had
not violated the Medicaid Act in adopting rates in 1995, but the
court remanded the case to allow the plaintiffs to pursue any
claim which they might have that the rates substantively do not
satisfy the statutory standard prescribed by 42 U.S.C. Section
1396(a)(30)(A).
The case is pending in the District Court. No
substantial proceedings have occurred there since the remand. In
addition, a case raising State law issues is pending in
Commonwealth Court.
Year 2000
The Governor has made fixing the year 2000 problem a top
priority for Pennsylvania state agencies. At the Governor's
direction, Pennsylvania has begun an aggressive program to make
its computer systems year 2000 compatible and to identify
potential problems with entities outside state government with
which the Commonwealth does business or exchanges data. The
projected cost of the Commonwealth's year 2000 modification work
is $39.5 million and is being paid from appropriations from
current revenues.
The Office of Administration's Office for Information
Technology is responsible for monitoring the progress of state
agencies in meeting the Governor's Year 2000 Action Plan. While
state agencies are making reasonable efforts to address potential
year 2000 impacts, there can be no guarantee that all of the
Commonwealth's mission-critical and non-mission critical computer
programs will be free from year 2000 related problems and that a
material adverse impact on Commonwealth operations or finances
will be avoided as a result.
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
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from federal income tax and Commonwealth of Virginia personal
income tax. As a matter of fundamental policy at least 65
percent 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 at least 80 percent of its net
assets in municipal securities the interest on which is exempt
from federal income tax. Under normal market conditions, at
least 65 percent of the Virginia Portfolio's total assets will be
invested in income-producing securities (including zero coupon
securities). Shares of the Virginia Portfolio are available only
to Virginia residents.
The following is based on information obtained from an
Official Statement, dated November 1, 1999, relating to
$91,770,000 Virginia Public School Authority, School Financing
Bonds (1997 Resolution) Series 1999 B.
Economic Climate
The Commonwealth's 1998 population of 6,791,300 was 2.5
percent of the United States' total. Among the 50 states, it
ranked twelfth in population. With 39,700 square miles of land
area, its 1998 population density was 170 person per square mile,
compared with 73 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. MSA. This is the fastest growing
metropolitan area in the Commonwealth and had a 1998 population
of 2,041,900. 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.
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According to the U.S. Department of Commerce, Virginians
received over $176 billion in personal income in 1997. This
represents a 66.9 percent increase over 1988 while the nation as
a whole experienced a gain of 66.3 percent for the same period.
In 1997, Virginia had per capita income of $26,109, the highest
of the Southeast region and greater than the national average of
$25,288. Virginia's per capita income rose from 94 percent to
103 percent of the national average from 1970 to 1997. From 1988
to 1997, Virginia's 4.7 percent average rate of growth in
personal per capita income was slightly less than the national
rate of growth. Much of Virginia's per capita income gain in
these years has been due to the continued strength of the
manufacturing sectors, rapid growth of high-technology
industries, basic business services, corporate headquarters and
regional offices and the attainment of parity with the nation in
labor force participation rates.
More than 3 million residents of the Commonwealth are in
the civilian labor force, which includes agricultural and
nonagricultural employment, the unemployed, the self-employed and
residents who commute to jobs in other states. Services, the
largest employment sector, accounted for 30.9 percent of
nonagricultural employment in 1998, and has increased by 23.3
percent from 1994-1998, making it the fastest growing sector in
the Commonwealth. Manufacturing is also a significant employment
sector, accounting for 12.2 percent of nonagricultural employment
in 1998. 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 increased 0.2 percent from 1994 to 1998.
Virginia generally has one of the lowest unemployment
rates in the nation, according to statistics published by the
U.S. Department of Labor. During 1997, an average of 4.0 percent
of Virginia's citizens were unemployed as compared with the
national average which was 4.9 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
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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
appropriations, based on previous forecasts, exceed expected
revenues in subsequent forecasts. As of June 30, 1999,
$361,471,000 was on deposit in the Revenue Stabilization Fund.
Of the General Fund Balance on June 30, 1999, $194,135,000 is
reserved but not deposited into the Revenue Stabilization Fund.
This reserved amount is required to be deposited in fiscal year
2000.
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 December 19, 1997, the Governor presented to the
General Assembly the 1998-2000 Budget Bill for the 1998-2000
biennium. The 1998-2000 Budget Bill presented about $2,242.1
million in operating increases from the general fund above fiscal
year 1998 appropriation levels. Of this amount $211.4 million
was for deposit to the Revenue Stabilization Fund. The remainder
provided for increases in K-12 education ($874.2 million), higher
education ($345.5 million), public safety, economic development,
health and human resources and natural resources. The 1998-2000
Budget Bill also provided $350 million in funding for tax
reductions, including $260 million for the first installment of a
proposal to eliminate the personal property tax on the personal
use vehicles valued up to $20,000 and a proposal to eliminate the
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sales tax on non-prescription drugs. In addition to increases to
operating funds, the 1998-2000 Budget Bill provided $532.8
million in pay-as-you-go funding for capital projects.
On January 26, 1998, the incoming Governor submitted
amendments to the introduced 1998-2000 Budget Bill to fund his
commitments to provide additional teachers in K-12 classrooms
($35.1 million) and to eliminate the personal property tax on
personal use vehicles valued up to $20,000 ($233.2 million). His
amendment also made minor adjustments, many of them based on
updated information available after the 1998-2000 Budget Bill was
introduced. Revenue adjustments included a revised estimate of
general fund revenue, correct accounting for interest earnings,
and elimination of an unneeded Lottery Special Reserve.
The 1998-2000 Budget Bill enacted by the 1998 General
Assembly in its 60-day Session, which began January 14, 1998,
included $447 million for personal property tax relief and $80.8
million for local school construction and repair. The Governor
signed the 1998-2000 Budget Bill into law on April 14, 1998. The
1998-2000 Budget Bill became the 1998-2000 Appropriation Act.
This Act was amended by action of a Special Session of the 1999
General Assembly, which convened on April 23, 1998.
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 in five annual
installments to federal retirees in settlement of their claims
for overpaid taxes. In 1995 and 1996, the General Assembly
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passed legislation allowing more retirees to participate in the
settlement. As of June 30, 1997, the estimated total cost to the
Commonwealth for the settlement was approximately $316.2 million.
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 $329 million ($250.2 in respect of the
settlement and the entire $78.7 million in respect of the
judgment) has been paid, leaving $66 million payable in respect
of the settlement. This final payment was originally scheduled
to be paid on March 31, 1999. During the 1998 Session of the
General Assembly, legislation was approved providing for the
early payment of the remaining balance on September 20, 1998,
(subject to appropriation) and providing that the undesignated
and unreserved general fund balance is met on August 15, 1998.
Since such balances were not met, a special installment payment
of 52.8592 percent of the remaining balance (approximately $34.88
million) was made on September 30, 1998 with payment of the final
balance ($31.1 million) made on March 31, 1999.
Year 2000
Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed
and developed without considering the impact of the upcoming
change in the century. If not corrected, these programs could
fail or create erroneous results by or at the Year 2000. On
December 1, 1996, the Governor through Executive Memorandum 2-96,
established the Century Date Change Initiative (CDCI) within the
Commonwealth to resolve computer problems associated with the
arrival of the Year 2000. As of June 30, 1998, the Commonwealth
had incurred approximately $682 million in Year 2000 related
costs and it was estimated by the CDCI Project office that
approximately $96.3 million of additional costs would be required
to complete the assessment, remediation, testing, validation and
implementation of systems to ensure Year 2000 compliance. As of
December 31, 1998 the Commonwealth had incurred approximately
$969 million in Year 2000 related costs and it was estimated by
the CDCI Project Office that approximately $87.7 million of
additional costs would be required to ensure Year 2000
compliance.
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Additional Investment Policies
Except as otherwise noted, the following investment
policies apply to all Portfolios of the Fund.
General. Municipal securities include municipal bonds
as well as short-term (i.e., maturing in under one year to as
much as three years) municipal notes, demand notes and tax-exempt
commercial paper. In the event a Portfolio invests in demand
notes, 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
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applicable short-term interest rate index multiplied by a
designated factor. The additional interest component of the
coupon rate of these municipal securities generally expires
before the maturity of the underlying instrument. These
municipal securities may also contain provisions that provide for
conversion at the option of the issuer to constant interest rates
in addition to standard call features.
A Portfolio may invest a maximum of 35% of its total
assets in zero coupon securities, which are debt obligations that
do not entitle the holder to any periodic payments prior to
maturity and are issued and traded at a discount from their face
amounts. The discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. The market
prices of zero coupon securities are generally more volatile than
the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a
greater degree than do securities having similar maturities and
credit quality that do pay periodic interest.
Each Portfolio may also invest in municipal securities,
the interest rate on which has been divided into two different
and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the
"Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of
the components (the "Residual Component") pays a current residual
interest rate based on the difference between the total interest
paid by the issuer on the municipal securities and the auction
rate paid on the Auction Component. A Portfolio may purchase
both Auction and Residual Components.
Because the interest rate paid to holders of Residual
Components is generally determined by subtracting the interest
rate paid to the holders of Auction Components from a fixed
amount, the interest rate paid to Residual Component holders will
decrease the Auction Component's rate increases and increase as
the Auction Component's rate decreases. Moreover, the extent of
the increases and decreases in market value of Residual
Components may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal
security having similar credit quality, redemption provisions and
maturity.
Municipal notes in which a Portfolio may invest include
demand notes, which are tax-exempt obligations that have stated
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
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credit offered by banks. The interest rate on a demand note may
be based upon a known lending rate, such as a bank's prime rate,
and may be adjusted when such rate changes, or the interest rate
on a demand note may be a market rate that is adjusted at
specified intervals.
Other short-term obligations constituting municipal
notes include tax anticipation notes, revenue anticipation notes,
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
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higher yields and are generally subject to greater price
movements than obligations with shorter maturities. Under normal
circumstances the average weighted maturity of the securities in
each Portfolio will range between 10 and 30 years. However, no
Portfolio has any restrictions on the maturity of municipal
securities in which it may invest. Since the Portfolios'
objective is to provide high current income, they will emphasize
income rather than stability of net asset values, and the average
maturity of the Portfolios will vary depending on anticipated
market conditions. The Portfolios will seek to invest in
municipal securities of such maturities that, in the judgment of
the Adviser, will provide a high level of current income
consistent with liquidity requirements and market conditions.
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
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introduced in the future. If such a proposal were enacted, the
availability of municipal securities for investment by the Fund
and the value of the Fund's Portfolios would be affected.
Additionally, the Fund would reevaluate the Portfolios'
investment objectives and policies.
Futures Contracts and Options on Futures Contracts.
Each Portfolio may enter into contracts for the purchase or sale
for future delivery of municipal securities or obligations of the
U.S. Government securities or contracts based on financial
indices, including an index of municipal securities or U.S.
Government securities ("futures contracts") and may purchase and
write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the
incurring of a contractual obligation to acquire the securities
called for by the contract at a specified price on a specified
date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current
contract value") and the price at which the contract was
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
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will be entitled to a cash payment. In connection with its
purchase of index futures each Portfolio will deposit liquid
assets equal to the market value of the futures contract (less
related margin) in a segregated account with the Fund's custodian
or a futures margin account with a broker. If the Adviser were
to forecast incorrectly, a Portfolio might suffer a loss arising
from adverse changes in the current contract values of the bond
futures or index futures which it had purchased or sold. A
Portfolio's ability to hedge its positions through transactions
in index futures depends on the degree of correlation between
fluctuations in the index and the values of the securities which
the Portfolio owns or intends to purchase, or general interest
rate movements.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix B.
Options on Municipal and U.S. Government Securities. In
an effort to increase current income and to reduce fluctuations
in net asset value, the Portfolios intend to write covered put
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
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price of the put written. The premium paid by the purchaser of
an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and
demand and interest rates.
The Portfolios intend to write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
a Portfolio does not own the underlying security, and is designed
to provide a hedge against a decline in value in another security
which the Portfolio owns or has the right to acquire. In such
circumstances, a Portfolio collateralizes its obligation under
the option by maintaining in a segregated account with the Fund's
custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily. A
Portfolio would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option, while at
the same time achieving the desired hedge.
In purchasing a call option, a Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security increased by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security declined or remained the same or did not
increase during the period by more than the amount of the
premium. In purchasing a put option, the Portfolio would be in a
position to realize a gain if, during the option period, the
price of the underlying security declined by an amount in excess
of the premium paid. It would realize a loss if the price of the
underlying security increased or remained the same or did not
decrease during that period by more than the amount of the
premium. If a put or call option purchased by a Portfolio were
permitted to expire without being sold or exercised, its premium
would be lost by the Portfolio.
If a put option written by a Portfolio were exercised
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by a
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a
decrease in the market value of the underlying security caused by
rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then
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
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exercised and the underlying security would then be sold by the
Portfolio at a lower price than its current market value. These
risks could be reduced by entering into a closing transaction.
The Portfolio retains the premium received from writing a put or
call option whether or not the option is exercised. See Appendix
C for a further discussion of the use, risks and costs of option
trading.
The Portfolios may purchase or write options on
securities of the types in which they are permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. These
Portfolios will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written in negotiated transactions 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
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Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any,
of a Portfolio's obligations over its entitlements with respect
to each interest rate swap will be accrued daily, and an amount
of liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated
account by the custodian. If a Portfolio enters into an interest
rate swap on other than a net basis, the Portfolio will maintain
in a segregated account with the custodian the full amount,
accrued daily, of the Portfolio's obligations with respect to the
swap. A Portfolio will not enter into any interest rate swap, cap
or floor unless the unsecured senior debt or the claims paying
ability of the other party thereto is then rated in the highest
rating category of at least one nationally recognized rating
organization. The Adviser will monitor the creditworthiness of
counterparties on an ongoing basis. If there were a default by
such a counterparty, the Portfolios would have contractual
remedies. The swap market has grown substantially in recent
years, with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap
documentation. The Adviser has determined that, as a result, the
swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has
not yet been developed and, accordingly they are less liquid than
swaps. To the extent a Portfolio sells (i.e., writes) caps and
floors it will maintain in a segregated account with the
custodian 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
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to receive. A Portfolio may purchase and sell (i.e., write) caps
and floors without limitation, subject to the segregated account
requirement described above.
When-Issued Securities and Forward Commitments. Each
Portfolio may purchase municipal securities offered on a "when-
issued" basis and may purchase or sell municipal securities on a
"forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment by a
Portfolio and settlement, no payment is made for the securities
purchased by the purchaser, and, thus, no interest accrues to the
purchaser from the transaction. The use of when-issued
transactions and forward commitments enables a Portfolio to hedge
against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling bond
prices, a Portfolio might sell municipal securities which it
owned on a forward commitment basis to limit its exposure to
falling bond prices. In periods of falling interest rates and
rising bond prices, a Portfolio might sell a municipal security
held by the Portfolio and purchase the same or a similar security
on a when-issued or forward commitment basis, thereby obtaining
the benefit of currently higher cash yields. However, if the
Adviser were to forecast incorrectly the direction of interest
rate movements, the Portfolio might be required to complete such
when-issued or forward transactions at prices less favorable than
the current market value.
When-issued municipal securities and forward commitments
may be sold prior to the settlement date, but a Portfolio enters
into when-issued and forward commitment transactions only with
the intention of actually receiving or delivering the municipal
securities, as the case may be. To facilitate such transactions,
the Fund's custodian bank will maintain, in a separate account of
the Fund, liquid assets having value equal to, or greater than,
any commitments to purchase municipal securities on a when-issued
or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of a Portfolio, the
portfolio securities themselves. If a Portfolio, however,
chooses to dispose of the right to acquire a when-issued security
prior to its acquisition or dispose of its right to deliver or
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
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Portfolio assets to the purchase of securities on a "when, as an
if issued" basis may increase the volatility of the Portfolio's
net asset value. At the time a Portfolio makes the commitment to
purchase or sell a municipal security on a when-issued or forward
commitment basis, it records the transaction and reflects the
value of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. No when-issued or
forward commitments will be made by any Portfolio if, as a
result, more than 20% of the value of such Portfolio's total
assets would be committed to such transactions.
General. The successful use of the foregoing investment
practices, all of which are highly specialized investment
activities, draws upon the Adviser's special skill and experience
with respect to such instruments and usually depends on Adviser's
ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Portfolios may
not achieve the anticipated benefits of futures contracts,
options, interest rate transactions or forward commitment
contracts, or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of such instruments
and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its position in
futures contracts, options, interest rate transactions and
forward commitment contracts will depend on the availability of
liquid markets in such instruments. Markets for all these
vehicles with respect to municipal securities are relatively new
and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures
contracts and options on futures contracts. If, for example, a
secondary market did not exist with respect to an option
purchased or written by a Portfolio over-the-counter, it might
not be possible to effect a closing transaction in the option
(i.e., dispose of the option) with the result that (i) an option
purchased by the Portfolio would have to be exercised in order
for the Portfolio to realize any profit and (ii) the Portfolio
might not be able to sell portfolio securities covering the
option until the option expired or it delivered the underlying
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.
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Repurchase Agreements. Each Portfolio may seek
additional income by investing in repurchase agreements
pertaining only to U.S. Government securities. A repurchase
agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time
the buyer's money is invested in the security and which is not
related to the coupon rate on the purchased security. Such
agreements permit a Portfolio to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. Each Portfolio maintains procedures for
evaluating and monitoring the creditworthiness of vendors of
repurchase agreements. In addition, each Portfolio requires
continual maintenance of collateral held by the Fund's custodian
in an amount equal to, or in excess of, the market value of the
securities which are the subject of the agreement. In the event
that a vendor defaulted on its repurchase obligation, a Portfolio
might suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. In the
event of a vendor's bankruptcy, a Portfolio might be delayed in,
or prevented from, selling the collateral for its benefit.
Repurchase agreements may be entered into with member banks of
the Federal Reserve System including the Fund's custodian or
"primary dealers" (as designated by the Federal Reserve Bank of
New York) in U.S. Government securities. It is the Fund's current
practice to enter into repurchase agreements only with such
primary dealers.
Illiquid Securities. Subject to any applicable
fundamental investment policy, a Portfolio will not maintain more
than 15% of its net assets in illiquid securities. These
securities include, among others, securities for which there is
no readily available market, options purchased by a Portfolio
over-the-counter, the cover for such options and repurchase
agreements not terminable within seven days. Because of the
absence of a trading market for these investments, a Portfolio
may not be able to realize their value upon sale.
Future Developments. A Portfolio may, following written
notice to its shareholders, take advantage of other investment
practices which are not at present contemplated for use by the
Portfolio or which currently are not available but which may be
developed, to the extent such investment practices are both
consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Such investment practices, if
they arise, may involve risks which exceed those involved in the
activities described above.
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Portfolio Turnover. From time to time, the Portfolios
may engage in active short-term trading to benefit from yield
disparities among different issues of municipal securities, to
seek short-term profits during periods of fluctuating interest
rates, or for other reasons. Such trading will increase a
Portfolio's rate of turnover and the incidence of short-term
capital gain taxable as ordinary income. Management anticipates
that the annual turnover in each Portfolio will not exceed 250%.
An annual turnover rate of 200% occurs, for example, when all of
the securities in a Portfolio are replaced twice in a period of
one year. A high rate of portfolio turnover involves
correspondingly greater expenses than a lower rate, which
expenses must be borne by a Portfolio and its shareholders.
However, the execution costs for municipal securities are
substantially less than those for equivalent dollar value of
equity securities. See "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
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credit risk. They are, however, subject to certain limitations
from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between
the time a rating is assigned and the time it is updated. In
addition, there may be varying degrees of differences in credit
risk of securities within each rating category. See Appendix A
for a description of such ratings.
The Adviser will try to reduce the risk of investment in
lower-rated securities through credit analysis, attention to
current developments and trends in interest rates and economic
conditions. However, there can be no assurance that losses will
not occur. Since the risk of default is higher for lower-quality
securities, the Adviser's research and credit analysis are a
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
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more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the outstanding shares,
whichever is less. Each such Portfolio may not:
(1) Invest 25% or more of its total assets in the
securities of issuers conducting their
principal business activities in any one
industry, provided that for purposes of this
policy (a) there is no limitation with respect
to investments in municipal securities issued
by governmental users (including private
activity bonds issued by governmental users)
or securities issued or guaranteed by the
United States Government and (b) consumer
finance companies, industrial companies and
gas, electric, water and telephone utility
companies are each considered to be separate
industries (for purposes of this restriction,
a Portfolio will regard the entity with the
primary responsibility for the payment of
interest an principal as the issuer);
(2) Pledge, hypothecate, mortgage or otherwise
encumber its assets, except in an amount of
not more than 15% of the value of its total
assets, to secure borrowings for temporary or
emergency purposes;
(3) Make short sales of securities, maintain a
short position or purchase securities on
margin;
(4) Participate on a joint or joint and several
basis in any securities trading account;
(5) Issue any senior security within the meaning
of the 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
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repaid before any subsequent investments are
made;
(6) Make loans of its assets to any person, except
for (i) the purchase of publicly distributed
debt securities, (ii) the purchase of non-
publicly distributed securities subject to
paragraph 8 below and (iii) entering into
repurchase agreements;
(7) Act as an underwriter of securities of other
issuers, except that a Portfolio may acquire
restricted or not readily marketable
securities under circumstances where, if such
securities were sold, the Fund might be deemed
to be an underwriter for purposes of the
Securities Act of 1933, as amended (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%.
