File Nos. 33-07812 and 811-04791.
File Nos. 33-60560 and 811-07618.
c/o AllianceBernstein Investor Services, Inc.
P.O. Box 786003, San Antonio, Texas 78278-6003
Toll Free: (800) 221-5672
For Literature: Toll Free (800) 227-4618
STATEMENT OF ADDITIONAL INFORMATION
January 31, 2014
This Statement of Additional Information ("SAI") is not a prospectus but
supplements and should be read in conjunction with the current prospectus, dated
January 31, 2014, for the National Portfolio, High Income Municipal Portfolio,
California Portfolio and New York Portfolio (the "Fund Portfolios") of
AllianceBernstein Municipal Income Fund, Inc. (the "Fund") that offers the Class
A, Class B (except for the High Income Municipal Portfolio), Class C and Advisor
Class shares of the Fund Portfolios, for the Arizona Portfolio, Massachusetts
Portfolio, Michigan Portfolio, Minnesota Portfolio, New Jersey Portfolio, Ohio
Portfolio, Pennsylvania Portfolio and Virginia Portfolio (the "Fund II
Portfolios") of AllianceBernstein Municipal Income Fund II (the "Fund II") that
offers the Class A, Class B and Class C shares of the Fund II Portfolios (the
Fund and Fund II are together referred to as the "Funds"; each of the Fund
Portfolios and the Fund II Portfolios is referred to as a "Portfolio" and
together as the "Portfolios") (the "Prospectus"). Financial statements for the
Funds for the year ended October 31, 2013, in the case of the Fund Portfolios,
and September 30, 2013, in the case of the Fund II Portfolios, are included in
the Funds' annual reports to shareholders and are incorporated into this SAI by
reference. Copies of the Funds' Prospectus and the Funds' annual reports may be
obtained by contacting AllianceBernstein Investor Services, Inc. ("ABIS") at the
address or the "For Literature" telephone number shown above or on the Internet
at www.AllianceBernstein.com.
TABLE OF CONTENTS
Page
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DESCRIPTION OF THE PORTFOLIOS..................................................2
INVESTMENT RESTRICTIONS.......................................................85
MANAGEMENT OF THE FUNDS.......................................................86
EXPENSES OF THE FUNDS........................................................121
PURCHASE OF SHARES...........................................................130
REDEMPTION AND REPURCHASE OF SHARES..........................................155
SHAREHOLDER SERVICES.........................................................158
NET ASSET VALUE..............................................................162
DIVIDENDS, DISTRIBUTIONS AND TAXES...........................................165
PORTFOLIO TRANSACTIONS.......................................................172
GENERAL INFORMATION..........................................................175
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM..................................................209
APPENDIX A: BOND AND COMMERCIAL PAPER RATINGS................................A-1
APPENDIX B: STATEMENT OF POLICIES AND PROCEDURES FOR PROXY VOTING..........B-1
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DESCRIPTION OF THE PORTFOLIOS
Introduction to the Portfolios
Except as otherwise noted, the Portfolios' investment objectives and
policies described below and in the Prospectus are not designated "fundamental
policies" within the meaning of the Investment Company Act of 1940, as amended
(the "1940 Act") and may be changed by the Board of Directors or Board of
Trustees of the Funds (each a "Board" and together, the "Boards") with respect
to a Portfolio without approval of the shareholders of such Portfolio. However,
no Portfolio will change its investment objective without at least 60 days'
prior written notice to shareholders. There is no guarantee that the Portfolios
will achieve their investment objectives.
Whenever any investment policy or restriction states a percentage of
a Portfolio's assets that may be invested in any security or other asset, it is
intended that such percentage limitation be determined immediately after and as
a result of the Portfolio's acquisition of such securities or other assets.
Accordingly, any later increases or decreases in percentage beyond the specified
limitation resulting from a change in values or net assets will not be
considered a violation of this percentage limitation.
Each State 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 in the named state. When AllianceBernstein L.P. (the
"Adviser") believes that municipal securities of the named state that meet a
State Portfolio's quality standards are not available, any State Portfolio may
invest up to 20% of its total assets in securities whose interest payments are
only federally tax-exempt.
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 that receives interest from such
specified private activity bonds, will be treated as an item of tax preference
for purposes of the AMT imposed on individuals and corporations, though for
regular federal income tax purposes such interest will remain fully tax-exempt,
and (2) interest on all tax-exempt obligations will be included in "adjusted
current earnings" of corporations for AMT purposes. Such private activity bonds
("AMT-Subject Bonds"), which include industrial development bonds and bonds
issued to finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage projects, have
provided, and may continue to provide, somewhat higher yields than other
comparable municipal securities.
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
assets of the Portfolio may be invested.
Insurance Feature
The insurance feature is generally described in the Prospectus under
"Additional Information about the Portfolios' Risks and Investments--Insured
Bonds."
The Portfolios may obtain insurance on their municipal bonds or
purchase insured municipal bonds covered by policies issued by monoline
insurance companies. Currently, only Assured Guaranty Municipal Corp. ("AGM") is
writing policies on newly issued municipal bonds. AGM (formerly, Financial
Security Assurance Holdings Ltd.) is an indirect subsidiary of Assured Guaranty
Ltd. ("Assured"). Prior to the recent financial crisis, there were several other
insurers writing policies on municipal bonds, but the ratings of these insurers
have been severely downgraded and, while they are still insuring municipal bonds
under policies written prior to the financial crisis, they are no longer writing
new policies. These insurers include National Public Finance Guarantee
Corporation ("National"), a wholly-owned subsidiary of MBIA Inc. ("MBIA");
Financial Guaranty Insurance Company ("FGIC"); Ambac Assurance Corporation
("Ambac"), a wholly-owned subsidiary of Ambac Financial Group, Inc.; ACA
Financial Guaranty Corporation ("ACA"); Radian Asset Assurance, Inc. (formerly,
Asset Guaranty Insurance Company) ("Radian"), a wholly-owned subsidiary of
Radian Group, Inc.; Syncora Guarantee Inc. ("Syncora") (formerly XL Capital
Assurance, Inc.), a wholly-owned subsidiary of Syncora Holdings Ltd. (formerly
Security Capital Assurance Ltd.); CIFG Assurance North America, Inc. (formerly,
CDC IXIS Financial Guaranty North America, Inc.) ("CIFG NA"); and Berkshire
Hathaway Assurance Corporation ("BHAC"), a wholly owned subsidiary of Berkshire
Hathaway Inc. As noted above, most of these insurers have been downgraded and it
is possible that additional downgrades may occur. Moody's and S&P ratings
reflect the respective rating agency's current assessment of the
creditworthiness of each insurer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the ratings may
be obtained only from the applicable rating agency. The ratings are not
recommendations to buy, sell or hold the municipal bonds, and such ratings may
be subject to revision or withdrawal at any time by the rating agencies. Any
downward revision or withdrawal of either or both ratings may have an adverse
effect on the market price of the municipal bonds.
It should be noted that insurance is not a substitute for the basic
credit of an issuer, but supplements the existing credit and provides additional
security therefore. Moreover, while insurance coverage for the municipal
securities held by the Portfolios may reduce credit risk, it does not protect
against market fluctuations caused by changes in interest rates and other
factors. As a result of declines in the credit quality and associated downgrades
of most fund insurers, insurance has less value than it did in the past. The
market now values insured municipal securities primarily based on the credit
quality of the issuer of the security with little value given to the insurance
feature. In purchasing insured municipal securities, the Adviser currently
evaluates the risk and return of such securities through its own research.
Risk of Concentration In a Single State
The primary purpose of investing in a portfolio of a single state's
municipal securities is the special tax treatment accorded the state's resident
individual investors. However, payment of interest and preservation of principal
depends upon the continuing ability of the state's issuers and/or obligors on
state, municipal and public authority debt obligations to meet their obligations
thereunder. Investors should be aware of certain factors that might affect the
financial condition of issuers of municipal securities, consider the greater
risk of the concentration of a Portfolio versus the safety that comes with a
less concentrated investment portfolio and compare yields available in
portfolios of the relevant state's issues with those of more diversified
portfolios, including out-of-state issues, before making an investment decision.
Municipal securities in which a Portfolio's assets are invested may
include debt obligations of the municipalities and other subdivisions of the
relevant state issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, schools, streets and water and sewer works. Other purposes for which
municipal securities may be issued include the obtaining of funds to lend to
public or private institutions for the construction of facilities such as
educational, hospital, housing, and solid waste disposal facilities. The latter,
including most AMT-Subject Bonds, are generally payable from private sources
which, in varying degrees, may depend on local economic conditions, but are not
necessarily affected by the ability of the state and its political subdivisions
to pay their debts. It is not practicable 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 "More Information About the
Portfolios and Their Investments" in the Prospectus. See also "Appendix A: Bond
and Commercial Paper Ratings" for a description of ratings and rating criteria.