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_________________________________________________________________
MANAGEMENT OF THE FUND
_________________________________________________________________
Adviser
The Fund's investment adviser, Alliance Capital
Management L.P. (the "Adviser"), 1345 Avenue of the Americas, New
York, New York 10105, is a leading international investment
adviser managing client accounts with assets as of December 31,
1999 totaling more than $368 billion (of which more than
$169 billion represented the assets of investment companies). As
of December 31, 1999, the Adviser managed retirement assets for
many of the largest public and private employee benefit plans
(including 31 of the nation's FORTUNE 100 companies), for public
employee retirement funds in 31 states, for investment companies,
and for foundations, endowments, banks and insurance companies
worldwide. The 52 registered investment companies managed by the
Adviser, comprising 105 separate investment portfolios, currently
have approximately 5 million shareholder accounts.
Alliance Capital Management Corporation ("ACMC") is the
general partner of the Adviser and a wholly owned subsidiary of
The Equitable Life Assurance Society of the United States
("Equitable"). Equitable, one of the largest life insurance
companies in the United States, is the beneficial owner of an
approximately 55.4% partnership interest in the Adviser.
Alliance Capital Management Holding L.P. ("Alliance Holding")
owns an approximately 41.9% partnership interest in the Adviser.*
Equity interests in Alliance Holding are traded on the New York
Stock Exchange in the form of units. Approximately 98% of such
interests are owned by the public and management or employees of
the Adviser and approximately 2% are owned by Equitable.
Equitable is a wholly owned subsidiary of AXA Financial, Inc.
("AXA Financial"), a Delaware corporation whose shares are traded
on the New York Stock Exchange. AXA Financial serves as the
holding company for the Adviser, Equitable and Donaldson, Lufkin
____________________
* Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material
business operations. One result of the organization was
that the Advisory Agreement, then between the Fund and
Alliance Holding, was transferred to the Adviser by means
of a technical assignment, and ownership of Alliance Fund
Distributors, Inc. and Alliance Fund Services, Inc., the
Fund's principal underwriter and transfer agent,
respectively, also was transferred to the Adviser.
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& Jenrette, Inc., an integrated investment and merchant bank. As
of June 30, 1999, AXA, a French insurance holding company, owned
approximately 58.2% of the issued and outstanding shares of
common stock of AXA Financial.
Under the Advisory Agreement, the Adviser furnishes
advice and recommendations with respect to the portfolios of
securities and investments and provides persons satisfactory to
the 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-, $69,000, $69,000, $-0-, $-0-,
$69,000, $69,000, $69,000 and $-0- in respect of such services
during the fiscal year of the Fund ended in 1999 for the Arizona,
Florida, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios, respectively.
Under the terms of an investment advisory agreement, the
Fund pays the Adviser an advisory fee at an annual rate of .625
of 1% of each Portfolio's average daily net assets. Such fees
are accrued daily and paid monthly. The Adviser has agreed for
the current fiscal year to waive its fee and bear certain
expenses so that total operational expenses do not exceed on an
annual basis the amounts set forth in the prospectus.
For the fiscal year ended September 30, 1997, advisory
fees payable to the Adviser with respect to the Arizona, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios amounted to $85,933,
$413,941, $97,045, $91,349, $117,961, $464,240, $290,778,
$421,262 and $49,263. Of such amounts, $350,299, $97,045,
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<PAGE>
$91,349, $117,961, $323,542, $290,778, $242,697, and $49,263 was
waived by the Adviser.
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 $188,200,
$533,325, $248,200, $135,408, $148,899, $520,692, $358,606,
$495,591 and $105,442. Of such amounts, $184,639, $401,919,
$260,454, $135,408, $148,899, $334,961, $286,646, $214,644 and
$105,442 was waived by the Adviser.
For the fiscal year ended September 30, 1999, advisory
fees payable to the Adviser with respect to the Arizona, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios amounted to $361,666,
$1,026,151, $604,352, $203,931, $196,871, $726,481, $539,593,
$755,932 and $350,775. Of such amounts, $282,649, $674,741,
$495,867, $148,898, $196,871, $431,754, $454,227, $286,615 and
$350,775 was waived by the Adviser.
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 for another annual term at their
meeting held on July 14, 1999.
The Advisory Agreement is terminable with respect to a
Portfolio without penalty by a vote of a majority of the
Portfolio's outstanding voting securities or by a vote of a
majority of the Fund's Trustees on 60 days' written notice, or by
the Adviser on 60 days' written notice, and will terminate
automatically in the event of its assignment. The Advisory
Agreement provides that in the absence of willful misfeasance,
bad faith or gross negligence on the part of the Adviser, or of
reckless disregard of its obligations thereunder, the Adviser
shall not be liable for any action or failure to act in
accordance with its duties thereunder.
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Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. It is
the policy of the Adviser to allocate advisory recommendations
and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Adviser (including the
Fund) are purchasing or selling the same security on a given day
from the same broker-dealer, such transactions may be averaged as
to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is the investment adviser to the following registered
investment companies: AFD Exchange Reserves, Inc., Alliance All-
Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Disciplined Value Fund, Inc., Alliance Global Dollar Government
Fund, Inc., Alliance Global Environment Fund, Inc., Alliance
Global Small Cap Fund, Inc., Alliance Global Strategic Income
Trust, Inc., Alliance Government Reserves, Alliance Greater China
'97 Fund, Inc., Alliance Health Care Fund, Inc., Alliance High
Yield Fund, Inc., Alliance Growth and Income Fund, Inc., Alliance
International Fund, Alliance International Premier Growth Fund,
Inc., Alliance Institutional Funds, Inc., Alliance Institutional
Reserves, Inc., Alliance Limited Maturity Government Fund, Inc.,
Alliance Money Market Fund, Alliance Mortgage Securities Income
Fund, Inc., Alliance Multi-Market Strategy Trust, Inc., Alliance
Municipal Income Fund, Inc., Alliance Municipal Trust, Alliance
New Europe Fund, Inc., Alliance North American Government Income
Trust, Inc., Alliance Premier Growth Fund, Inc., Alliance Quasar
Fund, Inc., Alliance Real Estate Investment Fund, Inc., Alliance
Select Investor Series, Inc., Alliance Technology Fund, Inc.,
Alliance Utility Income Fund, Inc., Alliance Variable Products
Series Fund, Inc., Alliance Worldwide Privatization Fund, Inc.,
The Alliance Fund, Inc. and The Alliance Portfolios, all
registered open-end investment companies; and to ACM Government
Income Fund, Inc., ACM Government Securities Fund, Inc., ACM
Government Spectrum Fund, Inc., ACM Government Opportunity Fund,
Inc., ACM Managed Dollar Income Fund, Inc., ACM Managed Income
Fund, Inc., ACM Municipal Securities Income Fund, Inc., Alliance
All-Market Advantage Fund, Inc., Alliance World Dollar Government
Fund, Inc., Alliance World Dollar Government Fund II, Inc., The
Austria Fund, Inc., The Korean Investment Fund, Inc., The
Southern Africa Fund, Inc. and The Spain Fund, Inc., all
registered closed-end investment companies.
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Trustees and Officers
The business and affairs of the Fund are managed under
the direction of the Board of Trustees. 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,** 54, is the President, Chief Operating
Officer and a Director of ACMC, with which he has been associated
since prior to 1995.
RUTH BLOCK, 68, 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, 70, 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, 57, is President of Historic Hudson
Valley (historic preservation) since prior to 1995. Previously
he was a Director of the National Academy of Design. His address
is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, Jr., 67, is an investment adviser and
independent consultant. He was formerly Senior Manager of Barrett
Associates, Inc., a registered investment adviser, with which he
has been associated since prior to 1995. His address is Room
100, 2 Greenwich Plaza, Greenwich, Connecticut 06831.
DR. JAMES M. HESTER, 75, is President of the Harry Frank
Guggenheim Foundation with which he has been associated since
prior to 1995. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, NJ
08540.
____________________
** An "interested person" of the Fund as defined in the 1940
Act.
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CLIFFORD L. MICHEL, 60, is a member of the law firm of
Cahill Gordon & Reindel with which he has been associated since
prior to 1995. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 65, is senior counsel to the law
firm of Orrick, Herrington & Sutcliffe and was formerly a senior
partner and a member of the Executive Committee of that firm. He
was also a Trustee of the City of New York from 1977 to 1995.
His address is 98 Hell's Peak Road, Weston, Vermont 05161.
Officers
JOHN D. CARIFA, Chairman and President, (see biography,
above).
SUSAN P. KEENAN, 42, Senior Vice President, is a Senior
Vice President of ACMC with which she has been associated since
prior to 1995.
WAYNE D. LYSKI, 58, Senior Vice President, is an
Executive Vice President of ACMC with which he has been
associated since prior to 1995.
KATHLEEN A. CORBET, 39, 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 1995.
WILLIAM E. OLIVER, 46, Vice President, has been a Vice
President of ACMC since prior to 1995.
DAVID M. DOWDEN, 34, Vice President, is a Vice President
of ACMC, with which he has been associated since prior to 1995.
Previously, he was an analyst in the Municipal Strategy Group at
Merrill Lynch Capital Markets.
TERRANCE T. HULTS, 33, Vice President, is Vice President
of ACMC, with which he has been associated since prior to 1995.
EDMUND P. BERGAN, JR., 49, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributor,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1995.
DOMENICK PUGLIESE, 38, Assistant Secretary, is Vice
President and Assistant General Counsel of AFD, with which he
has been associated since May 1995. Previously, he was Vice
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President and Counsel of Concord Financial Holding Corporation
since prior to 1995.
ANDREW L. GANGOLF, 45, Assistant Secretary, has been a
Vice President and Assistant General Counsel of AFD, with which
he has been associated since prior to 1995.
MARK D. GERSTEN, 49, Treasurer and Chief Financial
Officer, is a Vice President of AFD and a Senior Vice President
of AFS with which he has been associated since prior to 1995.
The aggregate compensation paid by the Fund to each of
the Trustees during its fiscal year ended September 30, 1999, the
aggregate compensation paid to each of the Trustees during
calendar year 1999 by all of the funds to which the Adviser
provides investment advisory services (collectively, the
"Alliance Fund Complex") and the total number of registered
investment companies (and separate investment portfolios within
those 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.
Total Number
in Investment Total Number
Company of Investment
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- 50 103
Ruth Block $3,733 $154,263 38 80
David H. Dievler $3,845 $210,188 45 87
John H. Dobkin $3,845 $206,488 42 84
William H. Foulk, Jr. $3,848 $246,413 45 98
Dr. James M. Hester $3,850 $164,138 39 81
Clifford L. Michel $3,850 $183,388 39 83
Donald J. Robinson $3,098 $154,313 41 92
______________________
As of January 5, 2000, the Trustees and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
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_________________________________________________________________
EXPENSES OF THE FUND
_________________________________________________________________
Distribution Services Agreement
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Fund's principal underwriter (the "Principal
Underwriter" or "AFD"), to permit the Principal Underwriter to
distribute the Fund's shares and to permit the Fund to pay
distribution services fees to defray expenses associated with the
distribution of its Class A, Class B and Class C shares in
accordance with a plan of distribution which is included in the
Agreement and which has been duly adopted and approved in
accordance with Rule 12b-1 adopted by the Commission under the
1940 Act (the "Rule 12b-1 Plan").
During the fiscal year ended September 30, 1999, 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 $90,011, $201,093,
$116,339, $30,935, $25,126, $77,731, $56,225, $144,368 and
$53,553, respectively, which constituted approximately .30% of
each portfolio's aggregate average daily net assets attributable
to Class A shares during the period, and the Adviser made
payments from its own resources as described above aggregating
$4,847,052. Of the $5,642,433 paid by the Fund and the Adviser
with respect to the Class A shares under the Agreement, $342,536
was spent on advertising, $65,851 on the printing and mailing of
prospectuses for persons other than current shareholders,
$1,933,647 for compensation to broker-dealers and other financial
intermediaries (including, $891,441 to the Fund's Principal
Underwriter), $1,057,171 for compensation to sales personnel and
$2,243,228 was spent on printing of sales literature, travel,
entertainment, due diligence and other promotional expenses.
During the Fund's fiscal year ended September 30, 1999,
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 $211,334,
$579,037, $330,332, $118,090, $146,798, $598,368, $457,799,
$489,744 and $295,978, respectively, which constituted
approximately 1.00% of each portfolio's aggregate average daily
net assets attributable to Class B shares during the period, and
the Adviser made payments from its own resources as described
above aggregating $7,887,750. Of the $11,115,230 paid by the
Fund and the Adviser with respect to the Class B shares under the
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<PAGE>
Agreement, $361,623 was spent on advertising, $75,106 on the
printing and mailing of prospectuses for persons other than
current shareholders, $7,959,761 for compensation to broker-
dealers and other financial intermediaries (including, $954,006
to the Fund's Principal Underwriter), $662,016 for compensation
to sales personnel, $1,650,629 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses and $406,095 was spent on interest on
Class B shares financing.
During the Fund's fiscal year ended September 30, 1999,
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 $67,296,
$392,495, $248,837, $105,082, $84,442, $304,898, $218,133,
$238,521 and $86,751, respectively, which constituted
approximately 1.00%, of each portfolio's aggregate average daily
net assets attributable to Class C shares during the period, and
the Adviser made payments from its own resources as described
above aggregating $2,406,534. Of the $4,152,989 paid by the Fund
and the Adviser with respect to the Class C shares under the
Agreement, $194,582 was spent on advertising, $33,232 on the
printing and mailing of prospectuses for persons other than
current shareholders, $2,667,852 for compensation to broker-
dealers and other financial intermediaries (including, $506,363
to the Fund's Principal Underwriter), $322,199 for compensation
to sales personnel, $875,734 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $59,390 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.
With respect to Class A shares of the Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Fund in subsequent
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fiscal years. AFD's compensation with respect to Class B and
Class C shares for any given year, however, will probably exceed
the distribution services fee payable under the Rule 12b-1 Plan
with respect to the class involved and, in the case of Class B
and Class C shares, payments received from contingent deferred
sales charges ("CDSCs"). The excess will be carried forward by
AFD and reimbursed from distribution services fees payable under
the Rule 12b-1 Plan with respect to the class involved and, in
the case of Class B and Class C shares, payments subsequently
received through CDSCs, so long as the Rule 12b-1 Plan is in
effect.
Unreimbursed distribution expenses incurred as of 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 each Portfolio were, as of that
time, as follows:
Fund Class B Class B Class C Class C
(as a percentage (as a percentage
of the net assets of the net assets
of Class B) of Class C)
______________________________________________________________________________
Arizona $1,956,413 9.3% $ 411,760 6.1%
Florida $2,846,389 4.9% $1,586,538 2.7%
Massachusetts $2,161,884 6.5% $1,128,353 4.5%
Michigan $1,406,873 11.9% $1,254,875 11.9%
Minnesota $1,789,761 12.2% $1,106,874 13.1%
New Jersey $3,427,343 5.7% $1,244,916 4.1%
Ohio $2,804,973 6.1% $1,215,073 5.6%
Pennsylvania $2,546,313 5.2% $1,113,897 4.7%
Virginia $2,707,431 9.1% $ 575,874 6.6%
The Rule 12b-1 Plan is in compliance with rules of the
National Association of Securities Dealers, Inc. which
effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to
.75% and .25%, respectively, of the average annual net assets
attributable to that class. The rules also limit the aggregate of
all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of
shares of that class, plus interest at the prime rate plus 1% per
annum.
In approving the Agreement, the 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
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to subsidize the provision of distribution services with respect
to any other class.
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission 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 for successive
twelve-month periods (computed from each October 1) with respect
to each class of a Portfolio, provided, however, that such
continuance is specifically approved at least annually by the
Trustees of the Fund or by vote of the holders of a majority of
the outstanding voting securities (as defined in the 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 for another annual term at their
meeting on July 14, 1999.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
Transfer Agency Agreement
AFS, an indirect wholly-owned subsidiary of the Adviser
located at 500 Plaza Drive, Secaucus, New Jersey 07094, receives
a transfer agency fee per account holder of the Class A shares,
Class B shares and Class C shares of each Portfolio of the Fund,
plus reimbursement for out-of-pocket expenses. The transfer
agency fee with respect to the Class B shares and Class C shares
is higher than the transfer agency fee with respect to the
Class A shares 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, 1999, the Fund
paid AFS $329,305 for transfer agency services.
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_______________________________________________________________
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
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.
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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
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.
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<PAGE>
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
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.
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<PAGE>
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 in
connection with the sale of shares of a Portfolio. Such
additional amounts may be utilized, in whole of in part, to
provide additional compensation to registered representatives who
sell shares of a Portfolio. On some occasions, such cash or
other incentives may take the form of payment for attendance at
seminars, meals, sporting events or theater performance, or
payment for travel, lodging and entertainment incurred in
connection with travel taken by persons associated with a dealer
or agent to locations within or outside the United States. Such
dealer or agent may elect to receive cash incentives of
equivalent amounts in lieu of such payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of
each Portfolio, have the same rights and are identical in all
respects, except that (i) Class A shares bear the expense of the
initial sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of
the deferred sales charge, (ii) Class B shares and Class C shares
each bear the expense of a higher distribution services fee than
do Class A shares, and Advisor Class shares do not bear such a
fee, (iii) Class B and Class C shares bear higher transfer agency
costs than that borne by Class A and Advisor Class shares,
(iv) each of Class A, Class B and Class C shares has exclusive
voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid and other
matters for which separate class voting is appropriate under
applicable law, provided that, if each Portfolio submits to a
vote of the Class A shareholders an amendment to the Rule 12b-1
Plan that would materially increase the amount to be paid
thereunder with respect to the Class A shares then such amendment
will also be submitted to the Class B and Advisor Class
shareholders and the Class A shareholders, the Class B
shareholders and the Advisor Class shareholders will vote
separately by class and (v) Class B and Advisor Class shares are
subject to a conversion feature. Each class has different
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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 Shares***
The alternative purchase arrangements available with
respect to Class A shares, Class B shares and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length
of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Portfolio, the
accumulated distribution services fee and contingent deferred
sales charge on Class B shares prior to conversion, or the
accumulated distribution services fee and contingent deferred
sales charge on Class C shares would be less than the initial
sales charge and accumulated distribution services fee on Class A
shares purchased at the same time and to what extent such
differential would be offset by the higher return of Class A
shares. Class A shares will normally be more beneficial than
Class B shares to the investor who qualifies for reduced initial
sales charges on Class A shares, as described below. In this
regard, the Principal Underwriter will reject any order (except
orders from certain retirement plans) for more than $250,000 for
Class B shares. Class C shares will normally not be suitable for
the investor who qualifies to purchase Class A shares at net
asset value. For this reason, the Principal Underwriter will
reject any order for more than $1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the time
of purchase, investors purchasing Class A shares would not have
all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for
an extended period of time might consider purchasing Class A
shares because the accumulated continuing distribution charges on
____________________
*** Advisor Class shares are sold only to investors described
above in this section under "--General."
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<PAGE>
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, 1999,
the aggregate amount of underwriting commissions payable with
respect to shares of the Florida Portfolio were $1,322,232; the
Minnesota Portfolio were $219,812; the New Jersey Portfolio were
$519,472; the Ohio Portfolio were $437,246; the Pennsylvania
Portfolio were $717,781; the Michigan Portfolio were $276,308;
the Massachusetts Portfolio were $489,671; the Virginia Portfolio
were $871,037; and the Arizona Portfolio were $623,114; of that
amount, the Principal Underwriter, received the amount of $56,932
for the Florida Portfolio; $6,975 for the Minnesota Portfolio;
$17,643 for the New Jersey Portfolio; $17,040 for the Ohio
Portfolio; $7,843 for the Pennsylvania Portfolio; $122,277 for
the Michigan Portfolio; $36,411 for the Massachusetts Portfolio;
$33,074 for the Virginia Portfolio and $3,796 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, 1999, the Principal Underwriter received in
contingent deferred sales charges with respect to Class B
redemptions $39,825 for the Florida Portfolio; $11,382 for the
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Minnesota Portfolio; $70,246 for the New Jersey Portfolio;
$52,549 for the Ohio Portfolio, $49,284 for the Pennsylvania
Portfolio, $17,666 for the Michigan Portfolio, $45,353 for the
Massachusetts Portfolio, $36,018 for the Virginia Portfolio and
$33,429 for the Arizona Portfolio. During the fiscal year ended
September 30, 1999, the Principal Underwriter received in
contingent deferred sales charges with respect to Class C
redemptions $20,482 for the Florida Portfolio; $2,941 for the
Minnesota Portfolio; $7,142 for the New Jersey Portfolio; $12,623
for the Ohio Portfolio; $4,135 for the Pennsylvania Portfolio;
$5,242 for the Michigan Portfolio; $17,435 for the Massachusetts
Portfolio; $9,839 for the Virginia Portfolio and $2,509 for the
Arizona Portfolio.
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
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;
$12,520 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 fiscal year ended
September 30, 1998, the Principal Underwriters received in
contingent deferred sales charges, with respect to Class C
redemptions $3,420, for the Florida Portfolio; $1,704 for the
Minnesota Portfolio; $4,182 for the New Jersey Portfolio; $2,362
for the Ohio Portfolio; $1,570 for the Pennsylvania Portfolio;
$103,431 for the Michigan Portfolio; $8,754 for the Massachusetts
Portfolio; $541 for the Virginia Portfolio and $706 for the
Arizona Portfolio.