Some municipal securities may be rated based on a "moral obligation" contract
which allows the municipality to terminate its obligation by deciding not to
make an appropriation. Generally, no legal remedy is available against the
municipality that is a party to the "moral obligation" contract in the event of
such non-appropriation.
The following brief summaries are included for the purpose of
providing certain information regarding the economic climate and financial
condition of the states of New York, California, Arizona, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia, and are based
primarily on information from the Annual Information Statement dated June 19,
2013, as updated on November 26, 2013, with respect to New York, the
Comprehensive Annual Financial Report dated June 30, 2012 with respect to
Arizona, and Official Statements dated September 2013 with respect to
Massachusetts, October 2013 with respect to Pennsylvania, and November 2013 with
respect to California, Michigan, Minnesota, New Jersey, Ohio and Virginia in
connection with the issuance of certain securities, and other documents and
sources, and do not purport to be complete. The Funds have not undertaken to
verify independently such information and the Funds assume no responsibility for
the accuracy of such information. These summaries do not provide information
regarding many 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 a
Portfolio or the ability of the respective obligors to make timely payments of
principal and interest on such obligations. In addition, a number of factors may
adversely affect the ability of the issuers of municipal securities to repay
their borrowings that are unrelated to the financial or economic condition of a
state, and that, in some cases, are beyond their control. Furthermore, issuers
of municipal securities are generally not required to provide ongoing
information about their finances and operations to holders of their debt
obligations, although a number of cities, counties and other issuers prepare
annual reports.
NEW YORK PORTFOLIO
The following is based on information obtained from the Annual
Information Statement of the State of New York, dated June 19, 2013, and the
Update to the Annual Information Statement dated November 26, 2013.
Debt Reform Act of 2000
The Debt Reform Act of 2000 ("Debt Reform Act") implemented
statutory initiatives intended to improve the borrowing practices of the State
of New York (the "State"). The Debt Reform Act applies to all new
State-supported debt issued on and after April 1, 2000 and includes the
following provisions: (a) a phased-in cap on new State-supported debt
outstanding of 4% of personal income; (b) a phased-in cap on new State-supported
debt service costs of 5% of total governmental funds receipts; (c) a limit on
the use of debt to capital works and purposes only; and (d) a limit on the
maximum term of new State-supported debt to 30 years.
The cap on new State-supported debt outstanding began at 0.75% of
personal income in 2000-01 and was fully phased in at 4% of personal income in
2010-11. Similarly, the phased-in cap on new State-supported debt service costs
began at 0.75% of total governmental funds receipts and is gradually increasing
until it is fully phased in at 5% in 2013-14.
The Debt Reform Act requires the limitations on the issuance of
State-supported debt and debt service costs to be calculated by October 31 of
each year and reported in the quarterly Financial Plan Update most proximate to
October 31st of each year. If the calculations for new State-supported debt
outstanding and debt service costs are less than the State-supported debt
outstanding and debt service costs permitted under the Debt Reform Act, new
State-supported debt may continue to be issued. However, if either the debt
outstanding or the debt service cap is met or exceeded, the State, absent a
change in law, would be precluded from contracting new State-supported debt
until the next annual cap calculation is made and State-supported debt is found
to be within the appropriate limitations. The Division of the Budget ("DOB")
intends to manage subsequent capital plans and issuance schedules consistent
with the limits.
The State was found to be in compliance with the statutory caps for
the most recent calculation period (October 2013).
Current projections estimate that debt outstanding and debt service
costs will continue to remain below the limits imposed by the Debt Reform Act
throughout the next several years. Available cap room, in regards to debt
outstanding, is expected to decline from $3.6 billion in 2012-13 to $560 million
in 2015-16. The State is continuing to implement measures to address capital
spending priorities and debt financing practices.
New York is one of the largest issuers of municipal debt, ranking
second among the states, behind California, in the amount of debt outstanding.
As of March 31, 2013, total State-related debt outstanding was $56.1 billion,
equal to approximately 5.4% of personal income. New York ranks fifth in debt per
capita, behind Connecticut, Massachusetts, Hawaii and New Jersey.
For purposes of analyzing the financial condition of the State, debt
may be classified as State-supported debt and State-related debt.
State-supported debt includes general obligation debt, to which the full faith
and credit of the State has been pledged, and lease-purchase and contractual
obligations of public authorities and municipalities, where the State's legal
obligation to make payments to those public authorities and municipalities is
subject to and paid from annual appropriations made by the Legislature.
State-related debt includes State-supported debt, as well as State-guaranteed
debt (to which the full faith and credit of the State has been pledged), moral
obligation financings and certain contingent-contractual obligation financings,
where debt service is expected to be paid from other sources and State
appropriations are contingent in that they may be made and used only under
certain circumstances.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
As of March 31, 2013, the total amount of general obligation debt
outstanding was $3.5 billion. The Enacted Budget Capital Plan projects that
about $338 million in general obligation bonds will be issued in 2013-14.
Also included in State-supported debt are certain long-term
financing mechanisms, lease-purchase and contractual-obligation financings,
including certificates of participation ("COPs"), which involve obligations of
public authorities or municipalities where debt service is payable by the State,
but are not general obligations of the State. Under these financing
arrangements, certain public authorities and municipalities have issued
obligations to finance certain payments to local governments (see "New York
Local Government Assistance Corporation," below), various capital programs,
educational and health facilities, prison construction, housing programs and
equipment acquisitions, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
The State expects to continue to use lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
and expects to finance many of these capital programs with State Personal Income
Tax ("PIT") Revenue Bonds. Based on current assumptions, DOB anticipates that
there will be $30.0 billion of State PIT Revenue Bonds outstanding during fiscal
year 2013-14.
New York Local Government Assistance Corporation
In 1990, as part of a State fiscal reform program, legislation was
enacted creating the New York Local Government Assistance Corporation (the
"LGAC"), a public benefit corporation empowered to issue long-term obligations
to fund certain payments to local governments traditionally funded through the
State's annual seasonal borrowing. The legislation also dedicated revenues equal
to the first one percent of the State sales and use tax to pay debt service on
these bonds. The legislation imposed a limitation on the annual seasonal
borrowing of the State except in cases where the Governor and the legislative
leaders have certified the need for additional borrowing and provided a schedule
for eliminating it over time. Any seasonal borrowing is required by law to be
eliminated by the fourth fiscal year after the limit was first exceeded. This
provision limiting the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds. No such restrictions were
placed on the State's ability to issue deficit notes.
As of June 1995, LGAC had issued bonds and notes to provide net
proceeds of $4.7 billion, completing the program. The impact of LGAC's borrowing
is that the State has been able to meet its cash flow needs throughout the
fiscal year without relying on short-term seasonal borrowings.
State Authorities
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities (the "Authorities"). Authorities, which have
responsibility for financing, constructing and/or operating revenue producing
public facilities, are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds and notes
within the amounts, and as otherwise restricted by, their legislative
authorizations. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially
adversely affected, if any of its Authorities were to default on their
respective obligations, particularly those using State-supported or
State-related financing techniques. As of December 31, 2012, there were 19
Authorities that had aggregate outstanding debt of $171 billion, only a portion
of which constitutes State-supported or State-related debt.
Moral obligation financing generally involves the issuance of debt
by an Authority to finance a revenue-producing project or other activity. The
debt is secured by project revenues and includes statutory provisions requiring
the State, subject to appropriation by the Legislature, to make up any
deficiencies that may occur in the issuer's debt service reserve fund. There has
never been a default on any moral obligation debt of any Authority. The State
does not intend to increase statutory authorizations for moral obligation bond
programs. From 1976 through 1987, the State was called upon to appropriate and
make payments totaling $162.8 million to make up deficiencies in the debt
service reserve funds of the Housing Finance Agency pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the New York State Urban Development
Corporation and other Authorities that had moral obligation debt outstanding.
The State has not been called upon to make any payments pursuant to any moral
obligations since the 1986-87 fiscal year and no such requirements are
anticipated during the 2013-14 fiscal year.
Authorities' operating expenses and debt service costs are generally
paid by revenues generated by the projects financed or operated, such as tolls
charged for the use of highways, bridges or tunnels, charges for public power,
electric and gas utility services, rentals charged for housing units, and
charges for occupancy at medical care facilities. In addition, State legislation
authorizes several financing techniques for Authorities. Also, there are
statutory arrangements providing for State local assistance payments, otherwise
payable to localities, to be made under certain circumstances to Authorities.
Although the State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements, if local assistance payments are so diverted, the affected
localities could seek additional State assistance. Some Authorities also receive
moneys from State appropriations to pay for the operating costs of certain of
their programs.
The Metropolitan Transportation Authority (the "MTA"), which
receives the bulk of State appropriations to the Authorities, oversees New York
City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York metropolitan area through the MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and
tunnels. Because fare revenues are not sufficient to finance the mass transit
portion of these operations, the MTA has depended and will continue to depend on
operating support from the State, local governments and TBTA, including loans,
grants and subsidies. If current revenue projections are not realized and/or
operating expenses exceed current projections, the TA or commuter railroads may
be required to seek additional State assistance, raise fares or take other
actions.