During the Fund's fiscal year ended September 30, 1997,
the aggregate amount of underwriting commissions payable with
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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; $4,431 for the Michigan Portfolio;
$152,917 for the Massachusetts Portfolio; $166,692 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;
$2,053 for the Michigan Portfolio; $2,193 for the Massachusetts
Portfolio; $187 for the Virginia Portfolio and $1,329 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.
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Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000. . . 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000. . . 3.36 3.25 3.00
$250,000 but
less than
$500,000. . . 2.30 2.25 2.00
$500,000 but
less than
$1,000,000.* . 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemption, as described below under "--Class B
Shares." In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends and
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
of compensation to selected dealers and agents for selling
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Class A Shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "Class B
Shares--Conversion Feature" and "--Conversion of Advisor Class
Shares to Class A Shares." Each Portfolio receives the entire
net asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may, however, elect to reallow the entire sales
charge to selected dealers and agents for all sales with respect
to which orders are placed with the Principal Underwriter. A
selected dealer who receives reallowance in excess of 90% of such
a sales charge may be deemed to be an "underwriter" under the
Securities Act.
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
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his, her or their own account(s); (ii) a single purchase by a
trustee or other fiduciary purchasing shares for a single trust,
estate or single fiduciary account although more than one
beneficiary is involved; or (iii) a single purchase for the
employee benefit plans of a single employer. The term "purchase"
also includes purchases by any "company," as the term is defined
in the 1940 Act, but does not include purchases by any such
company which has not been in existence for at least six months
or which has no purpose other than the purchase of shares of a
Portfolio or shares of other registered investment companies at a
discount. The term "purchase" does not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit card holders of a company, policy
holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase"
may also include shares, purchased at the same time through a
single selected dealer or agent, of any other "Alliance Mutual
Fund." Currently, the Alliance Mutual Funds include:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-Quality Bond Portfolio
-U.S. Government Portfolio
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
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 Health Care 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
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-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund
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.
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.
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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.
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,
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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
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
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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
or retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not
be resold except to the Fund); (iii) the Adviser, Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
certain employee benefit plans for employees of the Adviser, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their service and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a fee
based program, sponsored and maintained by a registered broker-
dealer and approved by the Principal Underwriter, pursuant to
which persons pay an asset-based fee to such or its affiliate or
agent, for services in the nature of investment advisory or
administrative services; and (vi) employer-sponsored qualified
pension or profit-sharing plans (including Section 401(k) plans),
custodial accounts maintained pursuant to Section 403(b)(7)
retirement plans and individual retirement accounts (including
individual retirement accounts to which simplified employee
pension (SEP) contributions are made), if such plans or accounts
are established or administered under programs sponsored by
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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
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).
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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
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
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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
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
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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
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
Conversion of Advisor Class Shares to Class-A Shares
Advisor Class shares may be held solely through the fee-
based program accounts and employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary that satisfies the
requirements to purchase shares set forth under "Purchase of
Shares--General" or (ii) the holder is otherwise no longer
eligible to purchase Advisor Class shares as described in the
Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically to
Class A shares of the Fund during the calendar month following
the month in which the Fund is informed of the occurrence of the
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Conversion Event. The Fund will provide the shareholder with at
least 30 days' notice of the conversion. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on the
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee
and have a higher expense ratio than Advisor Class shares. As a
result, Class A shares may pay correspondingly lower dividends
and have a lower net asset value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem his Advisor Class shares, which would constitute a taxable
event under federal income tax law.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Share--How to Sell Shares". If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
Redemption
Subject only to the limitations described below, the
Fund's 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
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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
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
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tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
Telephone Redemption By Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
Prior to March 1, 1998 this service can be employed only once in
any 30 day period (except for certain Omnibus accounts). A
telephone redemption request by electronic funds transfer may not
exceed $100,000 (except for certain omnibus accounts), and must
be made by 4:00 p.m. Eastern time on a Fund business day as
defined above. Proceeds of telephone redemptions will be sent by
Electronic Funds Transfer to a shareholder's designated bank
account at a bank selected by the shareholder that is a member of
the NACHA.
Telephone Redemption By Check. Each Fund shareholder is
eligible to request redemption by check of Portfolio shares for
which no stock certificates have been issued by telephone at
(800) 221-5672 before 4:00 p.m. Eastern time on a Fund business
day in an amount not exceeding $50,000 per day. Prior to
March 1, 1998 this service can be employed only once in any 30
day period (except for certain Omnibus accounts). Proceeds of
such redemptions are remitted by check to the shareholder's
address of record. A shareholder otherwise eligible for
telephone redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
Telephone Redemptions-General. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
redemption service at any time without notice. Telephone
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
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the Adviser, the Principal Underwriter or Alliance Fund Services,
Inc. will be responsible for the authenticity of telephone
requests for redemptions that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for redemptions are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers or agents may charge a commission for handling telephone
requests for redemptions.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value.) If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of a Portfolio to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of a Portfolio are offered through a financial
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.
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General
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of a Portfolio recently purchased by check, redemption proceeds
will not be made available until the Fund is reasonably assured
that the check has cleared, normally up to 15 calendar days
following the purchase date.
_______________________________________________________________
SHAREHOLDER SERVICES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus(es) under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set
forth below are applicable to Class A, Class B, Class C and
Advisor Class shares unless otherwise indicated. If you are an
Advisor Class shareholder through an account established under a
fee-based program your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Automatic Investment Program
Investors may purchase shares of a Portfolio through an
automatic investment program utilizing electronic fund transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
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.
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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
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
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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
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
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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
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
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below, any applicable contingent deferred sales charge. Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a shareholder of Class A shares who is
maintaining a systematic withdrawal plan, such investment should
normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
shares of a Portfolio should complete the appropriate portion of
the Subscription Application found in the Prospectus, while
current Portfolio shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at
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
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limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
Statements and Reports
Each shareholder of a Portfolio receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a monthly cumulative dividend statement and a
confirmation of each purchase and redemption. By contacting his
or her broker or Alliance Fund Services, Inc., a shareholder can
arrange for copies of his or her account statements to be sent to
another person.
Shareholder Services Applicable to
Class A and Class C Shareholders Only
Checkwriting
A new Class A or Class C investor may fill out the
Signature Card which is included in the Prospectus to authorize
the Fund to arrange for a checkwriting service through State
Street Bank and Trust Company (the "Bank") to draw against
Class A or Class C shares of a Portfolio redeemed from the
investor's account. Under this service, checks may be made
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,
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the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks
are returned to the shareholder. The checkwriting service
enables the shareholder to receive the daily dividends declared
on the shares to be redeemed until the day that the check is
presented to the Bank for payment.
_______________________________________________________________
NET ASSET VALUE
_______________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the 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
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or more other foreign or other national securities exchanges, and
portfolio securities not traded on the Exchange but traded on one
or more foreign or other national securities exchanges are valued
in accordance with these procedures by reference to the principal
exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
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. Mortgage-backed and asset-backed securities may be
valued at prices obtained from a bond pricing service or at a
price obtained from one or more of the major broker/dealers in
such securities. In cases where broker/dealer quotes are
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obtained, the Adviser may establish procedures whereby changes in
market yields or spreads are used to adjust, on a daily basis, a
recently obtained quoted bid price on a security.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of 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
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
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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
taxable year will be distributed; however the Fund may retain any
long-term capital gains realized by the Portfolio if this is
determined by the Trustees to be in the best interests of the
Portfolio. Dividends paid by a Portfolio, if any, with respect
to Class A, Class B and Class C shares will be calculated in the
same manner at the same time on the same day and will be in the
same amount, except that the higher distribution services fees
applicable to Class B and Class C shares, and any incremental
transfer agency costs relating to Class B shares, will be borne
exclusively by the class to which they relate.
The information set forth in the Prospectus and the
following discussion relates generally to Federal income taxes on
dividends and distributions by each Portfolio of the Fund and
assumes that each Portfolio of the Fund qualifies to be taxed as
a regulated investment company. Investors should consult their
own tax counsel with respect to the specific tax consequences of
their being shareholders of a Portfolio, including the effect and
applicability of Federal, state, and local tax laws to their own
particular situation and the possible effects of changes therein.
Each Portfolio intends to declare and distribute
dividends in the amounts and at the times necessary to avoid the
application of the 4% Federal excise tax imposed on certain
undistributed income of regulated investment companies. For
Federal income and excise tax purposes, dividends declared and
payable to shareholders of record as of a date in October,
November or December but actually paid during the following
January will be treated as having been distributed by the
Portfolio, and will be taxable to these shareholders, for the
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year declared, and not for the subsequent calendar year in which
the shareholders actually receive the dividend.
For shareholders' Federal income tax purposes,
distributions to shareholders out of tax-exempt interest income
earned by each Portfolio of the Fund are not subject to Federal
income tax if, at the close of each quarter of such Portfolio's
taxable year, at least 50% of the value of such Portfolio's total
assets consists of tax-exempt obligations. Each Portfolio
intends to meet this requirement.
Substantially all of the dividends paid by the Fund are
anticipated to be exempt from Federal income taxes. Shortly
after the close of each calendar year, a notice is sent to each
shareholder advising him of the total dividends paid into his
account for the year and the portion of such total that is exempt
from Federal income taxes. This portion is determined by the
ratio of the tax-exempt income to total income for the entire
year and, thus, is an annual average rather than a day-by-day
determination for each shareholder.
Each Portfolio generally will be required to withhold
tax at the rate of 31% with respect to dividends of net ordinary
income and net realized capital gains payable to a noncorporate
shareholder unless the shareholder certifies on his subscription
application that the social security or taxpayer identification
number provided is correct and that the shareholder has not been
notified by the Internal Revenue Service that he is subject to
backup withholding.
If a shareholder holds shares for six months or less and
during that time receives a distribution of long-term capital
gains, any loss realized on the sale of the shares during such
six-month period would be a long-term capital loss to the extent
of such distribution. If a shareholder holds shares for six
months or less and during that time receives a distribution of
tax-exempt interest income, any loss realized on the sale of the
shares would be disallowed to the extent of the distribution.
United States Federal Income Taxation of the Portfolios
The following discussion relates to certain significant
United States Federal income tax consequences to the Portfolios
with respect to the determination of their "investment company
taxable income" each year. This discussion assumes that each
Portfolio will be taxed as a regulated investment company for
each of its taxable years.
Options and Futures Contracts. Certain listed options
and regulated futures contracts are considered "section 1256
contracts" for Federal income tax purposes. Section 1256
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contracts held by a Portfolio at the end of each taxable year
will be "marked to market" and treated for Federal income tax
purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a
Portfolio on section 1256 contracts will generally be considered
60% long-term and 40% short-term capital gain or loss. A
Portfolio can elect to exempt its section 1256 contracts which
are part of a "mixed straddle" (as described below) from the
application of section 1256.
With respect to over-the-counter options, gain or loss
realized by a Portfolio upon the lapse or sale of such options
held by the Portfolio will be either long-term or short-term
capital gain or loss depending upon the Portfolio's holding
period with respect to such option. However, gain or loss
realized upon the lapse or closing out of such options that are
written by a Portfolio will be treated as short-term capital gain
or loss. In general, if a Portfolio exercises an option, or an
option that the Portfolio has written is exercised, gain or loss
on the option will not be separately recognized but the premium
received or paid will be included in the calculation of gain or
loss upon disposition of the property underlying the option.
Tax Straddles. Any option, futures contract, interest
rate swap, cap or floor, or other position entered into or held
by a Portfolio in conjunction with any other position held by
such Portfolio may constitute a "straddle" for Federal income tax
purposes. A straddle of which at least one, but not all, the
positions are section 1256 contracts may constitute a "mixed
straddle." In general, straddles are subject to certain rules
that may affect the character and timing of a Portfolio's gains
and losses with respect to straddle positions by requiring, among
other things, that (i) loss realized on disposition of one
position of a straddle not be recognized to the extent that such
Portfolio has unrealized gains with respect to the other position
in such straddle; (ii) such Portfolio's holding period in
straddle positions be suspended while the straddle exists
(possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (iii) losses recognized
with respect to certain straddle positions which are part of a
mixed straddle and which are non-section 1256 positions be
treated as 60% long-term and 40% short-term capital loss;
(iv) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (v) the deduction of
interest and carrying charges attributable to certain straddle
positions may be deferred. Various elections are available to a
Portfolio which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held
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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.
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, trusts and corporations 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
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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 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
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.
Distributions representing income derived from the Portfolio from
sources other than Michigan municipal securities and U.S.
government securities, including capital gain distributions, are
subject to Michigan income and single business tax.
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
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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,
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
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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 obligations issued by Puerto Rico, the U.S. Virgin Islands or
Guam, 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.
________________________________________________________________
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
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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 years ended
September 30, 1997, 1998 and 1999, the Arizona, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios incurred no brokerage
commissions.
________________________________________________________________
GENERAL INFORMATION
________________________________________________________________
Capitalization
The Fund has an unlimited number of authorized Class A,
Class B and Class C shares of beneficial interest par value $.01
per share. Such shares are currently divided into 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
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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
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.
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<PAGE>
Shareholder Liability
Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for the
obligations of the Fund. However, the Agreement and Declaration
of Trust disclaims shareholder liability for acts or obligations
of the Fund and requires that the Trustees use their best efforts
to ensure that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or officers of the Fund. The Agreement
and Declaration of Trust provides for indemnification out of the
property of the Fund for all loss and expense of any shareholder
of the Fund held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. In
the view of the Adviser, such risk is not material.
At January 5, 2000, there were outstanding 90,793,942
voting shares of common stock of the Fund, including, 3,565,266
Class A shares, 3,112,374 Class B shares and 899,685 Class C
shares of the Arizona Portfolio; 7,384,966 Class A shares,
6,981,419 Class B shares and 4,460,207 Class C shares of the
Florida Portfolio; 4,353,447 Class A shares, 3,898,608 Class B
shares and 2,527,839 Class C shares of the Massachusetts
Portfolio; 1,318,906 Class A shares, 1,323,885 Class B shares and
1,185,896 Class C shares of the Michigan Portfolio; 1,465,804
Class A shares, 1,360,214 Class B shares and 868,247 Class C
shares of the Minnesota Portfolio; 4,155,744 Class A shares,
6,538,765 Class B shares and 3,245,869 Class C shares of the New
Jersey Portfolio; 2,679,714 Class A shares, 4,853,541 Class B
shares and 2,405,489 Class C shares of the Ohio Portfolio;
6,148,616 Class A shares, 4,944,844 Class B shares and 2,536,176
Class C shares of the Pennsylvania Portfolio; and 2,925,562 Class
A shares, 4,371,188 Class B shares and 1,281,671 Class C shares
of the Virginia Portfolio.
The following is a list of all persons who owned as of
record or beneficially 5% of more of each class of shares of each
Portfolio at January 5, 2000.
NO. OF
SHARES % OF % OF % OF
NAME AND ADDRESS OF CLASS CLASS A CLASS B CLASS C
ARIZONA PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith for the
Sole Benefit of its
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<PAGE>
Customers
Attn: Fund Administration
4800 Deer Lake Dr.
2nd Floor
Jacksonville, FL 32246-6485 486,423 14%
U.S. Clearing Corp.
FBO 165-25490-13
26 Broadway
New York, NY 10004-1703 321,286 9%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97D14)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 361,630 12%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97D14)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 188,577 21%
PaineWebber for the
Benefit of William B.
Thomas TTEE FBO
The William B. Thomas
Personal Trust UI/A DTD
2-15-90
P.O. Box 20729
Wickenburg, AZ 85358-5729 92,213 10%
FLORIDA PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 531,369 7%
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PaineWebber for the
Benefit of Wallace E.
Sapp and Edna M. Sapp
JTWROS
P.O. Box 6047
Marianna, FL 32447-6047 459,588 6%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN3)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 [ ] 20%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 2,122,742 47%
MASSACHUSETTS PORTFOLIO
NFSC FEBO# Q13-000027
FMTC Personal TR Omnibus
Account
Rachel Greenfield
82 Devonshire St.
Mailzone R18B
Boston, MA 02109-3605 487,020 11%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97DR5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,030,969 27%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
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<PAGE>
its Customers
Attn: Fund Administration
(97D53)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 522,782 21%
MICHIGAN PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97DH1)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 82,268 7%
Donaldson Lufkin Jenrette
Securities Corp., Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052 76,877 6%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97DH2)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 219,570 17%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97DH3)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 325,989 27%
Verlin R. Eppert &
Rosalie A. Eppert
JT Ten
34190 Bellvine Trail
Birmingham, MI 48025-3703 123,278 10%
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MINNESOTA PORTFOLIO
Billy K. Erickson
27930 Smithtown Rd.
Shorewood, MN 55331 126,050 8%
Attn: Mutual Funds Dept.
Fiserv Securities, Inc.
FAO 40359228
One Commerce Square
Philadephia, PA 19103-7084 208,768 14%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN2)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 71,664 5%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN7)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 261,871 30%
James G. Hynes and
Carol Y. Hynes
Jt TEN
4628 Churchill Circle
Minnetonka, MN 55345-2509 45,487 5%
NEW JERSEY PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BM3)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 500,800 12%
Merrill Lynch, Pierce,
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<PAGE>
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BM8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,115,762 17%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN6)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,640,852 50%
OHIO PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BM5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 290,339 11%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 850,198 18%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,195,437 50%
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PENNSYLVANIA PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BM4)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 687,308 11%
James E. Beasley, Esq.
1125 Walnut Street
Philadelphia, PA 19107-4918 1,249,881 20%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BM9)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,074,672 22%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97BN5)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 1,336,142 53%
VIRGINIA PORTFOLIO
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97DY9)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 179,016 6%
Olin V. Hyde TTEE
Olin V. Hyde REVOC Trust
VA DTD 12/02/96
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8900 Bellefonte Rd.
Richmond Va 23229-7109 190.812 8%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97D00)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 [ ] 14%
Merrill Lynch, Pierce,
Fenner & Smith
for the Sole Benefit of
its Customers
Attn: Fund Administration
(97D03)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 433,223 34%
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 LLP, New
York, New York. Seward & Kissel LLP has relied upon the opinion
of Sullivan & Worcester, Boston, Massachusetts, for matters
relating to Massachusetts law.
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<PAGE>
Independent Auditors
Ernst & Young LLP, New York, New York, has been appointed
as independent auditors for the Fund.
Yield and Total Return Quotations
From time to time, a Portfolio states its "yield,"
"actual distribution rate" and "total return." Computed
separately for each class, a Portfolio's yield for any 30-day (or
one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. A Portfolio may advertise a
"taxable equivalent yield" that is calculated by assuming that net
investment income per share is increased by an amount sufficient
to offset the benefit of tax exemptions at the stated income 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
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 9/30/99) 9/30/99) Rate
Florida
Class A 5.03% 8.33% 5.13%
Class B 4.56% 7.55% 4.64%
Class C 4.56% 7.55% 4.64%
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Minnesota
Class A 5.08% 9.19% 5.03%
Class B 4.58% 8.29% 4.51%
Class C 4.60% 8.32% 4.51%
New Jersey
Class A 4.78% 8.45% 4.79%
Class B 4.27% 7.55% 4.27%
Class C 4.29% 7.59% 4.27%
Pennsylvania
Class A 4.82% 8.21% 4.99%
Class B 4.32% 7.36% 4.49%
Class C 4.33% 7.38% 4.49%
Massachusetts
Class A 5.13% 9.03% 4.98%
Class B 4.66% 8.20% 4.53%
Class C 4.66% 8.20% 4.53%
Arizona
Class A 4.83% 8.42% 5.03%
Class B 4.35% 7.58% 4.58%
Class C 4.35% 7.58% 4.58%
Ohio
Class A 4.75% 8.44% 4.98%
Class B 4.24% 7.53% 4.48%
Class C 4.25% 7.55% 4.48%
Virginia
Class A 5.02% 8.82% 5.12%
Class B 4.55% 7.99% 4.67%
Class C 4.55% 7.99% 4.67%
Michigan
Class A 4.63% 8.02% 4.73%
Class B 4.14% 7.17% 4.26%
Class C 4.14% 7.17% 4.26%
145
<PAGE>
Total Return Calculations
Ten-Year
One-Year period Five-Year period period ended
Fund ended 9/30/99 ended 9/30/99 9/30/99
Florida
Class A (5.61)% 6.87% 4.71*
Class B (4.87)% 7.02% 4.71*
Class C (3.00)% 7.02% 4.67*
Minnesota
Class A (4.68)% 5.80% 4.40*
Class B (4.03)% 5.96% 4.36*
Class C (2.14)% 5.94% 4.35*
New Jersey
Class A (4.49)% 6.50% 4.71*
Class B (3.84)% 6.63% 4.71*
Class C (1.94)% 6.63% 4.67*
Pennsylvania
Class A (6.55)% 6.31% 4.82*
Class B (5.88)% 6.47% 4.82*
Class C (4.03)% 6.47% 4.79*
Massachusetts
Class A (5.47)% 6.87%* 7.00%*
Class B (4.68)% 7.07%* 7.12%*
Class C (2.81)% 7.08%* 7.12%*
Arizona
Class A (4.68)% 6.59%* 6.10*
Class B (4.01)% 6.78%* 6.23*
Class C (2.13)% 6.78%* 6.23*
Ohio
Class A (4.88)% 6.49% 4.71*
Class B (4.21)% 6.64% 4.69*
Class C (2.33)% 6.64% 4.67*
Virginia
Class A (5.30)% 7.29%* 6.58%
Class B (4.54)% 7.50%* 6.70% Class
C (2.67)% 7.48%* 6.70%
146
<PAGE>
Michigan
Class A (4.21)% 7.36%* 5.94*
Class B (3.48)% 7.55%* 6.01*
Class C (1.59)% 7.55%* 6.01*
____________________
* 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, Inc. and Morningstar,
Inc. and advertisements presenting the historical record of
payments of income dividends by the Portfolios may also from time
to time be sent to investors or placed in newspapers and
magazines such as Barrons, Business Week, Changing Times, Forbes,
Investor's Daily, Money Magazine, The New York Times and The Wall
Street Journal or other media on behalf of the Fund.