Fiscal Year 2013
The state ended FY 2013 in balance on a cash basis in the General
Fund, and maintained a closing balance of $1.61 billion, consisting of $1.1
billion in the Tax Stabilization Reserve, $175 million in the Rainy Day Reserve,
$93 million in the Community Projects Fund, $21 million in the Contingency
Reserve, $77 million reserved for potential retroactive labor settlements, and
$113 million in an undesignated fund balance. The FY 2013 closing balance was
$177 million less than the FY 2012 closing balance, which largely reflects the
use of designated resources to address costs associated with retroactive labor
agreements.
General Fund receipts, including transfers from other funds, totaled
$58.8 billion in FY 2013. Total receipts during FY 2013 were $1.9 million (3.3%
higher than in the prior fiscal year). Total tax receipts were $1.5 billion
higher than the previous fiscal year, mainly due to growth in PIT collections
($1.0 billion) and business tax collections ($493 million). General Fund
miscellaneous receipts also increased, largely due to one-time receipts from a
settlement between the Department of Financial Services and Standard Chartered
Bank.
General Fund disbursements, including transfers to other funds,
totaled $59.0 billion in FY 2013, $2.5 billion (4.4% higher than in the prior
fiscal year). This reflects expected growth in various local assistance
programs, including education and Medicaid, both of which are subject to an
annual cap; increased personal service costs associated with retroactive labor
settlements; and increased transfers in support of debt service payments.
Fiscal Year 2012
The State ended FY 2012 in balance on a cash basis in the General
Fund, and maintained a closing balance of $1.79 billion, consisting of $1.1
billion in the Tax Stabilization Reserve, $175 million in the Rainy Day Reserve,
$102 million in the Community Projects Fund, $21 million in the Contingency
Reserve, $283 million reserved for potential retroactive labor settlements, and
$75 million in an undesignated fund balance. The FY 2012 closing balance was
$411 million greater than the FY 2011 closing balance, which largely reflects
actions to establish designated resources that can be used to address costs
associated with potential retroactive labor agreements, and to build the State's
general emergency reserve fund balances. The State made a $100 million deposit
to the Tax Stabilization Reserve at the close of FY 2012, the first deposit to
the State's "rainy day" reserves since FY 2008.
General Fund receipts, including transfers from other funds, totaled
$56.9 billion in FY 2012. Total receipts during FY 2012 were $2.5 billion (4.5%
higher than in the prior fiscal year). Total tax receipts were $3.1 billion
higher than the previous fiscal year, mainly due to growth in PIT collections
($2.4 billion) and business tax collections ($481 million). A decrease in the
level of excess balances transferred from other funds partly offset the annual
increase in tax receipts.
General Fund disbursements, including transfers to other funds,
totaled $56.5 billion in FY 2012, $1.1 billion (2.0%) higher than in the prior
fiscal year. Excluding the impact of a $2.1 billion school aid deferral from
March 2010 to the statutory deadline of June 2010, annual spending grew by $3.2
billion. Spending growth is largely due to the phase-out of extraordinary
Federal aid that temporarily reduced State-share spending in FY 2011. Annual
General Fund spending for agency operations in FY 2012 was lower than in FY
2011, consistent with management expectations and continued efforts in managing
the workforce and controlling costs.
Fiscal Year 2011
The State ended FY 2011 in balance on a cash basis in the General
Fund. The General Fund ended FY 2011 with a closing balance of $1.38 billion,
consisting of $1.0 billion in the Tax Stabilization Reserve, $175 million in the
Rainy Day Reserve, $136 million in the Community Projects Fund, $21 million in
the Contingency Reserve, and $13 million in an undesignated fund balance. The
closing balance was $928 million lower than FY 2010. This reflected the planned
use of a fund balance to pay for expenses deferred from FY 2010 into FY 2011.
General Fund receipts, including transfers from other funds, totaled
$54.4 billion in FY 2011. Total receipts during FY 2011 were $1.9 billion (3.6%
higher than in the prior fiscal year). Total tax receipts were $2.5 billion
higher, mainly due to the growth in PIT collections, sales taxes, estate taxes,
and the real estate transfer tax, resulting from changes to the law as well as
the economic recovery. Non-tax revenue was $631 million below the prior year.
This was primarily due to the following FY 2010 collections that were not
received, or were received in lower amounts, in FY 2011: temporary utility
surcharge; Power Authority resources; Energy Research and Development Authority;
and fine collections. An increase in the level of excess balances transferred
from other funds partly offset the annual decline in miscellaneous receipts.
General Fund disbursements, including transfers to other funds,
totaled $55.4 billion in FY 2011. Disbursements in FY 2011 were $3.2 billion
(6.1% higher than in the prior fiscal year). Spending growth was affected by the
deferral of a $2.06 billion payment to schools from March 2010 to the statutory
deadline of June 2010. Adjusting for this anomaly, spending would have been
approximately $950 million below FY 2010 levels.
Economic Overview
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's financial activities, information,
education and health services employment, and a very small share of the nation's
farming and mining activity. The State's location and its air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. Like
the rest of the nation, the State has a declining proportion of its workforce
engaged in manufacturing, and an increasing proportion engaged in service
industries.
The services sector, which includes professional and business
services, private education and healthcare, leisure and hospitality services,
and other services, is the State's leading economic sector. The services sector
accounts for half of all nonagricultural jobs in New York and has a higher
proportion of total jobs than does the rest of the nation.
Manufacturing employment continues to decline in importance in New
York, as in most other states, and New York's economy is less reliant on this
sector than in the past. However, it remains an important sector of the State
economy, particularly for the upstate region, as high concentrations of
manufacturing industries for transportation equipment, optics and imaging,
materials processing, and refrigeration, heating and electrical equipment
products are located in the upstate region.
The trade, transportation and utilities sector accounts for the
second largest component of nonagricultural jobs in New York but is only the
fifth largest, when measured by wage share. This sector accounts for less
employment and wages for the State than for the nation.
New York City is the nation's leading center of banking and finance
and, as a result, this is a far more important sector in the State than in the
nation as a whole. Although this sector accounts for under one-tenth of all
nonagricultural jobs in the State, it contributes about one-fifth of total
wages.
Farming is an important part of the economy in rural areas, although
it constitutes a very minor part of total State output. Principal agricultural
products of the State include milk and dairy products, greenhouse and nursery
products, fruits, and vegetables. New York ranks among the nation's leaders in
the production of these commodities.
Federal, State and local government together comprise the third
largest sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.
The State is likely to be less affected than the nation as a whole
during an economic recession that is concentrated in manufacturing and
construction, but likely to be more affected during a recession that is
concentrated in the services sector.
In the calendar years 1990 through 1998, the State's rate of
economic growth was somewhat slower than that of the nation. In particular,
during the 1990-91 recession and post-recession period, the economy of the
State, and that of the rest of the Northeast, was more heavily damaged than that
of the nation as a whole and was slower to recover. However, the situation
subsequently improved. In 1999, for the first time in 13 years, the employment
growth rate of the State surpassed the national growth rate and, in 2000, the
rates were essentially the same. In 2001, the September 11 terrorist attacks
resulted in a slowdown in New York that was more serious than in the nation as a
whole. In contrast, the State labor market fared better than that of the nation
as a whole during the most recent downturn that began in 2008, though New York
experienced a historically large wage decline in 2009. The State unemployment
rate was higher than the national rate from 1991 to 2000, but the gap between
them has since closed, with the State rate below that of the nation from the
start of the national recession through the end of 2011. In 2012, the State
unemployment rate was 8.5%, compared to 8.1% for the nation as a whole.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies. In 2012, New York per capita personal income was
$52,095, compared to $42,693 for the nation as a whole.
Recent Developments
The State economy has performed well in the context of a challenging
national and global economic environment. New York's private sector labor market
remains strong, continuing to exhibit robust growth in professional and business
services, private educational services, and tourism-related leisure and
hospitality services. However, New York has not been entirely immune to the
national slowdown. Private sector employment growth of 1.4% is projected for the
2013 calendar year, followed by growth of a similar pace for 2014. These growth
rates represent marginal downward revisions from mid-2013, but remain above
historical averages.
In contrast to recent private labor market trends, public sector
employment is expected to continue to decline well into 2014. The ongoing
downsizing of both the finance and government sectors has been contributing to
unusually weak income growth over the past two years. In advance of Federal tax
increases at the start of 2013, a sizable magnitude of wages, dividends, and
capital gains was accelerated into the fourth quarter of 2012. Consequently, it
is more instructive to view State income growth on a fiscal year basis rather
than on a calendar year basis. Weaker growth of 3.8% is now estimated for the
State fiscal year in progress, but offsetting that revision is stronger growth
in the non-wage components of personal income. On balance, personal income
growth of 3.7% is now projected for FY 2014, followed by growth of 4.9% for FY
2015. These projections represent only marginal revisions from the First
Quarterly Update Financial Plan forecast.