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or to Alliance Fund Services, Inc. at the
address or telephone numbers shown on the front cover of this
Statement of Additional Information. This Statement of
Additional Information does not contain all the information set
forth in the Registration Statement filed by the Fund with the
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.
147
<PAGE>
________________________________________________________________
REPORT OF INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
________________________________________________________________
ALLIANCE MUNICIPAL INCOME FUND II
ANNUAL REPORT
SEPTEMBER 30, 1999
ALLIANCE CAPITAL
ARIZONA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-94.9%
ARIZONA-88.3%
Aaa Arizona Student Loan
Acquisition Authority
(Student Loan Rev)
Ser 99B-2 AMT
5.90%, 5/01/24 (b) $ 1,500 $ 1,492,215
AAA Glendale IDR
(Midwestern Univ)
Connie Lee Ser 96A
6.00%, 5/15/26 475 490,756
AAA Glendale IDR
(Midwestern Univ)
Connie Lee Ser 96A,
Pre-refunded
6.00%, 5/15/06 1,025 1,116,215
NR Goodyear Assessment District # 1
Ser 96C
7.25%, 7/01/16 4,652 5,040,395
NR Goodyear Dev Auth
Water & Sewer Rev
(Litchfield Pk Svc Proj)
Ser 99 AMT
5.95%, 10/01/23 3,160 2,990,498
NR Hassayampa Cmnty Fac
Dist Spec Assessment Lien
Ser 96
7.75%, 7/01/21 6,795 7,488,702
AAA Maricopa Cnty GO
School Dist No. 28
(Kyrene Elem)
FGIC Ser 95B
6.00%, 7/01/14 2,000 2,056,120
AAA Maricopa Cnty Hosp Rev
(Catholic Healthcare West)
MBIA Ser 93
7.45%, 7/01/13 (c) 2,700 2,737,881
A+ Maricopa Cnty IDR
(Citizens Utilities)
Ser 95 AMT
6.20%, 5/01/30 8,550 8,649,607
AAA Maricopa Cnty MFHR
(Mesa Ridge Apts Proj)
MBIA Ser 99A
5.15%, 7/01/29 1,250 1,132,112
AAA Maricopa Cnty MFHR
(Shadow Creek Apts Proj)
FNMA Ser 98C AMT
5.20%, 12/15/21 4,100 3,838,420
AAA Mesa Cnty Health Care Fac
(Discovery Hlth Sys)
MBIA Ser 99A
5.75%, 1/01/25 7,000 6,953,170
AAA Mesa Cnty Health Care Fac
(Lutheran Hlth Sys)
MBIA Ser 98A
5.00%, 1/01/19 4,000 3,653,200
AAA Mohave Cnty IDR
(Cargill/North Star Steel)
Ser 95A AMT
6.70%, 3/01/20 2,500 2,713,700
AAA Mohave Cnty MFHR
(Chris Ridge & Silver)
GNMA Ser 96
6.375%, 11/01/31 1,000 1,038,960
AAA Phoenix Arpt Rev
(Sky Harbor/Goodyear/Deer Valley)
MBIA Ser 94D AMT
6.30%, 7/01/10 1,795 1,926,915
AA+ Phoenix Excise Tax Rev
(Civic Plaza Bldg Corp)
Sr Lien Ser 94
6.00%, 7/01/12 1,015 1,061,741
AA Phoenix MFHR
(Woodstone & Silver Springs)
Asset Gty Ser 93
6.25%, 4/01/23 3,000 3,084,210
AAA Pima Cnty SFMR
GNMA/FNMA/FHLMC
Ser 97A AMT
6.25%, 11/01/30 2,195 2,245,616
AAA Pima Cnty SFMR
GNMA/FNMA/FHLMC
Ser 99A AMT
5.20%, 5/01/31 3,500 3,150,805
NR Scottsdale GO Comm Fac
(McDowell Ranch)
Ser 97, Pre-refunded
6.50%, 7/15/07 2,000 2,228,040
11
ARIZONA PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED)
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
AAA Tempe MFHR
(Quadrangles)
FHA Ser 93
6.25%, 6/01/26 $1,615 $ 1,661,366
AAA Yuma MFHR
(Alexandrite Sands Apts)
FHA Ser 90 AMT
7.70%, 12/01/29 3,000 3,074,610
------------
69,825,254
PUERTO RICO-6.6%
AAA Puerto Rico Hsg Fin
Corp Rev
SFMR GNMA
Ser 98A AMT
5.20%, 12/01/32 4,200 3,779,454
BBB- Puerto Rico Port Auth
(American Airlines)
Ser 96A AMT
6.25%, 6/01/26 1,400 1,414,756
------------
5,194,210
TOTAL INVESTMENTS-94.9%
(cost $74,571,422) $ 75,019,464
Other assets less liabilities-5.1% 4,062,273
NET ASSETS-100% $ 79,081,737
See footnote summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
12
FLORIDA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-98.2%
FLORIDA-90.1%
Aaa Brevard Cnty Hsg Fin Auth
SFMR GNMA Ser 94 AMT
6.70%, 9/01/27 (b) $ 4,140 $ 4,285,024
A Broward Cnty Hsg Fin Auth
MFHR
(Bridgewater Place Apts)
Ser 99A AMT
5.50%, 4/01/41 5,640 5,170,470
NR Collier Cnty Cmnty Dev Dist
(Fiddlers Creek) Ser 96
7.50%, 5/01/18 18,865 20,088,584
A Collier Cnty Cmnty Dev Dist
(Fiddlers Creek)
Ser 99B
5.80%, 5/01/21 (d) 7,940 7,665,117
BBB+ Collier Cnty Hlth Fac
(The Moorings) Ser 94
7.00%, 12/01/19 2,000 2,144,480
A Collier Cnty Hsg Fin Auth
MFHR
(Whistlers Green Apts)
Ser 99A AMT
5.45%, 6/01/39 5,040 4,628,938
A3 Dade Cnty
(Courthouse Ctr Proj)
Ser 95, Pre-refunded
6.10%, 4/01/05 (b) 3,000 3,262,830
AAA Dade Cnty Aviation Rev
(Miami Int'l)
MBIA Ser 95B AMT
6.00%, 10/01/24 9,730 10,003,024
NR Dade Cnty Hsg Fin Auth
(Golden Lakes Apts)
Ser 97A AMT
6.00%, 11/01/32 250 249,985
NR Dade Cnty Hsg Fin Auth
(Golden Lakes Apts)
Ser 97A AMT
6.05%, 11/01/39 750 752,198
Aaa Duval Cnty Hsg Fin Auth
SFMR Ser 99 AMT
5.30%, 4/01/29 (b) 6,000 5,476,260
AAA Escambia Cnty Hsg Fin Auth
SFMR GNMA/FNMA
Ser 95B AMT
6.25%, 4/01/28 11,500 11,729,540
Aaa Escambia Cnty Hsg Fin Auth
SFMR MBIA Ser 99 AMT
5.20%, 4/01/32 (b) 5,000 4,489,800
Baa1 Escambia Cnty PCR
(Champion Int'l Corp)
Ser 96 AMT
6.40%, 9/01/30 (b) 5,000 5,070,700
AAA Florida Hsg Fin Agy MFHR
(Brittany of Rosemont)
AMBAC Ser 95G AMT
6.25%, 7/01/35 1,350 1,390,176
AAA Florida Hsg Fin Agy MFHR
(Landings at Boot Ranch)
AMBAC Ser 95K AMT
6.10%, 11/01/35 2,050 2,089,729
AAA Florida Hsg Fin Agy MFHR
(Turtle Creek Apts)
AMBAC Ser 96C AMT
6.20%, 5/01/36 3,245 3,329,532
AAA Florida Hsg Fin Agy
SFMR GNMA/FNMA
Ser 94B AMT
6.65%, 7/01/26 3,600 3,713,652
AAA Florida Hsg Fin Agy
SFMR GNMA/FNMA
Ser 95A AMT
6.65%, 1/01/24 6,675 6,918,037
AAA Florida Hsg Fin Corp MFHR
(Crossing at Univ Apts)
AMBAC Ser 98Q-1 AMT
5.25%, 12/01/38 6,545 5,934,155
AAA Florida Hsg Fin Corp MFHR
(Logans Pointe Apts)
FSA Ser 99F-1 AMT
6.00%, 6/01/39 6,630 6,776,987
Aaa Florida Hsg Fin Corp MFHR
(Waterbridge Apts) MBIA
Ser 98R-1 AMT
5.20%, 2/01/32 (b) 1,540 1,403,571
A Florida Hsg Fin Corp MFHR
(Wentworth II Apts)
Ser 99A AMT
5.40%, 11/01/34 3,055 2,808,584
AAA Greater Orlando Aviation Auth
Orlando Arpt Facs Rev
FGIC Ser 99A AMT
5.13%, 10/01/28 6,000 5,419,260
13
FLORIDA PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
AAA Hillsborough Cnty Aviation Auth
(Tampa Int'l Arpt)
FGIC Ser 96A AMT
6.00%, 10/01/23 $ 1,500 $ 1,551,540
AAA Jacksonville Wtr & Swr Rev
(United Wtr Proj)
AMBAC Ser 95 AMT
6.35%, 8/01/25 1,500 1,575,165
NR Lee Cnty Comm Fac Dist
(Herons Glen Recreational Dist)
Ser 99
5.90%, 5/01/19 5,380 5,269,764
Aaa Manatee Cnty Hsg Fin Auth
SFMR GNMA Ser 99 AMT
6.25%, 11/01/28 (b) 3,015 3,179,378
A Miami-Dade Cnty Hsg
Fin Auth
(Cntry Club Villas Apts)
Ser 99A AMT
6.20%, 10/01/39 5,145 5,114,593
AAA Miami-Dade Cnty
(Professional Sports
Franchise Fac Tax)
MBIA Ser 98
4.75%, 10/01/30 800 662,920
Aa3 North Miami Hlth Fac Auth
(Catholic Hlth Svcs
Oblig Grp) Ser 96
6.00%, 8/15/24 (b) 1,200 1,207,260
AA Orange Cnty Hlth Facs Auth Rev
(Mayflower Retirement Proj)
Asset Gty Ser 99
5.25%, 6/01/29 4,410 4,056,538
A+ Palm Beach Cnty IDR
(Lourdes McKeen Residence)
Ser 96
6.63%, 12/01/26 4,000 4,095,960
Aaa Pinellas Cnty Hsg Fin Auth
SFMR GNMA/FNMA
Ser 94A AMT
6.55%, 8/01/27 (b) 4,090 4,209,387
A Suwannee Cnty Hlth Care Facs Rev
(Advent Christian Village)
ACA Ser 99
5.25%, 4/01/24 1,300 1,175,694
Baa2 Volusia Cnty Ed Fac Auth
(Embry-Riddle Aero Univ)
Ser 99A
5.75%, 10/15/29 (b) 2,000 1,912,020
Baa2 Volusia Cnty Ed Fac Auth
(Embry-Riddle Aero Univ)
Ser 96A
6.13%, 10/15/26 (b) 7,060 7,091,346
AA Volusia Cnty Hlth Fac Auth
(John Knox Village)
Asset Gty Ser 96A
6.00%, 6/01/17 3,000 3,066,720
AAA Volusia Cnty Hlth Fin Auth
MFHR FNMA/GNMA
(Spring Arbor Apts)
Ser 98A AMT
5.25%, 8/01/31 1,955 1,783,703
------------
170,752,621
WEST VIRGINIA-8.1%
A Braxton Cnty Solid Waste
Disp Rev
(Weyerhaeuser Co Proj)
Ser 98 AMT
5.40%, 5/01/25 16,700 15,249,271
TOTAL INVESTMENTS-98.2%
(cost $186,201,910) 186,001,892
Other assets less liabilities-1.8% 3,451,434
NET ASSETS-100% $189,453,326
See footnote summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
14
MASSACHUSETTS PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-95.4%
MASSACHUSETTS-90.5%
BBB- Massachusetts Dev Fin Agy
(Boston Biomedical)
Ser 99
5.75%, 2/01/29 $ 1,800 $ 1,639,206
BBB- Massachusetts Dev Fin Agy
(Eastern Nazarene)
Ser 99
5.63%, 4/01/29 2,000 1,815,160
AA Massachusetts Dev Fin Agy
(Landmark Sch)
Asset Gty Ser 99
5.25%, 6/01/29 2,815 2,516,723
BBB+ Massachusetts Dev Fin Agy
(Ogden Haverhill Proj)
Ser 98B AMT
5.50%, 12/01/19 2,735 2,573,033
AA Massachusetts Dev Fin Agy
(Seven Hills)
Asset Gty Ser 99
5.15%, 9/01/28 6,035 5,372,236
BBB Massachusetts Dev Fin Agy
(Suffolk Univ)
Ser 99
5.85%, 7/01/29 1,375 1,302,730
AA Massachusetts Dev Fin Agy
(Worcester Redev Auth)
Asset Gty Ser 99
6.00%, 6/01/24 1,300 1,316,185
BBB+ Massachusetts Dev Fin Agy
(YMCA Greater Boston)
Ser 98
5.45%, 11/01/28 1,000 911,970
AAA Massachusetts Ed Fin Auth
(Educational Loan)
AMBAC Ser 99A AMT
5.00%, 7/01/15 1,890 1,772,234
AAA Massachusetts Hlth &
Ed Fac Auth
(Beth Israel)
AMBAC Ser G-4
8.826%, 7/01/25 (c) 2,000 2,015,900
BBB Massachusetts Hlth &
Ed Fac Auth
(Caritas Christi)
Ser 99A
5.75%, 7/01/28 16,940 15,457,750
Baa3 Massachusetts Hlth &
Ed Fac Auth
(Lasell College)
Ser 99A
5.625%, 7/01/29 (b). 7,490 6,841,516
AAA Massachusetts Hlth & Ed Fac Auth
(New England Med Ctr)
MBIA Ser 94
6.73%, 7/01/18 (c) 5,000 4,544,900
AA+ Massachusetts Hlth & Ed Fac Auth
(Wellesley College)
Ser 99F
5.13%, 7/01/39 6,500 5,739,240
AAA Massachusetts Hsg Fin Agy
AMBAC Ser 93A
6.15%, 10/01/15 3,500 3,598,490
AAA Massachusetts Hsg Fin Agy
MFHR
AMBAC Ser 95E AMT
6.00%, 7/01/37 2,680 2,683,163
AAA Massachusetts Hsg Fin Agy
SFMR
FSA Ser 73 AMT
5.90%, 12/01/23 10,000 9,935,400
A3 Massachusetts Ind Fin Agy
(Brooks School)
Ser 93, Pre-refunded
5.95%, 7/01/03 (b) 2,250 2,407,095
AAA Massachusetts Ind Fin Agy
(Heights Crossing)
FHA Ser 95 AMT
6.15%, 2/01/35 7,000 7,049,070
AAA Massachusetts Muni
Wholesale Elec
Power Supply Sys Rev
MBIA Ser 92A
6.00%, 7/01/18 4,940 5,025,363
AAA Massachusetts Port Auth
(Bosfuel Corp)
MBIA Ser 97 AMT
6.00%, 7/01/36 12,460 12,476,821
15
MASSACHUSETTS PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
AAA Massachusetts Port Auth Spec Fac
(US Air)
MBIA Ser 96A AMT
5.88%, 9/01/23 $ 5,600 $ 5,511,352
AA+ Massachusetts Wtr Poll Abate
(South Essex Program)
Ser 94A
6.38%, 2/01/15 3,000 3,167,760
------------
105,673,297
PUERTO RICO-4.9%
AAA Puerto Rico Hsg Fin Corp Rev
SFMR GNMA
Ser 98A AMT
5.20%, 12/01/32 6,300 5,669,181
TOTAL INVESTMENTS-95.4%
(cost $111,026,406) 111,342,478
Other assets less liabilities-4.6% 5,409,119
NET ASSETS-100% $116,751,597
See footnotes summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
16
MICHIGAN PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MICHIGAN MUNICIPAL
BONDS-99.7%
AAA Detroit GO
FGIC Ser 93, Pre-refunded
6.35%, 4/01/03 $ 1,690 $ 1,792,330
BB- Detroit Local Dev Fin Auth
Daimler/Chrysler
(Jefferson North Assembly Plant)
Ser98A
5.50%, 5/01/21 7,000 6,483,680
AAA Genessee Cnty Arpt Rev
(Bishop Int'l)
AMBAC Ser 99A
5.00%, 12/01/23 1,000 889,530
AAA Grand Rapids Swr Sys
MBIA Ser 92
6.00%, 1/01/22 1,500 1,581,690
Aa2 Independence Eco
Dev Auth
(Greenery Health)
FHA Ser 97A
6.15%, 8/01/17 (b) 1,850 1,924,296
AAA Kent Cnty Arpt Fac
(Kent Cnty Int'l)
Ser 95 AMT, Pre-refunded
6.10%, 1/01/05 1,700 1,829,320
AA+ Michigan Hosp Fin Auth
(Charity Oblig Group)
Ser 99A
5.13%, 11/01/29 2,080 1,827,841
Aaa Michigan Hsg Dev Auth
MFHR/GNMA
(Arbor Pointe) Ser 99
5.40%, 6/20/40 (b) 1,810 1,663,046
AAA Michigan Hsg Dev Auth
MFHR
AMBAC Ser 97A AMT
6.10%, 10/01/33 4,680 4,737,049
AAA Michigan Hsg Dev Auth
MFHR
MBIASer 99A AMT
5.30%, 10/01/37 3,500 3,192,945
AAA Michigan Strategic Fund
(Detroit Edison)
MBIA Ser 95AA
6.40%, 9/01/25 1,690 1,795,135
A Michigan Strategic Fund
(General Motors)
Ser 95
6.20%, 9/01/20 1,715 1,803,356
NR Michigan Strategic Fund
(Holland Home)
Ser 98
5.75%, 11/15/28 2,200 1,993,354
BBB+ Romulus Tax Increment
Fin Auth Ser 94
6.75%, 11/01/19 1,585 1,649,827
AAA Three Rivers GO
MBIA Ser 96, Pre-refunded
6.00%, 5/01/06 1,400 1,509,676
AA Troy Downtown Dev
Auth Asset Gty Ser 95A
6.375%, 11/01/18 1,500 1,568,655
TOTAL INVESTMENTS-99.7%
(cost $35,916,628) 36,241,730
Other assets less liabilities-0.3% 110,242
NET ASSETS-100% $36,351,972
See footnotes summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
17
MINNESOTA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MINNESOTA MUNICIPAL
BONDS-95.4%
A Bass Brook PCR
(Minn Power & Light)
Ser 92
6.00%, 7/01/22 $ 1,680 $ 1,693,574
AAA Brooklyn Park MFHR
(Brooklyn Landing)
FNMA Ser 99A AMT
5.60%, 7/01/24 1,370 1,330,598
AAA Duluth Arpt Lease Rev
GO
Ser 95C AMT
6.25%, 8/01/14 1,570 1,639,739
A- Golden Valley Health Fac
Covenant Retmt Cmty
Ser 99A
5.50%, 12/01/29 3,750 3,388,725
A- Minneapolis Common
Bond Fund Cmnty Dev Agy
Ser 95-2 AMT
6.63%, 12/01/15 1,245 1,300,154
NR Minneapolis Hlth Fac
(Walker Methodist)
Ser 98A
6.00%, 11/15/28 5,000 4,631,850
AAA Minneapolis Spec School Dist No. 1
COP MBIA Ser 96A
5.90%, 2/01/17 1,670 1,692,662
AAA Minnesota Agric & Eco Dev
(Benedictine Health)
Ser 99A
5.13%, 2/15/29 1,000 900,080
NR Minnesota Agric & Eco Dev
(Small Business Loan Prog)
Ser 96A AMT
6.75%, 8/01/16 1,450 1,511,393
NR Minnesota Agric & Eco Dev
(Small Business Loan Prog)
Ser 96B AMT
7.00%, 8/01/16 750 773,385
Baa1 Minnesota Higher Ed Fac Auth
(Hamline Univ)
Ser 4-I
6.00%, 10/01/16 (b) 790 789,163
AA+ Minnesota Hsg Fin Agy
SFMR Ser 96G AMT
6.25%, 7/01/26 3,500 3,564,925
Aaa Minnetonka MFHR
(Archer Heights Apts)
GNMA Ser 99A AMT
5.30%, 1/20/27 (b) 1,620 1,517,940
AA+ Rochester Hosp Rev
(Mayo Med Ctr)
Ser 92H
8.07%, 11/15/15 (c) 3,000 3,151,950
BBB- So. St. Paul Hosp Rev
(Healtheast Proj)
Ser 94B
6.75%, 11/01/09 1,630 1,669,381
AAA St. Francis GO
Ind Sch Dist No. 15
FSA Ser 95A
6.38%, 2/01/16 1,000 1,078,150
Aaa St. Paul MFHR
(Wellington Proj)
FHLMC Ser 99A
5.10%, 2/01/24 (b) 1,720 1,608,527
TOTAL INVESTMENTS-95.4%
(cost $31,950,094) 32,242,196
Other assets less liabilities-4.6% 1,550,361
NET ASSETS-100% $ 33,792,557
See footnote summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
18
NEW JERSEY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-96.0%
NEW JERSEY-91.1%
AAA Essex Cnty Imp Auth Util Rev
(Orange Twp)
MBIA Ser 93
6.00%, 12/01/17 $ 2,510 $ 2,679,927
BBB- New Jersey Eco Dev
(American Airlines)
AMT
7.10%, 11/01/31 4,500 4,729,320
A+ New Jersey Eco Dev
(Anheuser-Busch)
Ser 95 AMT