All of the risks to the U.S. forecast apply to the State forecast as
well, although as the nation's financial capital, the volume of financial market
activity and equity market volatility pose a particularly large degree of
uncertainty for New York. In addition, with Wall Street firms still adjusting
their compensation practices in the wake of the passage of financial reform,
both the bonus and non-bonus components of employee pay are becoming
increasingly difficult to estimate. Securities industry revenues have in the
past been a useful predictor of bonus payouts, but that relationship has become
much more erratic in recent years.
New York City
The fiscal demands on the State may be affected by the fiscal
condition of New York City, which relies in part on State aid to balance its
budget and meet its cash requirements. It is also possible that the State's
finances may be affected by the ability of New York City to market securities
successfully in the public credit markets.
Other Localities
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. While a relatively infrequent practice, deficit
financing has become more common in recent years. Between 2004 and January 2012,
the State Legislature authorized 21 bond issuances to finance local government
operating deficits. There were four new or additional deficit financing
authorizations during the 2009 and 2010 legislative sessions.
Like the State, local governments must respond to changing
political, economic and financial influences over which they have little or no
control. Such changes may adversely affect the financial condition of certain
local governments. For example, the federal government may reduce (or in some
cases eliminate) federal funding of some local programs which, in turn, may
require local governments to fund these expenditures from their own resources.
The loss of temporary Federal stimulus funding in 2011 also adversely impacted
counties and school districts in New York State. The State's cash flow problems
have resulted in delays to the payment of State aid, and in some cases, have
necessitated borrowing by the localities. Additionally, recent enactment of
legislation that caps most local government and school district property tax
levies may affect the amount of property tax revenue available for local
government and school district purposes. The legislation does not apply to New
York City. Changes to sales tax distributions resulting from the 2010 Federal
population census may also have a material impact on certain local governments.
Ultimately, localities or any of their respective public authorities may suffer
serious financial difficulties that could jeopardize local access to the public
credit markets, which may adversely affect the marketability of notes and bonds
issued by localities within the State. Localities may also face unanticipated
problems resulting from certain pending litigation, judicial decisions and
long-range economic trends. Other large scale potential problems, such as
declining urban populations, increasing expenditures, and the loss of skilled
manufacturing jobs, may also adversely affect localities and necessitate State
assistance.
Litigation
The State is a defendant in legal proceedings involving State
finances and programs and miscellaneous civil rights, real property, and
contract and other tort claims where the monetary claims against the State are
deemed to be material, generally in excess of $100 million or involving
significant challenges to or impacts on the State's financial policies or
practices. These proceedings could affect adversely the financial condition of
the State in FY 2014 or thereafter.
Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced FY 2014
Financial Plan. The State believes that the FY 2014 Enacted Budget includes
sufficient reserves for the payment of judgments that may be required during FY
2014. There can be no assurance, however, that adverse decisions in legal
proceedings against the State would not exceed the amount of all potential FY
2014 Enacted Budget resources available for the payment of judgments, and could
therefore adversely affect the ability of the State to maintain a balanced FY
2014 Enacted Budget.
CALIFORNIA PORTFOLIO
The following is based on information obtained from an Official
Statement, dated November 6, 2013, relating to State of California $300,000,000
General Obligation Bonds (Index Floating Rate Bonds) (the "Official Statement").
Constitutional Limits on Spending and Taxes
Certain California (the "State") constitutional amendments,
legislative measures, executive orders, civil actions and voter initiatives
could adversely affect the ability of issuers of the State's municipal
securities to pay interest and principal on municipal securities.
Article XIII B. The State is subject to an annual appropriations
limit (the "Appropriations Limit") imposed by Article XIII B to the State
Constitution.
Article XIII B was modified substantially by Propositions 98 and 111
in 1988 and 1990, respectively. (See "Proposition 98" below.) "Appropriations
subject to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by the entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most State subsidies to local governments, tax refunds and some benefit payments
such as unemployment insurance. No limit is imposed on appropriations of funds
which are not "proceeds of taxes," such as reasonable user charges or fees, and
certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations for tax refunds, appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels, and appropriation of certain special taxes
imposed by initiative (e.g., cigarette and tobacco taxes). The Appropriations
Limit may also be exceeded in cases of emergency.
The State's yearly Appropriations Limit is based on the limit for
the prior year with annual adjustments for changes in California per capita
personal income and population and any transfers of financial responsibility for
providing services to or from another unit of government.
The Department of Finance projected the Appropriations Limit to be
$71.559 billion and $71.703 billion under the Appropriations Limit in Fiscal
Years 2012-13 and 2013-14, respectively.