5.85%, 12/01/30 6,400 6,403,520
NR New Jersey Eco Dev
(Kapkowski Rd)
Ser 98B AMT
6.50%, 4/01/31 28,085 28,403,765
BBB New Jersey Eco Dev
(NUI Corp)
Ser 98A AMT
5.25%, 11/01/33 12,000 10,605,240
AAA New Jersey Eco Dev
(Pub Ser Elec & Gas)
MBIA Ser 94A AMT
6.40%, 5/01/32 5,000 5,292,950
BBB New Jersey Hlth Care Fac
(Englewood Hosp)
Ser 94
6.75%, 7/01/24 4,230 4,460,661
BBB New Jersey Hlth Care Fac
(Franciscan Sisters,
St. Mary's Hosp)
Ser 93
5.88%, 7/01/12 2,755 2,743,732
AAA New Jersey Hlth Care Fac
(Monmouth Med Ctr)
FSA Ser C
6.25%, 7/01/24 2,750 2,996,400
A New Jersey Hlth Care Fac
(Palisades Med Ctr)
ACA Ser 99
5.25%, 7/01/28 3,840 3,461,914
AAA New Jersey Hlth Care
Fac Auth
(St. Barnabas Hosp)
Ser 98B
5.00%, 7/01/24 5,000 4,447,550
AAA New Jersey Higher Ed
Student Loan MBIA
Ser 99A AMT
5.25%, 6/01/18 1,500 1,426,260
AAA New Jersey Hsg & Mtg
MFHR AMBAC
Ser 96A AMT
6.25%, 5/01/28 5,000 5,136,800
A+ New Jersey Hsg & Mtg
(Sect 8) Ser 1
6.70%, 11/01/28 4,665 4,897,830
AAA New Jersey Hsg & Mtg
SFMR MBIA
Ser 95O AMT
6.35%, 10/01/27 5,000 5,132,050
AA- New Jersey Hwy Auth
Garden State Pkwy Rev
6.25%, 1/01/14 1,250 1,311,500
AAA Passaic Valley Sewer
AMBAC Ser 92D
5.75%, 12/01/15 3,400 3,435,904
AAA Port Auth of NY & NJ
(JFK Int'l Airport)
MBIA Ser 6 AMT
5.75%, 12/01/22 7,690 7,611,716
AA- Port Auth of NY & NJ
95th Ser 94 AMT
6.13%, 7/15/29 6,300 6,496,875
AA- Salem Cnty NJ Waste
Disposal Auth (E.I. Dupont)
Ser 92A AMT
6.13%, 7/15/22 3,500 3,555,230
BBB South Jersey Transportation
Auth NJ Lease Rev
(Raytheon Aircraft Service)
Ser 97A AMT
6.15%, 1/01/22 500 503,440
AAA NJ Sewer Auth
(Landis)
FGIC Ser 93C
7.12%, 9/19/19 (c) 3,250 3,287,993
------------
119,020,577
19
NEW JERSEY PORTFOLIO
PORTFOLIO OF INVESTMENTS
(CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
PUERTO RICO-4.9%
AAA Puerto Rico Hsg Fin
Corp Rev SFMR
GNMA, Ser 98A AMT
5.20%, 12/01/32 $ 7,100 $ 6,389,077
TOTAL INVESTMENTS-96.0%
(cost $123,050,683) 125,409,654
Other assets less liabilities-4.0% 5,206,297
NET ASSETS-100% $130,615,951
See footnotes summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
20
OHIO PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
OHIO MUNICIPAL BONDS-92.5%
BBB Akron
COP Ser 96
Zero Coupon to 12/01/01
Converts to 6.907 to
12/01/16 $ 5,000 $ 4,769,850
BBB- Butler Cnty Hosp Rev
(Fort Hamilton Hughes)
7.50%, 1/01/10 1,400 1,489,572
BB Cleveland Arpt
(Continental Airlines)
Ser 98 AMT
5.38%, 9/15/27 20,015 17,016,553
AAA Cleveland Arpt Sys
FGIC Ser 94A AMT
6.25%, 1/01/20 10,000 10,390,500
BBB Dayton Spec Fac Rev
(Emery Air Freight)
Ser 96D AMT
6.20%, 10/01/09 4,380 4,585,772
A Franklin Cnty Rev
(OCLC Online Computer Library Ctr)
Ser 98A
5.20%, 10/01/20 4,885 4,548,619
BBB Hamilton Cnty Hlth Sys
(Franciscan Sisters/Providence Hosp)
Ser 92
6.875%, 7/01/15 2,500 2,706,900
NR Kent Ohio MFHR
(Silver Meadows Apt)
GNMA Ser 95 AMT
7.15%, 12/20/26 3,100 3,326,424
Aaa Lucas Cnty Health Fac
(Altenheim)
GNMA Ser 99
5.50%, 7/20/40 (b) 3,200 2,961,472
NR Mahoning Valley Sanitary
Dist Ser 94
7.75%, 5/15/14 1,500 1,632,975
A+ Ohio Air Quality Dev Auth
(Anheuser-Busch)
Ser 99 AMT
6.00%, 8/01/29 2,250 2,254,725
AA- Ohio Air Quality Dev Auth
(Dayton Pwr & Light)
Ser 92B
6.40%, 8/15/27 2,000 2,118,280
AAA Ohio Air Quality Dev Auth
(JMG Funding)
AMBAC Ser 94B AMT
6.38%, 4/01/29 4,685 4,889,828
AAA Ohio Air Quality Dev Auth
(Ohio Pwr Co)
AMBAC Ser 99C
5.15%, 5/01/26 3,000 2,733,480
BB+ Ohio Air Quality Dev Auth
(Toledo Edison Co)
Ser 97A AMT
6.10%, 8/01/27 5,000 4,837,200
Aa2 Ohio Hsg Fin Agy MFHR
(Bridgeview Villa II)
FHA AMT
6.45%, 12/01/33 (b) 1,965 2,016,228
AAA Ohio Hsg Fin Agy
SFMR GNMA
Ser 94 B2 AMT
6.70%, 3/01/25 5,325 5,520,640
AAA Ohio Hsg Fin Agy
SFMR GNMA
Ser 95 A2 AMT
6.63%, 3/01/26 4,445 4,595,419
AAA Ohio Hsg Fin Agy
SFMR GNMA
Ser 99C AMT
5.75%, 9/01/30 5,700 5,555,049
A- Ohio St Wtr Dev Auth
(North Star/BHP) AMT
6.45%, 9/01/20 4,750 4,931,070
TOTAL INVESTMENTS-92.5%
(cost $91,763,037) 92,880,556
Other assets less liabilities-7.5% 7,529,177
NET ASSETS-100% $100,409,733
See footnote summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
21
PENNSYLVANIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
PENNSYLVANIA MUNICIPAL
BONDS-98.2%
AAA Allegheny Cnty Arpt Rev
(Pittsburgh Int'l)
FSA Ser 92A AMT
6.40%, 1/01/02 $ 1,000 $ 1,041,680
AAA Allegheny Cnty Arpt Rev
(Pittsburgh Int'l)
FSA Ser 92B AMT
6.63%, 1/01/22 3,315 3,481,015
A Allegheny Cnty Higher Ed
(Thiel College)
ACA Ser 99A
5.38%, 11/15/19 2,300 2,148,476
A Allegheny Cnty Higher Ed
(Thiel College)
ACA Ser 99A
5.38%, 11/15/29 2,000 1,818,920
BBB- Allegheny Cnty
IDR (USX) Ser 96
6.10%, 1/15/18 4,000 3,995,160
BBB- Allegheny Cnty
IDR (USX) Ser 98
5.50%, 12/01/29 14,000 12,512,080
Aaa Allegheny Cnty MFHR
(Green Meadow Apts)
FHA
Ser 98 A1 AMT
5.13%, 10/20/40 (b) 8,440 7,317,649
BBB+ Bradford Cnty IDR
Solid Waste Disp Rev
(Int'l Paper)
Ser 95A AMT
6.60%, 3/01/19 2,500 2,614,275
BBB Crawford Cnty Hosp Auth
(Wesbury Methodist Cmnty)
Ser 99
6.25%, 8/15/29 (d) 2,100 2,041,746
BBB+ Cumberland Cnty
Municipal Auth Rev
(Presbyterian Homes Inc)
Ser 96
6.00%, 12/01/26 3,000 2,932,920
BBB- Delaware Cnty
(Eastern College)
Ser 99C
5.63%, 10/01/28 3,300 3,025,407
BB- New Morgan IDR
Solid Waste Disp Rev
(Browning-Ferris)
Ser 94 AMT
6.50%, 4/01/19 4,000 4,162,720
AAA Pennsylvania Higher Ed
Student Loan AMBAC
Ser 88D AMT
6.05%, 1/01/19 5,900 5,936,226
AAA Pennsylvania Higher Ed
(University of Pittsburgh
Med Ctr)
FSA Ser 99A
5.00%, 8/01/29 18,500 16,058,740
AA+ Pennsylvania Hsg
Fin Agy SFMR
Ser 92 35D AMT
8.69%, 4/01/25 (c) 9,500 9,860,430
AA+ Pennsylvania Hsg
Fin Agy SFMR
Ser 99 67A AMT
5.90%, 10/01/30 19,020 18,859,281
AAA Pennsylvania Turnpike
AMBAC Ser 94A,
Pre-refunded
6.00%, 12/01/04 3,000 3,251,040
AAA Philadelphia Arpt Rev
Ser 95A AMT
6.10%, 6/15/25 6,750 6,957,968
AAA Philadelphia Gas Wks Rev
FSA Ser 99
5.25%, 7/01/29 7,500 6,888,225
AAA Philadelphia GO
FSA Ser 98
5.00%, 3/15/28 7,900 6,925,140
BBB+ Philadelphia Hosp Rev
(Temple Univ)
Ser 93A
6.625%, 11/15/23 3,250 3,330,697
AAA Philadelphia Pkg Auth Rev
AMBAC Ser 99A
5.25%, 2/15/29 4,600 4,196,672
AA Potter Cnty Hosp Auth
(Charles Cole Memorial)
Asset Gty Ser 96
6.05%, 8/01/24 4,340 4,422,677
22
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
BBB Pottsville Hosp Rev
(Pottsville Hospital &
Warne Clinic)
Ser 98
5.50%, 7/01/05 $ 1,000 $ 973,560
AA Schuylkill Cnty IDR
(Charity Oblig Group)
Ser 99A
5.00%, 11/01/28 1,675 1,451,990
NR Susquehanna Regl Arpt Auth
(Aero Harrisburg LLC)
Ser 99 AMT
5.50%, 1/01/24 1,490 1,310,887
BBB Warren Cnty Hosp Auth
(Warren General)
Ser 94A
7.00%, 4/01/19 2,200 2,333,474
TOTAL INVESTMENTS-98.2%
(cost $138,534,119) 139,849,055
Other assets less liabilities-1.8% 2,557,111
NET ASSETS-100% $142,406,166
See footnote summary on page 25.
See Glossary of Terms on page 25.
See notes to financial statements.
23
VIRGINIA PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
STANDARD & PRINCIPAL
POOR'S AMOUNT
RATINGS (A) (000) VALUE
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-97.0%
VIRGINIA-85.5%
A Alexandria MFHR
(Buckingham Village Apts)
Ser 96A AMT
6.15%, 1/01/29 $ 4,000 $ 4,025,200
AAA Arlington Cnty IDR
(Ogden Martin)
FSA Ser 98B AMT
5.25%, 1/01/29 2,500 2,508,875
BBB Giles Cnty IDR
(Hoechst Celanese Corp)
Ser 96 AMT
6.45%, 5/01/26 7,500 7,794,450
Baa2 Goochland Cnty IDR
(Nekoosa Pkg/GA Pacific)
Ser 98 AMT
5.65%, 12/01/25 (b) 14,000 12,923,400
AAA Harrisonburg MFHR
(Battery Heights Assoc)
GNMA Ser 96A
6.25%, 4/20/36 3,760 3,888,178
AA Henrico Cnty IDR
(Henrico Cnty Jail)
Ser 94
7.13%, 8/01/21 2,000 2,210,100
BBB+ Isle of Wight Cnty
Solid Waste Rev
(Union Camp Corp)
Ser 94 AMT
6.55%, 4/01/24 1,015 1,052,342
AAA Loudoun Cnty IDR
Hosp Rev
(Loudoun Hosp Ctr)
FSA Ser 95
5.80%, 6/01/20 2,500 2,535,225
AA- Metropolitan Washington DC
Arpt Rev
Ser 97B AMT
5.50%, 10/01/23 5,910 5,615,859
Aaa Prince William Cnty Hosp Rev
(Potomac Hosp Group)
Ser 95
6.75%, 10/01/15 (b) 2,250 2,531,205
AAA Richmond Metro Auth Expwy Rev
FGIC Ser 92B
6.25%, 7/15/22 1,000 1,044,870
AAA Russell Cnty IDR
(Appalachian Pwr)
MBIA Ser 98H
5.00%, 11/01/21 2,000 1,804,440
NR Staunton Ed Fac
(Mary Baldwin College)
Ser 96
6.75%, 11/01/21 3,145 3,290,079
AAA Suffolk MFHR
(Prince William Commons)
FNMA Ser 96A AMT
6.50%, 6/01/29 3,250 3,393,098
AA Virginia Beach Hosp Rev
(Sentara Bayside)
6.30%, 11/01/21 1,000 1,059,980
AA+ Virginia Hsg Dev Auth
MFHR
Ser 99 AMT
5.95%, 2/01/23 5,525 5,517,541
AA+ Virginia Hsg Dev Auth
(Rental Hsg)
Ser 99F AMT
5.25%, 5/01/22 5,165 4,754,899
AA+ Virginia Hsg Dev Auth
(Commonwealth Mtg)
Ser 96B AMT
6.375%, 1/01/26 5,000 5,101,650
------------
71,051,391
PUERTO RICO-11.5%
A Puerto Rico GO
Ser 98
5.00%, 7/01/05 1,400 1,424,332
AAA Puerto Rico Hsg Fin
Corp Rev SFMR
GNMA Ser 98A AMT
5.20%, 12/01/32 4,440 3,995,423
BBB- Puerto Rico Port Auth
(American Airlines)
Ser 96A AMT
6.25%, 6/01/26 4,075 4,117,951
------------
9,537,706
24
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS-97.0%
(cost $80,254,745) $ 80,589,097
Other assets less liabilities-3.0% 2,527,080
NET ASSETS-100% $ 83,116,177
(a) Unaudited.
(b) Moody's Rating--unaudited.
(c) Inverse floater security--security with variable or floating interest rate
that moves in opposite direction of short-term interest rates.
(d) Fitch's Rating--unaudited.
See notes to financial statements.
Glossary of Terms:
ACA American Capital Access
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
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.
GNMA Government National Mortgage Association
GO General Obligation
IDR Industrial Development Revenue
MBIA Municipal Bond Investors Assurance
MFHR Multi-Family Housing Revenue
NR Rating not applied for
PCR Pollution Control Revenue
SFMR Single Family Mortgage Revenue
25
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSETTS
---------- ----------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in securities, at value (cost: $74,571,422,
$186,201,910, $111,026,406, $35,916,628,
$31,950,094, $123,050,683, $91,763,037,
$138,534,119 and $80,254,745, respectively) $75,019,464 $186,001,892 $111,342,478
Cash -0- 75,133 -0-
Receivable for investment securities sold 3,103,694 -0- 4,376,939
Interest receivable 1,349,683 4,346,028 1,807,030
Receivable for shares of beneficial interest sold 391,419 1,463,517 444,593
Receivable due from Adviser -0- -0- 31,789
Total assets 79,864,260 191,886,570 118,002,829
LIABILITIES
Due to custodian 466,836 -0- 193,379
Dividends payable 107,231 259,576 155,683
Payable for shares of beneficial interest redeemed 96,003 994,562 736,184
Distribution fee payable 41,921 110,529 69,946
Advisory fee payable 2,138 10,216 -0-
Payable for investment securities purchased -0- 939,496 -0-
Accrued expenses and other liabilities 68,394 118,865 96,040
Total liabilities 782,523 2,433,244 1,251,232
NET ASSETS $79,081,737 $189,453,326 $116,751,597
COMPOSITION OF NET ASSETS
Shares of beneficial interest, at par $ 76,107 $ 193,048 $ 109,621
Additional paid-in capital 81,028,344 200,431,682 121,542,222
Distributions in excess of net investment income (107,231) (259,575) (155,684)
Accumulated net realized loss on investment transactions (2,363,525) (10,711,811) (5,060,634)
Net unrealized appreciation (depreciation) of investments 448,042 (200,018) 316,072
$79,081,737 $189,453,326 $116,751,597
CLASS A SHARES
Net assets $38,471,630 $ 79,751,726 $ 44,758,278
Shares of beneficial interest outstanding 3,700,882 8,126,355 4,199,425
CLASS B SHARES
Net assets $31,242,282 $ 67,532,387 $ 42,628,248
Shares of beneficial interest outstanding 3,007,861 6,881,653 4,004,144
CLASS C SHARES
Net assets $ 9,367,825 $ 42,169,213 $ 29,365,071
Shares of beneficial interest outstanding 901,995 4,296,822 2,758,484
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share $10.40 $ 9.81 $10.66
Sales charge--4.25% of public offering price 0.46 0.44 0.47
Maximum offering price $10.86 $10.25 $11.13
CLASS B SHARES
Net asset value and offering price per share $10.39 $ 9.81 $10.65
CLASS C SHARES
Net asset value and offering price per share $10.39 $ 9.81 $10.65
</TABLE>
26
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
------------ ------------ ------------- ------------ -------------- ------------
<C> <C> <C> <C> <C> <C>
$36,241,730 $32,242,196 $125,409,654 $92,880,556 $139,849,055 $80,589,097
-0- 325,406 62,052 27,615 -0- 806,985
-0- 2,810,527 11,406,625 6,434,660 958,924 5,187,628
805,183 410,167 2,604,864 1,166,246 2,514,529 1,751,457
138,348 57,793 928,463 779,158 1,317,960 872,472
-0- 11,314 -0- 1,587 -0- 12,694
37,185,261 35,857,403 140,411,658 101,289,822 144,640,468 89,220,333
100,536 -0- -0- -0- 648,761 -0-
45,019 44,601 160,806 129,591 187,879 111,668
96,582 139,287 1,052,179 575,777 1,170,675 338,278
23,224 21,792 88,239 67,084 81,486 51,121
8,694 -0- 27,447 -0- 36,272 -0-
500,000 1,799,494 8,357,379 -0- -0- 5,525,000
59,234 59,672 109,657 107,637 109,229 78,089
833,289 2,064,846 9,795,707 880,089 2,234,302 6,104,156
$36,351,972 $33,792,557 $130,615,951 $100,409,733 $142,406,166 $83,116,177
$ 36,147 $ 34,956 $ 131,527 $ 101,845 $ 143,956 $ 80,563
36,855,423 35,427,942 134,674,113 104,505,129 147,251,176 86,185,988
(45,019) (44,601) (160,806) (129,590) (187,879) (111,668)
(819,681) (1,917,842) (6,387,854) (5,185,170) (6,116,023) (3,373,058)
325,102 292,102 2,358,971 1,117,519 1,314,936 334,352
$36,351,972 $33,792,557 $130,615,951 $100,409,733 $142,406,166 $83,116,177
$11,760,327 $10,600,844 $ 33,109,063 $ 27,229,414 $ 62,478,746 $28,147,847
1,168,498 1,096,502 3,333,282 2,761,802 6,314,697 2,726,191
$13,844,496 $14,111,140 $ 64,928,776 $ 49,054,679 $ 52,011,686 $42,006,657
1,377,167 1,459,812 6,539,259 4,976,079 5,258,815 4,072,952
$10,747,149 $ 9,080,573 $ 32,578,112 $ 24,125,640 $ 27,915,734 $12,961,673
1,069,061 939,255 3,280,150 2,446,623 2,822,089 1,257,140
$10.06 $ 9.67 $ 9.93 $ 9.86 $ 9.89 $10.32
0.45 0.43 0.44 0.44 0.44 0.46
$10.51 $10.10 $10.37 $10.30 $10.33 $10.78
$10.05 $ 9.67 $ 9.93 $ 9.86 $ 9.89 $10.31
$10.05 $ 9.67 $ 9.93 $ 9.86 $ 9.89 $10.31
</TABLE>
See notes to financial statements.
26
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
27
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
ARIZONA FLORIDA MASSACHUSETTS
---------- ----------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 3,197,527 $ 9,315,443 $ 5,288,933
EXPENSES
Advisory fee 361,666 1,026,151 604,352
Distribution fee - Class A 90,011 201,093 116,339
Distribution fee - Class B 211,334 579,037 330,332
Distribution fee - Class C 67,296 392,495 248,837
Custodian 93,292 100,874 95,915
Administrative 92,000 92,000 92,000
Transfer agency 30,266 74,555 52,569
Audit & legal 28,147 47,458 29,543
Registration 26,791 35,660 30,712
Printing 7,635 17,413 12,736
Amortization of organization expenses 5,928 -0- 3,491
Trustees' fees 2,457 2,457 2,457
Miscellaneous 4,225 7,165 1,215
Total expenses 1,021,048 2,576,358 1,620,498
Less: expenses waived and reimbursed by Adviser
(see Note B) (374,649) (697,741) (518,867)
Net expenses 646,399 1,878,617 1,101,631
Net investment income 2,551,128 7,436,826 4,187,302
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investment transactions (2,363,497) (6,777,319) (5,060,634)
Net change in unrealized appreciation of investments (1,186,209) (4,449,716) (1,540,378)
Net loss on investments (3,549,706) (11,227,035) (6,601,012)
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (998,578) $(3,790,209) $(2,413,710)
</TABLE>
28
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
------------ ------------ ------------- ------------ -------------- ------------
<C> <C> <C> <C> <C> <C>
$ 1,775,970 $ 1,772,652 $ 6,551,455 $ 4,860,872 $ 6,805,296 $ 2,996,554
203,931 196,871 726,481 539,593 755,932 350,775
30,935 25,126 77,731 56,225 144,368 53,553
118,090 146,798 598,368 457,799 489,744 295,978
105,082 84,442 304,898 218,133 238,521 86,751
90,302 87,672 89,352 95,240 97,664 97,453
92,000 92,000 92,000 92,000 92,000 92,000
27,157 28,034 75,054 58,287 81,505 41,149
20,273 18,994 37,856 40,909 30,157 34,226
7,755 4,340 16,601 20,336 13,371 21,128
6,156 7,834 16,847 13,723 20,294 8,035
2,272 -0- -0- -0- -0- 3,714
2,457 2,457 2,457 2,457 2,457 2,457
3,946 5,198 8,523 7,765 7,301 7,618
710,356 699,766 2,046,168 1,602,467 1,973,314 1,094,837
(240,898) (300,185) (454,754) (477,227) (309,615) (450,896)
469,458 399,581 1,591,414 1,125,240 1,663,699 643,941
1,306,512 1,373,071 4,960,041 3,735,632 5,141,597 2,352,613
(794,295) (774,099) (2,765,281) (2,325,166) (5,789,857) (3,373,058)
(772,736) (1,040,378) (3,817,282) (2,893,533) (3,757,992) (384,519)
(1,567,031) (1,814,477) (6,582,563) (5,218,699) (9,547,849) (3,757,577)
$ (260,519) $ (441,406) $(1,622,522) $(1,483,067) $(4,406,252) $(1,404,964)
</TABLE>
See notes to financial statements.
28
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
29
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
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 2,551,128 $ 1,390,473 $ 7,436,826 $ 3,993,694 $ 4,187,302 $ 1,762,833
Net realized gain (loss) on
investment transactions (2,363,497) 221,494 (6,777,319) 1,226,752 (5,060,634) 348,332
Net change in unrealized
appreciation/depreciation
of investments (1,186,209) 1,146,364 (4,449,716) 1,754,979 (1,540,378) 1,218,465
Net increase (decrease) in net
assets from operations (998,578) 2,758,331 (3,790,209) 6,975,425 (2,413,710) 3,329,630
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (1,422,629) (858,694) (3,312,718) (1,365,535) (1,836,597) (738,055)
Class B (856,109) (414,304) (2,459,083) (1,379,472) (1,342,251) (522,866)
Class C (272,390) (117,475) (1,665,025) (1,248,687) (1,008,454) (501,912)
Distributions in excess of net
investment income
Class A (93,745) (43,709) (171,909) (35,676) (135,677) (61,754)
Class B (75,448) (28,034) (150,028) (43,750) (131,050) (60,479)
Class C (24,429) (8,101) (106,023) (37,351) (102,932) (57,462)
Net realized gain on investments
Class A (79,250) (212,751) -0- -0- (80,419) (181,523)
Class B (55,031) (121,124) -0- -0- (63,701) (139,090)
Class C (18,802) (29,194) -0- -0- (54,163) (137,598)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase 43,387,517 21,134,959 84,405,261 45,780,029 62,444,310 36,041,467
Total increase 39,491,106 22,059,904 72,750,266 48,644,983 55,275,356 36,970,358
NET ASSETS
Beginning of year 39,590,631 17,530,727 116,703,060 68,058,077 61,476,241 24,505,883
End of year $79,081,737 $39,590,631 $189,453,326 $116,703,060 $116,751,597 $61,476,241
</TABLE>
See notes to financial statements.
30
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
<TABLE>
<CAPTION>
MICHIGAN MINNESOTA NEW JERSEY
------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 1,306,512 $ 888,888 $ 1,373,071 $ 1,040,289 $ 4,960,041 $ 3,654,968
Net realized gain (loss) on
investment transactions (794,295) 285,847 (774,099) 274,145 (2,765,281) 529,540
Net change in unrealized
appreciation/depreciation
of investments (772,736) 572,490 (1,040,378) 358,291 (3,817,282) 2,076,332
Net increase (decrease) in net
assets from operations (260,519) 1,747,225 (441,406) 1,672,725 (1,622,522) 6,260,840
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (461,761) (321,710) (410,462) (260,414) (1,250,108) (910,827)
Class B (447,452) (284,561) (610,472) (469,051) (2,454,054) (1,773,742)
Class C (397,299) (282,617) (352,137) (310,824) (1,255,879) (970,399)
Distributions in excess of net
investment income
Class A (30,996) (28,794) (13,422) (12,557) (16,310) (16,544)
Class B (38,763) (33,663) (25,067) (27,032) (57,365) (40,961)
Class C (35,476) (33,194) (13,957) (16,330) (32,337) (20,260)
Net realized gain on investments
Class A (58,573) (151,780) -0- -0- -0- -0-
Class B (65,313) (160,394) -0- -0- -0- -0-
Class C (63,713) (150,076) -0- -0- -0- -0-
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase 11,177,569 10,508,825 7,815,621 7,272,544 40,926,509 17,828,850
Total increase 9,317,704 10,809,261 5,948,698 7,849,061 34,237,934 20,356,957
NET ASSETS
Beginning of year 27,034,268 16,225,007 27,843,859 19,994,798 96,378,017 76,021,060
End of year $36,351,972 $27,034,268 $33,792,557 $27,843,859 $130,615,951 $96,378,017
</TABLE>
See notes to financial statements.
31
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
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 3,735,632 $ 2,569,409 $ 5,141,597 $ 3,692,305 $ 2,352,613 $ 740,489
Net realized gain (loss) on
investment transactions (2,325,166) 227,096 (5,789,857) 1,548,033 (3,373,058) 132,862
Net change in unrealized
appreciation/depreciation
of investments (2,893,533) 1,407,156 (3,757,992) 1,104,276 (384,519) 498,764
Net increase (decrease) in net
assets from operations (1,483,067) 4,203,661 (4,406,252) 6,344,614 (1,404,964) 1,372,115
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (914,541) (537,858) (2,252,014) (1,490,341) (833,405) (294,619)
Class B (1,908,969) (1,369,998) (1,940,681) (1,487,630) (1,174,902) (354,381)
Class C (912,122) (661,553) (948,902) (714,334) (344,306) (91,489)
Distributions in excess of net
investment income
Class A (44,837) (12,445) (167,279) (34,321) (91,739) (20,332)
Class B (108,943) (41,754) (181,017) (46,978) (167,735) (34,779)
Class C (49,086) (18,701) (84,332) (21,194) (48,628) (9,563)
Net realized gain on investments
Class A -0- -0- -0- -0- (31,533) (109,207)
Class B -0- -0- -0- -0- (51,651) (157,407)
Class C -0- -0- -0- -0- (14,082) (39,965)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST
Net increase 37,636,801 17,338,126 59,757,965 19,566,732 56,394,462 20,866,666
Total increase 32,215,236 18,899,478 49,777,488 22,116,548 52,231,517 21,127,039
NET ASSETS
Beginning of year 68,194,497 49,295,019 92,628,678 70,512,130 30,884,660 9,757,621
End of year $100,409,733 $68,194,497 $142,406,166 $92,628,678 $83,116,177 $30,884,660
</TABLE>
See notes to financial statements.
32
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 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 may be subject to a contingent deferred sales charge of 1%.
Class B shares are currently sold with a contingent deferred sales charge which
declines from 3% to zero depending on the period of time the shares are held.
Class B shares will automatically convert to Class A shares six years after the
end of the calendar month of purchase. Class C shares are subject to a
contingent deferred sales charge of 1% on redemptions made within the first
year after purchase. All three classes of shares have identical voting,
dividend, liquidation and other rights 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 financial statements
have been prepared in conformity with generally accepted accounting principles
which require management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities in the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. The following is a summary of the
significant accounting policies followed by the Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange are valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. If no bid prices are
quoted, then the security is valued at the mean of the bid and asked prices as
obtained on that day from one or more dealers regularly making a market in that
security. Securities traded on the over-the-counter market are valued at the
mean of the closing bid and asked price provided by two or more dealers
regularly making a market in such securities. U.S. government securities and
other debt securities which mature in 60 days or less are valued at amortized
cost unless this method does not represent fair value. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by, or in accordance with procedures approved by, the
Board of Trustees. Fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
2. ORGANIZATION EXPENSES
Organization expenses of approximately $41,750 for the Arizona, $31,450 for the
Massachusetts, $25,550 for the Michigan and $27,200 for the Virginia Portfolios
have been deferred and amortized on a straight-line basis through June, March,
February and April 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 any, 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 Portfolios amortize premium and
accrete 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 Portfolios are borne on a
pro-rata basis by each settled class
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
of shares, based on the proportionate interest in the Portfolios represented by
the net assets of such class, except that the Portfolio's Class B and Class C
shares bear higher distribution and transfer agent fees than Class A shares.
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, permanent differences, primarily due to
distributions in excess of net tax exempt income, resulted in a net decrease in
distributions in excess of net investment income and a corresponding decrease
in additional paid-in capital. This reclassification had no effect on net
assets.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the 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, 1999, the Adviser
agreed to waive all or a portion of its advisory fees. The aggregate amounts of
such fee waivers were: Arizona Portfolio, $282,649; Florida Portfolio,
$674,741; Massachusetts Portfolio, $495,867; Michigan Portfolio, $148,898;
Minnesota Portfolio, $196,871; New Jersey Portfolio, $431,754; Ohio Portfolio,
$454,227; Pennsylvania Portfolio, $286,615; and Virginia Portfolio, $350,775.
Pursuant to the advisory agreement, the Adviser provides to each Portfolio
certain legal and accounting services. For the year ended September 30, 1999,
the Adviser agreed to waive all or a portion of its fees for such services.
The aggregate amounts of such fee waivers were $92,000 for the Arizona,
Michigan, Minnesota and Virginia Portfolios and $23,000 for the Florida,
Massachusetts, New Jersey, Ohio and Pennsylvania Portfolios. In addition, the
Adviser agreed to reimburse each Portfolio for certain operating expenses. Such
expenses amounted to: Minnesota Portfolio, $11,314; and Virginia Portfolio,
$8,121. There was no such reimbursement for the Arizona Portfolio, the Florida
Portfolio, the Massachusetts Portfolio, the Michigan Portfolio, the New Jersey
Portfolio, the Ohio Portfolio and the Pennsylvania Portfolio.
Each Portfolio compensates Alliance Fund Services, Inc. (a wholly-owned
subsidiary of the Adviser) under a Transfer Agency Agreement for providing
personnel and facilities to perform transfer agency services for each
Portfolio. Such compensation amounted to: Arizona Portfolio, $21,050; Florida
Portfolio, $50,964; Massachusetts Portfolio, $34,602; Michigan Portfolio,
$20,827; Minnesota Portfolio, $19,050; New Jersey Portfolio, $58,448; Ohio
Portfolio, $40,636; Pennsylvania Portfolio, $55,971; and Virginia Portfolio,
$27,757.
For the year ended September 30, 1999, each Portfolio's expenses were reduced
under an expense offset arrangement with Alliance Fund Services as follows:
Arizona Portfolio, by $1,384; Florida Portfolio, by $3,446; Massachusetts
Portfolio, by $2,448; Michigan Portfolio, by $1,423; Minnesota Portfolio, by
$1,451; New Jersey Portfolio, by $3,882; Ohio Portfolio, by $2,425;
Pennsylvania Portfolio, by $3,739; and Virginia Portfolio, by $1,980.
Alliance Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Adviser serves as the Distributor of the Fund's shares. The Distributor
has advised the Fund that it has received front-end sales charges from sales of
Class A shares and contingent deferred sales charges imposed upon redemptions
by shareholders of Class A, Class B and Class C shares for the year ended
September 30, 1999 as follows:
34
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
FRONT END CONTINGENT DEFERRED
SALES CHARGES SALES CHARGES
------------- -------------------------------------
PORTFOLIO CLASS A CLASS A CLASS B CLASS C
------------- ----------- ----------- -----------
Arizona $3,796 $-0- $33,429 $2,509
Florida 56,932 10,571 39,825 20,482
Massachusetts 36,411 354 45,353 17,435
Michigan 12,277 -0- 17,666 5,242
Minnesota 6,975 -0- 11,382 2,941
New Jersey 17,643 21,196 70,246 7,142
Ohio 17,040 4,016 52,549 12,623
Pennsylvania 7,843 699 49,284 4,135
Virginia 33,074 683 36,018 9,839
NOTE C: DISTRIBUTION SERVICES AGREEMENT
Each Portfolio has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, each Portfolio pays distribution and servicing fees to the
Distributor at an annual rate of up to .30 of 1% of each Portfolio's average
daily net assets attributable to Class A shares and 1% of each Portfolio's
average daily net assets attributable to both Class B and Class C shares. Such
fees are accrued daily and paid monthly. The Agreement provides that the
Distributor will use such payments in their entirety for distribution
assistance and promotional activities. The Distributor has advised the Fund
that it has incurred expenses in excess of the distribution costs reimbursed by
each Portfolio as follows:
PORTFOLIO CLASS B CLASS C
- --------- ---------- ----------
Arizona $1,956,413 $ 411,760
Florida 2,846,389 1,586,538
Massachusetts 2,161,884 1,128,353
Michigan 1,406,873 1,254,875
Minnesota 1,789,761 1,106,874
New Jersey 3,427,343 1,244,916
Ohio 2,804,973 1,215,073
Pennsylvania 2,546,313 1,131,897
Virginia 2,707,431 575,874
Such costs may be recovered from each Portfolio at an annual rate of up to .30
of 1% of each Portfolio's daily net assets 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, 1999 were as
follows:
PORTFOLIO PURCHASES SALES
- --------- ------------ ------------
Arizona $163,497,312 $121,826,159
Florida 470,923,241 371,580,939
Massachusetts 345,379,729 284,571,327
Michigan 80,316,928 66,688,497
Minnesota 89,136,503 80,204,578
New Jersey 189,695,270 148,699,970
Ohio 210,215,531 178,401,316
Pennsylvania 364,356,494 291,275,161
Virginia 222,843,398 167,970,623
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
At September 30, 1999, the cost of investments for federal income tax purposes,
gross unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation (depreciation) of investments for each Portfolio were as follows:
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
PORTFOLIO TAX COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
- --------- ------------ ------------ ------------- --------------
Arizona $ 74,712,244 $ 656,264 $ (349,044) $ 307,220
Florida 186,406,879 761,795 (1,166,782) (404,987)
Massachusetts 111,691,615 826,999 (1,176,136) (349,137)
Michigan 35,916,628 392,792 (67,690) 325,102
Minnesota 31,950,094 361,734 (69,632) 292,102
New Jersey 123,220,075 2,487,967 (298,388) 2,189,579
Ohio 91,860,302 1,268,572 (248,318) 1,020,254
Pennsylvania 138,535,435 1,778,590 (464,970) 1,313,620
Virginia 80,700,662 477,905 (589,470) (111,565)
For Federal income tax purposes at September 30, 1999, the Fund had capital
loss carryforwards for the following Portfolios: $3,931,206 expiring in 2003
and 4,853 expiring in 2007, for Florida Portfolio; $650,584 expiring in 2003,
and $492,981 expiring in 2004, for Minnesota Portfolio; $3,041,366 expiring in
2003, and $349,704 expiring in 2004, for New Jersey Portfolio; $2,526,402
expiring in 2003, and $332,000 expiring in 2004, for Ohio Portfolio; and
$316,038 expiring in 2003, and 1,363 expiring in 2007, for Pennsylvania
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.
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
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
ARIZONA PORTFOLIO 1999 1998 1999 1998
- ----------------- ------------ ------------ -------------- --------------
CLASS A
Shares sold 2,277,927 1,731,764 $24,623,422 $18,634,736
Shares issued in
reinvestment of
dividends and
distributions 72,186 45,597 777,242 491,757
Shares converted
from Class B 19,950 10,448 215,625 163,390
Shares redeemed (588,982) (723,933) (6,374,579) (7,863,841)
Net increase 1,781,081 1,063,876 $19,241,710 $11,426,042
CLASS B
Shares sold 1,905,927 730,287 $20,514,932 $ 7,895,448
Shares issued in
reinvestment of
dividends and
distributions 51,041 30,944 548,786 333,822
Shares converted
to Class A (19,950) (10,458) (215,625) (163,390)
Shares redeemed (170,811) (115,125) (1,824,014) (1,192,886)
Net increase 1,766,207 635,648 $19,024,079 $ 6,872,994
36
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
ARIZONA PORTFOLIO 1999 1998 1999 1998
- ----------------- ------------ ------------ -------------- --------------
CLASS C
Shares sold 552,598 287,268 $5,960,967 $3,107,936
Shares issued in
reinvestment of
dividends and
distributions 16,202 9,267 174,860 100,059
Shares redeemed (93,570) (34,469) (1,014,099) (372,072)
Net increase 475,230 262,066 $5,121,728 $2,835,923
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
FLORIDA PORTFOLIO 1999 1998 1999 1998
- ----------------- ------------ ------------ -------------- --------------
CLASS A
Shares sold 4,938,321 3,074,851 $50,810,230 $31,787,286
Shares issued in
reinvestment of
dividends 157,067 53,907 1,602,230 557,235
Shares converted
from Class B 307,992 60,032 3,065,724 668,487
Shares redeemed (1,515,732) (676,944) (15,363,283) (7,012,672)
Net increase 3,887,648 2,511,846 $40,114,901 $26,000,336
CLASS B
Shares sold 3,874,899 1,752,957 $39,796,253 $18,139,164
Shares issued in
reinvestment of
dividends 132,982 65,852 1,358,222 680,172
Shares converted
to Class A (307,992) (60,032) (3,065,724) (668,487)
Shares redeemed (704,252) (319,776) (7,164,709) (3,256,349)
Net increase 2,995,637 1,439,001 $30,924,042 $14,894,500
CLASS C
Shares sold 1,798,383 930,521 $18,543,697 $ 9,625,371
Shares issued in
reinvestment of
dividends 95,440 58,806 975,564 607,695
Shares redeemed (603,835) (518,362) (6,152,943) (5,347,873)
Net increase 1,289,988 470,965 $13,366,318 $ 4,885,193
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MASSACHUSETTS SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 3,312,860 1,525,593 $37,219,332 $17,085,284
Shares issued in
reinvestment of
dividends and
distributions 114,805 50,570 1,280,006 566,795
Shares converted
from Class B 18,753 717 202,106 58,037
Shares redeemed (1,268,882) (400,515) (14,120,578) (4,495,983)
Net increase 2,177,536 1,176,365 $24,580,866 $13,214,133
CLASS B
Shares sold 2,527,508 1,237,850 $28,165,325 $13,890,559
Shares issued in
reinvestment of
dividends and
distributions 81,618 36,577 910,840 409,785
Shares converted
to Class A (18,753) (717) (202,106) (58,037)
Shares redeemed (378,875) (127,210) (4,147,852) (1,375,179)
Net increase 2,211,498 1,146,500 $24,726,207 $12,867,128
CLASS C
Shares sold 1,554,684 1,013,035 $17,399,768 $11,364,712
Shares issued in
reinvestment of
dividends and
distributions 73,064 46,652 814,318 522,783
Shares redeemed (455,361) (171,986) (5,076,849) (1,927,289)
Net increase 1,172,387 887,701 $13,137,237 $9,960,206
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MICHIGAN SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 487,789 434,869 $5,078,916 $4,494,329
Shares issued in
reinvestment of
dividends and
distributions 32,476 32,622 337,440 340,581
Shares converted
from Class B 2,666 2,043 28,003 71,547
Shares redeemed (167,913) (210,595) (1,734,568) (2,208,136)
Net increase 355,018 258,939 $3,709,791 $2,698,321
CLASS B
Shares sold 623,638 447,245 $6,488,521 $4,685,103
Shares issued in
reinvestment of
dividends and
distributions 36,531 31,065 379,775 323,917
Shares converted
to Class A (2,666) (2,043) (28,003) (71,547)
Shares redeemed (167,093) (93,242) (1,729,098) (927,923)
Net increase 490,410 383,025 $5,111,195 $4,009,550
CLASS C
Shares sold 498,274 489,303 $5,196,724 $5,126,475
Shares issued in
reinvestment of
dividends and
distributions 38,412 39,986 398,957 417,372
Shares redeemed (314,121) (166,391) (3,239,098) (1,742,893)
Net increase 222,565 362,898 $2,356,583 $3,800,954
38
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MINNESOTA SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 497,561 240,220 $5,020,946 $2,376,324
Shares issued in
reinvestment of
dividends 27,350 15,544 273,996 157,123
Shares converted
from Class B 82,720 5,897 805,502 109,403
Shares redeemed (123,890) (62,015) (1,231,987) (628,217)
Net increase 483,741 199,646 $4,868,457 $2,014,633
CLASS B
Shares sold 352,879 641,379 $3,549,698 $6,478,136
Shares issued in
reinvestment of
dividends 40,642 32,588 408,744 329,386
Shares converted
to Class A (82,720) (5,897) (805,502) (109,403)
Shares redeemed (208,063) (164,976) (2,072,985) (1,616,471)
Net increase 102,738 503,094 $1,079,955 $5,081,648
CLASS C
Shares sold 311,979 170,118 $3,153,964 $1,720,113
Shares issued in
reinvestment of
dividends 28,240 26,170 283,659 264,223
Shares redeemed (156,007) (179,084) (1,570,414) (1,808,073)
Net increase 184,212 17,204 $1,867,209 $ 176,263
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NEW JERSEY SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 1,418,607 751,262 $14,654,659 $ 7,705,304
Shares issued in
reinvestment of
dividends 71,338 54,575 736,677 561,562
Shares converted
from Class B 501,257 21,774 5,056,860 268,704
Shares redeemed (792,821) (298,768) (8,182,428) (3,073,637)
Net increase 1,198,381 528,843 $12,265,768 $ 5,461,933
CLASS B
Shares sold 3,200,774 1,449,989 $33,167,812 $14,941,581
Shares issued in
reinvestment of
dividends 162,998 113,069 1,683,868 1,163,362
Shares converted
to Class A (501,257) (21,774) (5,056,860) (268,704)
Shares redeemed (914,657) (722,074) (9,402,931) (7,381,335)
Net increase 1,947,858 819,210 $20,391,889 $ 8,454,904
CLASS C
Shares sold 1,216,161 668,420 $12,623,102 $ 6,885,939
Shares issued in
reinvestment of
dividends 84,996 65,486 878,529 673,386
Shares redeemed (507,784) (354,535) (5,232,779) (3,647,312)
Net increase 793,373 379,371 $ 8,268,852 $ 3,912,013
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
OHIO PORTFOLIO 1999 1998 1999 1998
- -------------- ------------ ------------ -------------- --------------
CLASS A
Shares sold 1,475,518 639,331 $15,096,494 $ 6,566,039
Shares issued in
reinvestment of
dividends 48,567 33,356 496,061 344,655
Shares converted
from Class B 290,049 58,121 2,897,413 646,153
Shares redeemed (412,951) (117,443) (4,253,626) (1,213,183)
Net increase 1,401,183 613,365 $14,236,342 $ 6,343,664
CLASS B
Shares sold 2,157,546 1,207,646 $22,134,341 $12,480,119
Shares issued in
reinvestment of
dividends 136,727 100,554 1,403,955 1,038,805
Shares converted
to Class A (290,049) (58,121) (2,897,413) (646,153)
Shares redeemed (596,765) (320,073) (6,060,731) (3,263,624)
Net increase 1,407,459 930,006 $14,580,152 $ 9,609,147
CLASS C
Shares sold 1,196,091 372,776 $12,324,925 $ 3,860,583
Shares issued in
reinvestment of
dividends 64,479 46,608 659,657 480,928
Shares redeemed (410,627) (286,393) (4,164,275) (2,956,196)
Net increase 849,943 132,991 $ 8,820,307 $ 1,385,315
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
PENNSYLVANIA SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 3,024,140 1,354,357 $31,598,359 $14,149,149
Shares issued in
reinvestment of
dividends 150,874 96,257 1,566,915 1,006,799
Shares converted
from Class B 477,975 64,196 4,823,033 722,138
Shares redeemed (680,929) (586,559) (7,066,429) (6,149,684)
Net increase 2,972,060 928,251 $30,921,878 $ 9,728,402
CLASS B
Shares sold 2,668,536 1,163,458 $27,855,387 $12,209,270
Shares issued in
reinvestment of
dividends 122,280 85,232 1,271,826 891,248
Shares converted
to Class A (477,975) (64,196) (4,823,033) (722,138)
Shares redeemed (756,737) (392,609) (7,843,288) (4,075,590)
Net increase 1,556,104 791,885 $16,460,892 $ 8,302,790
CLASS C
Shares sold 1,404,524 428,757 $14,722,908 $ 4,483,838
Shares issued in
reinvestment of
dividends 59,984 38,019 624,110 397,062
Shares redeemed (287,237) (320,592) (2,971,823) (3,345,360)
Net increase 1,177,271 146,184 $12,375,195 $ 1,535,540
40
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
VIRGINIA SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
PORTFOLIO 1999 1998 1999 1998
- ------------ ------------- ------------- -------------- -------------
CLASS A
Shares sold 1,961,441 657,077 $20,961,953 $ 7,125,472
Shares issued in
reinvestment of
dividends and
distributions 64,215 23,268 684,946 252,054
Shares converted
from Class B 9,212 5,107 96,919 105,746
Shares redeemed (244,939) (72,986) (2,603,335) (800,978)
Net increase 1,789,929 612,466 $19,140,483 $ 6,682,294
CLASS B
Shares sold 2,789,674 1,005,543 $29,989,497 $10,994,477
Shares issued in
reinvestment of
dividends and
distributions 104,702 37,823 1,116,887 409,683
Shares converted
to Class A (9,212) (5,107) (96,919) (105,746)
Shares redeemed (262,985) (47,923) (2,787,282) (472,693)
Net increase 2,622,179 990,336 $28,222,183 $10,825,721
CLASS C
Shares sold 979,841 311,389 $10,520,143 $ 3,408,930
Shares issued in
reinvestment of
dividends and
distributions 29,968 11,402 319,844 123,580
Shares redeemed (170,313) (15,874) (1,808,191) (173,859)
Net increase 839,496 306,917 $ 9,031,796 $ 3,358,651
41
FINANCIAL HIGHLIGHTS ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
ARIZONA PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.03 $10.78 $10.32 $10.29 $9.77
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .51(b) .54(b) .57(b) .55(b) .56
Net realized and unrealized gain (loss)
on investment transactions (.55) .45 .48 .14 .53
Net increase (decrease) in net asset
value from operations (.04) .99 1.05 .69 1.09
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.54) (.57) (.55) (.56)
Distributions in excess of net
investment income (.04) (.02) -0- (.03) (.01)
Distributions from net realized gains (.04) (.18) (.02) (.08) -0-
Total dividends and distributions (.59) (.74) (.59) (.66) (.57)
Net asset value, end of year $10.40 $11.03 $10.78 $10.32 $10.29
TOTAL RETURN
Total investment return based on net
asset value (c) (.45)% 9.54% 10.54% 6.84% 11.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $38,472 $21,185 $9,225 $4,409 $2,379
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .78% .78% .78% .78% .78%
Expenses, before waivers/
reimbursements 1.39% 1.55% 2.71% 3.69% 4.88%
Net investment income, net of
waivers/reimbursements 4.74% 4.92% 5.42% 5.33% 5.56%
Portfolio turnover rate 217% 45% 193% 244% 85%
</TABLE>
See footnote summary on page 68.
42
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
ARIZONA PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.03 $10.78 $10.32 $10.29 $9.77
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .45(b) .50(b) .47(b) .49
Net realized and unrealized gain (loss)
on investment transactions (.55) .47 .48 .14 .53
Net increase (decrease) in net asset
value from operations (.12) .92 .98 .61 1.02
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.45) (.50) (.47) (.49)
Distributions in excess of net
investment income (.05) (.04) -0- (.03) (.01)
Distributions from net realized gains (.04) (.18) (.02) (.08) -0-
Total dividends and distributions (.52) (.67) (.52) (.58) (.50)
Net asset value, end of year $10.39 $11.03 $10.78 $10.32 $10.29
TOTAL RETURN
Total investment return based on net
asset value (c) (1.19)% 8.84% 9.80% 6.10% 10.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $31,242 $13,698 $6,531 $5,199 $3,166
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.48% 1.48% 1.48% 1.48% 1.48%
Expenses, before waivers/
reimbursements 2.16% 2.30% 3.40% 4.40% 5.58%
Net investment income, net of
waivers/reimbursements 4.05% 4.21% 4.73% 4.62% 4.89%
Portfolio turnover rate 217% 45% 193% 244% 85%
</TABLE>
See footnote summary on page 68.
43
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
ARIZONA PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.03 $10.78 $10.32 $10.30 $9.77
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .45(b) .50(b) .47(b) .49
Net realized and unrealized gain (loss)
on investment transactions (.55) .47 .48 .13 .54
Net increase (decrease) in net asset
value from operations (.12) .92 .98 .60 1.03
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.45) (.50) (.47) (.49)
Distributions in excess of net
investment income (.05) (.04) -0- (.03) (.01)
Distributions from net realized gains (.04) (.18) (.02) (.08) -0-
Total dividends and distributions (.52) (.67) (.52) (.58) (.50)
Net asset value, end of year $10.39 $11.03 $10.78 $10.32 $10.30
TOTAL RETURN
Total investment return based on net
asset value (c) (1.19)% 8.83% 9.80% 6.00% 10.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $9,368 $4,708 $1,775 $710 $481
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.48% 1.48% 1.48% 1.48% 1.48%
Expenses, before waivers/
reimbursements 2.17% 2.34% 3.39% 4.41% 5.58%
Net investment income, net of
waivers/reimbursements 4.05% 4.19% 4.70% 4.61% 4.90%
Portfolio turnover rate 217% 45% 193% 244% 85%
</TABLE>
See footnote summary on page 68.
44
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
FLORIDA PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.48 $10.14 $9.73 $9.58 $8.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .51(b) .52(b) .55(b) .54(b) .55
Net realized and unrealized gain
(loss) on investment transactions (.65) .37 .41 .16 .69
Net increase (decrease) in net asset
value from operations (.14) .89 .96 .70 1.24
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.52) (.55) (.54) (.55)
Distributions in excess of net
investment income (.02) (.03) -0- (.01) -0-
Total dividends and distributions (.53) (.55) (.55) (.55) (.55)
Net asset value, end of year $9.81 $10.48 $10.14 $9.73 $9.58
TOTAL RETURN
Total investment return based on net
asset value (c) (1.38)% 8.97% 10.14% 7.45% 14.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $79,752 $44,440 $17,516 $14,297 $11,956
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .73% .73% .73% .73% .73%
Expenses, before waivers/
reimbursements 1.18% 1.27% 1.35% 1.33% 1.33%
Net investment income, net of
waivers/reimbursements 4.94% 5.14% 5.58% 5.52% 5.91%
Portfolio turnover rate 244% 65% 204% 237% 146%
</TABLE>
See footnote summary on page 68.
45
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
FLORIDA PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.48 $10.14 $9.74 $9.58 $8.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .46(b) .48(b) .47(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.64) .36 .40 .17 .70
Net increase (decrease) in net asset
value from operations (.21) .82 .88 .64 1.17
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.46) (.48) (.47) (.47)
Distributions in excess of net
investment income (.03) (.02) -0- (.01) (.01)
Total dividends and distributions (.46) (.48) (.48) (.48) (.48)
Net asset value, end of year $9.81 $10.48 $10.14 $9.74 $9.58
TOTAL RETURN
Total investment return based on net
asset value (c) (2.06)% 8.22% 9.24% 6.78% 13.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $67,532 $40,740 $24,820 $22,235 $20,660
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.43% 1.43% 1.43% 1.43% 1.42%
Expenses, before waivers/
reimbursements 1.91% 1.97% 2.05% 2.03% 2.03%
Net investment income, net of
waivers/reimbursements 4.25% 4.46% 4.87% 4.81% 5.22%
Portfolio turnover rate 244% 65% 204% 237% 146%
</TABLE>
See footnote summary on page 68.
46
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
FLORIDA PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.48 $10.14 $9.74 $9.58 $8.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .46(b) .49(b) .47(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.64) .36 .39 .17 .70
Net increase (decrease) in net asset
value from operations (.21) .82 .88 .64 1.17
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.46) (.48) (.47) (.47)
Distributions in excess of net
investment income (.03) (.02) -0- (.01) (.01)
Total dividends and distributions (.46) (.48) (.48) (.48) (.48)
Net asset value, end of year $9.81 $10.48 $10.14 $9.74 $9.58
TOTAL RETURN
Total investment return based on net
asset value (c) (2.06)% 8.22% 9.23% 6.78% 13.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $42,169 $31,524 $25,722 $30,121 $30,787
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.43% 1.43% 1.43% 1.43% 1.42%
Expenses, before waivers/
reimbursements 1.91% 1.99% 2.03% 2.02% 2.03%
Net investment income, net of
waivers/reimbursements 4.24% 4.48% 4.89% 4.81% 5.27%
Portfolio turnover rate 244% 65% 204% 237% 146%
</TABLE>
See footnote summary on page 68.
47
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MASSACHUSETTS PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.39 $11.19 $10.85 $10.50 $10.12
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .53(b) .54(b) .58(b) .60(b) .58
Net realized and unrealized gain (loss)
on investment transactions (.66) .45 .57 .44 .41
Net increase (decrease) in net asset
value from operations (.13) .99 1.15 1.04 .99
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.53) (.54) (.58) (.59) (.58)
Distributions in excess of net
investment income (.04) (.06) (.03) (.02) (.03)
Distributions from net realized gains (.03) (.19) (.20) (.08) -0-
Total dividends and distributions (.60) (.79) (.81) (.69) (.61)
Net asset value, end of year $10.66 $11.39 $11.19 $10.85 $10.50
TOTAL RETURN
Total investment return based on net
asset value (c) (1.24)% 9.18% 11.14% 10.25% 10.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $44,758 $23,026 $9,461 $3,211 $1,337
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .72% .72% .72% .62% .60%
Expenses, before waivers/
reimbursements 1.24% 1.51% 2.40% 3.15% 6.44%
Net investment income, net of
waivers/reimbursements 4.74% 4.87% 5.40% 5.62% 5.67%
Portfolio turnover rate 303% 69% 134% 246% 155%
</TABLE>
See footnote summary on page 68.
48
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MASSACHUSETTS PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.38 $11.19 $10.84 $10.49 $10.12
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .45(b) .46(b) .51(b) .52(b) .52
Net realized and unrealized gain (loss)
on investment transactions (.65) .45 .58 .45 .39
Net increase (decrease) in net asset
value from operations (.20) .91 1.09 .97 .91
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.45) (.46) (.51) (.52) (.52)
Distributions in excess of net
investment income (.05) (.07) (.03) (.02) (.02)
Distributions from net realized gains (.03) (.19) (.20) (.08) -0-
Total dividends and distributions (.53) (.72) (.74) (.62) (.54)
Net asset value, end of year $10.65 $11.38 $11.19 $10.84 $10.49
TOTAL RETURN
Total investment return based on net
asset value (c) (1.87)% 8.40% 10.52% 9.52% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $42,628 $20,400 $7,230 $3,683 $1,754
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.42% 1.42% 1.42% 1.32% 1.30%
Expenses, before waivers/
reimbursements 1.97% 2.22% 3.07% 3.85% 7.14%
Net investment income, net of
waivers/reimbursements 4.06% 4.16% 4.73% 4.93% 4.90%
Portfolio turnover rate 303% 69% 134% 246% 155%
</TABLE>
See footnote summary on page 68.
49
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MASSACHUSETTS PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.38 $11.19 $10.84 $10.49 $10.12
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .45(b) .47(b) .51(b) .52(b) .52
Net realized and unrealized gain(loss)
on investment transactions (.65) .44 .58 .45 .39
Net increase (decrease) in net asset
value from operations (.20) .91 1.09 .97 .91
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.45) (.47) (.51) (.52) (.52)
Distributions in excess of net
investment income (.05) (.06) (.03) (.02) (.02)
Distributions from net realized gains (.03) (.19) (.20) (.08) -0-
Total dividends and distributions (.53) (.72) (.74) (.62) (.54)
Net asset value, end of year $10.65 $11.38 $11.19 $10.84 $10.49
TOTAL RETURN
Total investment return based on net
asset value (c) (1.87)% 8.40% 10.52% 9.52% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $29,365 $18,050 $7,815 $4,514 $2,556
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.42% 1.42% 1.42% 1.31% 1.30%
Expenses, before waivers/
reimbursements 1.96% 2.21% 3.09% 3.84% 7.14%
Net investment income, net of
waivers/reimbursements 4.05% 4.18% 4.75% 4.88% 4.85%
Portfolio turnover rate 303% 69% 134% 246% 155%
</TABLE>
See footnote summary on page 68.
50
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MICHIGAN PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.62 $10.52 $10.12 $10.10 $9.35
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .46(b) .48(b) .53(b) .52(b) .52
Net realized and unrealized gain (loss)
on investment transactions (.45) .44 .55 .22 .78
Net increase (decrease) in net asset
value from operations .01 .92 1.08 .74 1.30
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.48) (.53) (.52) (.52)
Distributions in excess of net
investment income (.04) (.05) (.02) (.03) (.03)
Distributions from net realized gains (.07) (.29) (.13) (.17) -0-
Total dividends and distributions (.57) (.82) (.68) (.72) (.55)
Net asset value, end of year $10.06 $10.62 $10.52 $10.12 $10.10
TOTAL RETURN
Total investment return based on net
asset value (c) .03% 9.08% 11.05% 7.54% 14.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $11,760 $8,640 $5,836 $6,123 $5,158
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .96% .96% .96% .96% 1.36%
Expenses, before waivers/
reimbursements 1.62% 1.89% 2.46% 2.77% 3.43%
Net investment income, net of
waivers/reimbursements 4.48% 4.57% 5.24% 5.21% 5.27%
Portfolio turnover rate 213% 134% 161% 242% 151%
</TABLE>
See footnote summary on page 68.
51
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MICHIGAN PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.61 $10.52 $10.12 $10.10 $9.35
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .39(b) .40(b) .46(b) .45(b) .45
Net realized and unrealized gain (loss)
on investment transactions (.45) .44 .55 .22 .78
Net increase (decrease) in net asset
value from operations (.06) .84 1.01 .67 1.23
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.39) (.40) (.46) (.45) (.45)
Distributions in excess of net
investment income (.04) (.06) (.02) (.03) (.03)
Distributions from net realized gains (.07) (.29) (.13) (.17) -0-
Total dividends and distributions (.50) (.75) (.61) (.65) (.48)
Net asset value, end of year $10.05 $10.61 $10.52 $10.12 $10.10
TOTAL RETURN
Total investment return based on net
asset value (c) (.64)% 8.26% 10.30% 6.80% 13.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $13,844 $9,411 $5,300 $3,553 $2,424
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.66% 1.66% 1.66% 1.66% 2.06%
Expenses, before waivers/
reimbursements 2.44% 2.61% 3.23% 3.48% 4.12%
Net investment income, net of
waivers/reimbursements 3.79% 3.87% 4.53% 4.51% 4.57%
Portfolio turnover rate 213% 134% 161% 242% 151%
</TABLE>
See footnote summary on page 68.
52
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MICHIGAN PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.61 $10.52 $10.12 $10.10 $9.35
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .40(b) .41(b) .46(b) .45(b) .45
Net realized and unrealized gain (loss)
on investment transactions (.46) .43 .55 .22 .78
Net increase (decrease) in net asset
value from operations (.06) .84 1.01 .67 1.23
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.40) (.41) (.46) (.45) (.45)
Distributions in excess of net
investment income (.03) (.05) (.02) (.03) (.03)
Distributions from net realized gains (.07) (.29) (.13) (.17) -0-
Total dividends and distributions (.50) (.75) (.61) (.65) (.48)
Net asset value, end of year $10.05 $10.61 $10.52 $10.12 $10.10
TOTAL RETURN
Total investment return based on net
asset value (c) (.64)% 8.26% 10.30% 6.80% 13.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $10,747 $8,983 $5,089 $3,940 $2,886
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.66% 1.66% 1.66% 1.66% 2.06%
Expenses, before waivers/
reimbursements 2.43% 2.59% 3.20% 3.48% 4.13%
Net investment income, net of
waivers/reimbursements 3.78% 3.88% 4.55% 4.50% 4.69%
Portfolio turnover rate 213% 134% 161% 242% 151%
</TABLE>
See footnote summary on page 68.
53
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MINNESOTA PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.22 $9.97 $9.58 $9.49 $9.19
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .49(b) .50(b) .53(b) .53(b) .53
Net realized and unrealized gain (loss)
on investment transactions (.53) .27 .39 .11 .32
Net increase (decrease) in net asset
value from operations (.04) .77 .92 .64 .85
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.50) (.53) (.53) (.53)
Distributions in excess of net
investment income (.02) (.02) -0- (.02) (.02)
Total dividends and distributions (.51) (.52) (.53) (.55) (.55)
Net asset value, end of year $9.67 $10.22 $9.97 $9.58 $9.49
TOTAL RETURN
Total investment return based on net
asset value (c) (.48)% 7.94% 9.93% 6.95% 9.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $10,601 $6,261 $4,120 $3,165 $2,414
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .75% .75% .75% .72% .71%
Expenses, before waivers/
reimbursements 1.63% 1.80% 2.22% 2.19% 2.30%
Net investment income, net of
waivers/reimbursements 4.90% 4.92% 5.44% 5.54% 5.71%
Portfolio turnover rate 259% 30% 131% 195% 117%
</TABLE>
See footnote summary on page 68.
54
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MINNESOTA PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.22 $9.97 $9.58 $9.49 $9.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .42(b) .42(b) .46(b) .46(b) .46
Net realized and unrealized gain (loss)
on investment transactions (.53) .28 .39 .11 .33
Net increase (decrease) in net asset
value from operations (.11) .70 .85 .57 .79
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.42) (.42) (.46) (.46) (.46)
Distributions in excess of net
investment income (.02) (.03) -0- (.02) (.02)
Total dividends and distributions (.44) (.45) (.46) (.48) (.48)
Net asset value, end of year $9.67 $10.22 $9.97 $9.58 $9.49
TOTAL RETURN
Total investment return based on net
asset value (c) (1.19)% 7.17% 9.13% 6.15% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $14,111 $13,867 $8,517 $8,291 $7,299
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.46% 1.46% 1.46% 1.42% 1.42%
Expenses, before waivers/
reimbursements 2.43% 2.52% 2.91% 2.89% 3.02%
Net investment income, net of
waivers/reimbursements 4.16% 4.19% 4.75% 4.82% 4.97%
Portfolio turnover rate 259% 30% 131% 195% 117%
</TABLE>
See footnote summary on page 68.
55
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
MINNESOTA PORTFOLIO
-----------------------------------------------------------------
CLASS C
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.22 $9.97 $9.58 $9.50 $9.19
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .42(b) .43(b) .46(b) .46(b) .46
Net realized and unrealized gain (loss)
on investment transactions (.53) .27 .39 .10 .33
Net increase (decrease) in net asset
value from operations (.11) .70 .85 .56 .79
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.42) (.43) (.46) (.46) (.46)
Distributions in excess of net
investment income (.02) (.02) -0- (.02) (.02)
Total dividends and distributions (.44) (.45) (.46) (.48) (.48)
Net asset value, end of year $9.67 $10.22 $9.97 $9.58 $9.50
TOTAL RETURN
Total investment return based on net
asset value (c) (1.19)% 7.18% 9.13% 6.03% 8.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $9,081 $7,716 $7,358 $6,553 $7,305
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.45% 1.45% 1.45% 1.41% 1.41%
Expenses, before waivers/
reimbursements 2.44% 2.48% 2.89% 2.88% 3.00%
Net investment income, net of
waivers/reimbursements 4.17% 4.23% 4.76% 4.82% 5.05%
Portfolio turnover rate 259% 30% 131% 195% 117%
</TABLE>
See footnote summary on page 68.
56
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.46 $10.15 $9.72 $9.65 $9.07
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .49(b) .51(b) .51(b) .51(b) .54
Net realized and unrealized gain (loss)
on investment transactions (.51) .32 .44 .11 .59
Net increase (decrease) in net asset
value from operations (.02) .83 .95 .62 1.13
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.51) (.51) (.51) (.54)
Distributions in excess of net
investment income (.02) (.01) (.01) (.04) (.01)
Total dividends and distributions (.51) (.52) (.52) (.55) (.55)
Net asset value, end of year $9.93 $10.46 $10.15 $9.72 $9.65
TOTAL RETURN
Total investment return based on net
asset value (c) (.29)% 8.36% 10.01% 6.57% 12.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $33,109 $22,333 $16,309 $15,520 $11,612
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .82% .82% .82% .82% .82%
Expenses, before waivers/
reimbursements 1.25% 1.29% 1.34% 1.35% 1.35%
Net investment income, net of
waivers/reimbursements 4.82% 4.93% 5.16% 5.26% 5.73%
Portfolio turnover rate 131% 35% 61% 132% 86%
</TABLE>
See footnote summary on page 68.
57
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.46 $10.16 $9.72 $9.66 $9.07
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .42(b) .43(b) .44(b) .44(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.51) .32 .45 .10 .60
Net increase (decrease) in net asset
value from operations (.09) .75 .89 .54 1.07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.42) (.43) (.44) (.45) (.47)
Distributions in excess of net
investment income (.02) (.02) (.01) (.03) (.01)
Total dividends and distributions (.44) (.45) (.45) (.48) (.48)
Net asset value, end of year $9.93 $10.46 $10.16 $9.72 $9.66
TOTAL RETURN
Total investment return based on net
asset value (c) (.99)% 7.50% 9.32% 5.66% 12.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $64,929 $48,027 $38,308 $39,099 $34,695
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.53% 1.53% 1.53% 1.53% 1.53%
Expenses, before waivers/
reimbursements 1.99% 2.00% 2.04% 2.05% 2.06%
Net investment income, net of
waivers/reimbursements 4.10% 4.23% 4.45% 4.56% 5.03%
Portfolio turnover rate 131% 35% 61% 132% 86%
</TABLE>
See footnote summary on page 68.
58
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.46 $10.16 $9.72 $9.66 $9.07
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .43(b) .44(b) .44(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.52) .32 .45 .10 .60
Net increase (decrease) in net asset
value from operations (.09) .75 .89 .54 1.07
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.43) (.44) (.45) (.47)
Distributions in excess of net
investment income (.01) (.02) (.01) (.03) (.01)
Total dividends and distributions (.44) (.45) (.45) (.48) (.48)
Net asset value, end of year $9.93 $10.46 $10.16 $9.72 $9.66
TOTAL RETURN
Total investment return based on net
asset value (c) (.99)% 7.50% 9.32% 5.66% 12.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $32,578 $26,018 $21,404 $22,579 $21,255
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.52% 1.52% 1.52% 1.52% 1.52%
Expenses, before waivers/
reimbursements 1.98% 1.99% 2.03% 2.04% 2.06%
Net investment income, net of
waivers/reimbursements 4.12% 4.23% 4.47% 4.56% 5.09%
Portfolio turnover rate 131% 35% 61% 132% 86%
</TABLE>
See footnote summary on page 68.
59
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
OHIO PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $10.16 $9.61 $9.53 $9.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .49(b) .52(b) .54(b) .52(b) .54
Net realized and unrealized gain (loss)
on investment transactions (.55) .30 .54 .11 .48
Net increase (decrease) in net asset
value from operations (.06) .82 1.08 .63 1.02
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.52) (.53) (.53) (.54)
Distributions in excess of net
investment income (.04) (.01) -0- (.02) (.01)
Total dividends and distributions (.53) (.53) (.53) (.55) (.55)
Net sset value, end of year $9.86 $10.45 $10.16 $9.61 $9.53
TOTAL RETURN
Total investment return based on net
asset value (c) (.70)% 8.30% 11.60% 6.72% 11.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $27,229 $14,220 $7,596 $6,054 $4,170
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .75% .75% .75% .75% .75%
Expenses, before waivers/
reimbursements 1.30% 1.35% 1.52% 1.48% 1.51%
Net investment income, net of
waivers/reimbursements 4.88% 5.05% 5.49% 5.47% 5.74%
Portfolio turnover rate 208% 16% 104% 182% 108%
</TABLE>
See footnote summary on page 68.
60
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
OHIO PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $10.16 $9.61 $9.54 $9.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .45(b) .48(b) .46(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.57) .30 .53 .09 .49
Net increase (decrease) in net asset
value from operations (.14) .75 1.01 .55 .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.45) (.46) (.46) (.47)
Distributions in excess of net
investment income (.02) (.01) -0- (.02) (.01)
Total dividends and distributions (.45) (.46) (.46) (.48) (.48)
Net asset value, end of year $9.86 $10.45 $10.16 $9.61 $9.54
TOTAL RETURN
Total investment return based on net
asset value (c) (1.38)% 7.56% 10.80% 5.82% 10.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $49,055 $37,289 $26,821 $25,334 $21,821
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.46% 1.46% 1.46% 1.46% 1.46%
Expenses, before waivers/
reimbursements 2.01% 2.05% 2.22% 2.18% 2.21%
Net investment income, net of
waivers/reimbursements 4.17% 4.34% 4.81% 4.77% 5.08%
Portfolio turnover rate 208% 16% 104% 182% 108%
</TABLE>
See footnote summary on page 68.
61
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
OHIO PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $10.16 $9.61 $9.54 $9.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .43(b) .45(b) .47(b) .46(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.57) .30 .54 .09 .49
Net increase (decrease) in net asset
value from operations (.14) .75 1.01 .55 .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.45) (.46) (.46) (.47)
Distributions in excess of net
investment income (.02) (.01) -0- (.02) (.01)
Total dividends and distributions (.45) (.46) (.46) (.48) (.48)
Net asset value, end of year $9.86 $10.45 $10.16 $9.61 $9.54
TOTAL RETURN
Total investment return based on net
asset value (c) (1.38)% 7.56% 10.80% 5.82% 10.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $24,126 $16,685 $14,878 $17,203 $18,874
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.45% 1.45% 1.45% 1.45% 1.45%
Expenses, before waivers/
reimbursements 2.01% 2.04% 2.20% 2.16% 2.20%
Net investment income, net of
waivers/reimbursements 4.18% 4.36% 4.81% 4.78% 5.14%
Portfolio turnover rate 208% 16% 104% 182% 108%
</TABLE>
See footnote summary on page 68.
62
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
PENNSYLVANIA PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.66 $10.33 $9.85 $9.64 $9.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .49(b) .53(b) .55(b) .49(b) .54
Net realized and unrealized gain (loss)
on investment transactions (.73) .35 .49 .28 .48
Net increase (decrease) in net asset
value from operations (.24) .88 1.04 .77 1.02
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.53) (.55) (.53) (.54)
Distributions in excess of net
investment income (.04) (.02) (.01) (.03) (.02)
Total dividends and distributions (.53) (.55) (.56) (.56) (.56)
Net asset value, end of year $9.89 $10.66 $10.33 $9.85 $9.64
TOTAL RETURN
Total investment return based on net
asset value (c) (2.43)% 8.72% 10.85% 8.17% 11.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $62,479 $35,632 $24,948 $21,104 $8,721
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .95% .95% .95% 1.00% 1.00%
Expenses, before waivers/
reimbursements 1.24% 1.29% 1.40% 1.45% 1.47%
Net investment income, net of
waivers/reimbursements 4.68% 5.10% 5.44% 5.40% 5.78%
Portfolio turnover rate 249% 70% 85% 185% 114%
</TABLE>
See footnote summary on page 68.
63
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
PENNSYLVANIA PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT OPERATIONS $10.66 $10.33 $9.86 $9.65 $9.18
Net investment income (a) .41(b) .46(b) .47(b) .46(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.73) .34 .49 .24 .49
Net increase (decrease) in net asset
value from operations (.32) .80 .96 .70 .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.41) (.46) (.47) (.46) (.47)
Distributions in excess of net
investment income (.04) (.01) (.02) (.03) (.02)
Total dividends and distributions (.45) (.47) (.49) (.49) (.49)
Net asset value, end of year $9.89 $10.66 $10.33 $9.86 $9.65
TOTAL RETURN
Total investment return based on net
asset value (c) (3.10)% 7.98% 9.95% 7.38% 10.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $52,012 $39,465 $30,078 $30,440 $28,559
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.66% 1.66% 1.66% 1.71% 1.71%
Expenses, before waivers/
reimbursements 1.98% 2.00% 2.09% 2.15% 2.17%
Net investment income, net of
waivers/reimbursements 3.96% 4.39% 4.72% 4.69% 5.09%
Portfolio turnover rate 249% 70% 85% 185% 114%
</TABLE>
See footnote summary on page 68.
64
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
PENNSYLVANIA PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.66 $10.33 $9.86 $9.65 $9.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .41(b) .46(b) .47(b) .46(b) .47
Net realized and unrealized gain (loss)
on investment transactions (.73) .34 .49 .24 .49
Net increase (decrease) in net asset
value from operations (.32) .80 .96 .70 .96
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.41) (.46) (.47) (.46) (.47)
Distributions in excess of net
investment income (.04) (.01) (.02) (.03) (.02)
Total dividends and distributions (.45) (.47) (.49) (.49) (.49)
Net asset value, end of year $9.89 $10.66 $10.33 $9.86 $9.65
TOTAL RETURN
Total investment return based on net
asset value (c) (3.10)% 7.98% 9.95% 7.37% 10.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $27,916 $17,531 $15,486 $13,996 $15,052
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.65% 1.65% 1.65% 1.70% 1.70%
Expenses, before waivers/
reimbursements 1.98% 1.99% 2.10% 2.14% 2.17%
Net investment income, net of
waivers/reimbursements 3.98% 4.41% 4.73% 4.69% 5.09%
Portfolio turnover rate 249% 70% 85% 185% 114%
</TABLE>
See footnote summary on page 68.
65
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
VIRGINIA PORTFOLIO
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.02 $10.90 $10.58 $10.29 $9.69
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .49(b) .52(b) .57(b) .57(b) .56
Net realized and unrealized gain (loss)
on investment transactions (.60) .49 .57 .37 .61
Net increase (decrease) in net asset
value from operations (.11) 1.01 1.14 .94 1.17
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.49) (.52) (.57) (.57) (.56)
Distributions in excess of net
investment income (.07) (.05) -0- -0- (.01)
Distributions from net realized gains (.03) (.32) (.25) (.08) -0-
Total dividends and distributions (.59) (.89) (.82) (.65) (.57)
Net asset value, end of year $10.32 $11.02 $10.90 $10.58 $10.29
TOTAL RETURN
Total investment return based on net
asset value (c) (1.10)% 9.65% 11.32% 9.39% 12.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $28,148 $10,315 $3,530 $2,455 $1,855
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements .67% .67% .67% .67% .67%
Expenses, before waivers/
reimbursements 1.43% 2.09% 3.57% 5.18% 8.96%
Net investment income, net of
waivers/reimbursements 4.67% 4.84% 5.39% 5.39% 5.59%
Portfolio turnover rate 311% 62% 258% 298% 128%
</TABLE>
See footnote summary on page 68.
66
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
VIRGINIA PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.01 $10.90 $10.57 $10.29 $9.69
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .42(b) .44(b) .50(b) .50(b) .49
Net realized and unrealized gain (loss)
on investment transactions (.60) .49 .58 .36 .61
Net increase (decrease) in net asset
value from operations (.18) .93 1.08 .86 1.10
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.42) (.44) (.50) (.50) (.49)
Distributions in excess of net
investment income (.07) (.06) -0- -0- (.01)
Distributions from net realized gains (.03) (.32) (.25) (.08) -0-
Total dividends and distributions (.52) (.82) (.75) (.58) (.50)
Net asset value, end of year $10.31 $11.01 $10.90 $10.57 $10.29
TOTAL RETURN
Total investment return based on net
asset value (c) (1.73)% 8.85% 10.70% 8.57% 11.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $42,007 $15,973 $5,020 $3,345 $1,193
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.37% 1.37% 1.37% 1.37% 1.37%
Expenses, before waivers/
reimbursements 2.20% 2.84% 4.29% 5.88% 9.66%
Net investment income, net of
waivers/reimbursements 3.97% 4.14% 4.68% 4.70% 4.80%
Portfolio turnover rate 311% 62% 258% 298% 128%
</TABLE>
See footnote summary on page 68.
67
ALLIANCE MUNICIPAL INCOME FUND II
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR
<TABLE>
<CAPTION>
VIRGINIA PORTFOLIO
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.01 $10.90 $10.57 $10.29 $9.70
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a) .42(b) .44(b) .50(b) .50(b) .49
Net realized and unrealized gain (loss)
on investment transactions (.60) .49 .58 .36 .60
Net increase (decrease) in net asset
value from operations (.18) .93 1.08 .86 1.09
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.42) (.44) (.50) (.50) (.49)
Distributions in excess of net
investment income (.07) (.06) -0- -0- (.01)
Distributions from net realized gains (.03) (.32) (.25) (.08) -0-
Total dividends and distributions (.52) (.82) (.75) (.58) (.50)
Net asset value, end of year $10.31 $11.01 $10.90 $10.57 $10.29
TOTAL RETURN
Total investment return based on net
asset value (c) (1.73)% 8.85% 10.70% 8.58% 11.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $12,962 $4,597 $1,207 $642 $122
Ratio to average net assets of:
Expenses, net of waivers/
reimbursements 1.37% 1.37% 1.37% 1.37% 1.37%
Expenses, before waivers/
reimbursements 2.19% 2.85% 4.25% 5.88% 9.66%
Net investment income, net of
waivers/reimbursements 3.97% 4.11% 4.66% 4.73% 4.81%
Portfolio turnover rate 311% 62% 258% 298% 128%
</TABLE>
(a) Net of fee waived and expenses reimbursed by the Adviser.
(b) Based on average shares.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. initial sales charge or contingent
deferred sales charge is not reflected in the calculation of total investment
return.
68
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, 1999, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1999, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Alliance Municipal Income Fund II
at September 30, 1999, the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended, and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
New York, New York
November 4, 1999
FEDERAL TAX INFORMATION (UNAUDITED)
_______________________________________________________________________________
In accordance with Federal tax law, the following table represents each
portfolio's designation of "exempt-interest dividends" and long-term capital
gain distributions paid during the fiscal year ended September 30, 1999.
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 1999 calendar year on Form
1099-DIV which will be mailed by January 31, 2000.
EXEMPT-INTEREST LONG-TERM CAPITAL
PORTFOLIO DIVIDENDS GAIN DISTRIBUTIONS
- --------- --------------- ------------------
Arizona 2,605,646 116,521
Florida 7,479,184 -0-
Massachusetts 4,257,237 56,799
Michigan 1,318,425 1,358
Minnesota 1,381,310 -0-
New Jersey 4,991,913 -0-
Ohio 3,779,032 -0-
Pennsylvania 5,189,166 -0-
Virginia 2,423,099 -0-
69
148
<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
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liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
each Portfolio believes that use of such contracts will benefit
the Portfolio, if the Adviser's investment judgment about the
general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged
against the possibility of an increase in interest rates which
would adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Portfolio will
lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but
will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Futures Contracts
Each Portfolio intends to purchase and write options on
futures contracts for hedging purposes. The Portfolios are not
commodity pools and all transactions in futures contracts and
options on futures contracts engaged in by the Portfolios must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates.
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The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security which is deliverable upon exercise of the futures
contract or securities comprising an index. If the futures price
at expiration of the option is below the exercise price, a
Portfolio that has written a call will retain the full amount of
the option premium which provides a partial hedge against any
decline that may have occurred in its portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security which is
deliverable upon the exercise of futures contract or securities
comprising an index. If the futures price at the expiration of
the option is higher than the exercise price, a Portfolio that
has written a put will retain the full amount of the option
premium which provides a partial hedge against any increase in
the price of securities which it intends to purchase. If a put
or call option a Portfolio has written is exercised, that
Portfolio will incur a loss which will be reduced by the amount
of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, a Portfolio may
purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases
an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
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_________________________________________________________________
APPENDIX C: OPTIONS ON MUNICIPAL AND U.S. GOVERNMENT SECURITIES
_________________________________________________________________
Options on Municipal and U.S. Government Securities
Each Portfolio will only write "covered" put and call
options on municipal securities and U.S. Government Securities,
unless such options are written for cross-hedging purposes. The
manner in which such options will be deemed "covered" is
described in the Prospectus under the heading "Investment
Policies and Restrictions--Additional Investment Policies-
- -Options on Municipal and U.S. Government Securities."
The writer of an option may have no control when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. The effect of the purchase is that the
writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent
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sale of any securities subject to the option to be used for other
Portfolio investments. If a Portfolio desires to sell a
particular security from its portfolio on which it has written a
call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Portfolio will realize a profit from a closing
transaction if the price of the purchase transaction is less than
the premium received from writing the option or the price
received from a sale transaction is more than the premium paid to
purchase the option; a Portfolio will realize a loss from a
closing transaction if the price of the purchase transaction is
more than the premium received from writing the option or the
price received from a sale transaction is less than the premium
paid to purchase the option. Because increases in the market of
a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by a
Portfolio.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that a Portfolio would have to exercise the options in order to
realize any profit. If a Portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following:
(i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national
securities exchange ("National Exchange") on opening transactions
or closing transactions or both, (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances may interrupt normal
operations on a National Exchange, (v) the facilities of an
National Exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume, or
(vi) one or more National Exchanges could, for economic or other
reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that National Exchange
that had been issued by the Options Clearing Corporation as a
result of trades on that National Exchange would continue to be
exercisable in accordance with their terms.
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Each Portfolio may write options in connection with buy-
and-write transactions; that is, a Portfolio may purchase a
security and then write a call option against that security. The
exercise price of the call a Portfolio determines to write will
depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-
the-money"), equal to ("at-the-money") or above ("out-of-the-
money") the current value of the underlying security at the time
the option is written. Buy-and-write transactions using in-the-
money call options may be used when it is expected that the price
of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-
the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance
moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is
expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, a
Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the
difference between the Portfolio's purchase price of the security
and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, a Portfolio may elect to
close the position or take delivery of the security at the
exercise price and a Portfolio's return will be the premium
received from the put options minus the amount by which the
market price of the security is below the exercise price. Out-of-
the-money, at-the-money, and in-the-money put options may be used
by the Fund in the same market environments that call options are
used in equivalent buy-and-write transactions.
Each Portfolio may purchase put options to hedge against
a decline in the value of its portfolio. By using put options in
this way, a Portfolio will reduce any profit it might otherwise
have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
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Each Portfolio may purchase call options to hedge
against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Portfolio.
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