Proposition 98. On November 8, 1988, voters approved Proposition 98,
a combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level, and the operation of the
State Appropriations Limit, primarily by guaranteeing local schools and
community colleges ("K-14 schools") a minimum share of General Fund revenues.
Under Proposition 98 (as modified by Proposition 111 which was
enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) in
general, a fixed percentage of General Fund revenues (the "first test"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment (the "second test"), or (c) a third test,
which would replace the second test in any year when the percentage growth in
per capita General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in State per capita personal income.
Under the third test, schools would receive the amount appropriated in the prior
year adjusted for changes in enrollment and per capita General Fund revenues,
plus an additional small adjustment factor. If the third test is used in any
year, the difference between the third test and the second test would become a
"credit" to schools which would be the basis of payments in future years when
per capita General Fund revenue growth exceeds per capita personal income
growth.
The Proposition 98 guarantee is funded from two sources: local
property taxes and the General Fund. Any amount not funded by local property
taxes is funded by the General Fund. Thus, local property tax collections
represent an offset to General Fund costs in a second test or third test year.
State Indebtedness
The State Treasurer is responsible for the sale of debt obligations
of the State and its various authorities and agencies. The State has always paid
the principal of and interest on its general obligation bonds, general
obligation commercial paper notes, lease-purchase debt and short-term
obligations, including revenue anticipation notes and revenue anticipation
warrants, when due.
The State Constitution prohibits the creation of general obligation
indebtedness of the State unless a bond measure is approved by a majority of the
electorate voting at a general election or a direct primary. General obligation
bond acts provide that debt service on general obligation bonds shall be
appropriated annually from the General Fund and all debt service on general
obligation bonds is paid from the General Fund. Under the State Constitution,
debt service on general obligation bonds is the second charge to the General
Fund after the application of moneys in the General Fund to the support of the
public school system and public institutions of higher education. Certain
general obligation bond programs receive revenues from sources other than the
sale of bonds or the investment of bond proceeds.
As of September 1, 2013, the State had outstanding $79.373 billion
aggregate principal amount of long-term general obligation bonds, and unused
voter authorizations for the future issuance of $30.980 billion of long-term
general obligations bonds, some of which may first be issued as commercial paper
notes.
The General Obligation Bond Law permits the State to issue as
variable rate indebtedness up to 20% of the aggregate amount of long-term
general obligation bonds outstanding. The State had outstanding $3.282 billion
of variable rate general obligation bonds, representing about 4.135% of the
State's total outstanding general obligation bonds as of September 1, 2013.
In addition to general obligation bonds, the State builds and
acquires capital facilities through the use of lease-purchase borrowing. Under
these arrangements, the State Public Works Board, another State or local agency
or a joint powers authority issues bonds to pay for the construction of
facilities such as office buildings, university buildings or correctional
institutions. These facilities are leased to a State agency, the California
State University, the University of California or the Judicial Council under a
long-term lease which provides the source of payment of the debt service on the
lease-purchase bonds. In some cases, there is not a separate bond issue, but a
trustee directly creates certificates of participation in the State's lease
obligation, which are marketed to investors. The State had $11.822 billion
General Fund-supported lease-purchase debt outstanding as of September 13, 2013.
As part of its cash management program, the State has regularly
issued short-term obligations to meet cash flow needs. The State has issued
revenue anticipation notes ("RANs") in all but one fiscal year since the
mid-1980s and they have always been paid at maturity. RANs are issued to
partially fund timing differences between revenues and expenditures, as the
majority of General Fund revenues are received in the last part of the fiscal
year. By law, RANs must mature prior to the end of the fiscal year of issuance.
If additional external cash flow borrowings are required, the State has issued
revenue anticipation warrants ("RAWs"), which can mature in a subsequent fiscal
year.
Cash Management in Fiscal Year 2012-13
The State entered Fiscal Year 2012-13 in a stronger cash position
than it had in some prior years. Timely enactment of the 2012 Budget Act allowed
the State to carry out its regular cash management borrowing with RANs early in
the year, and without the need for Interim RANs for the first time in three
years. The State issued $10 million of RANs on August 23, 2012.
As in previous years, the Legislature enacted a cash management bill
which authorizes deferral of certain payments during Fiscal Year 2012-13,
including payments to K-12 schools, reimbursements to the federal government for
certain social service costs, certain local government social services,
transportation payments and Proposition 63 mental health payments (not to exceed
$1 billion in the aggregate at one time) and higher education. The applicable
deferrals were made in July and October 2012.
The State continued to benefit from $1.7 billion of additional
internal borrowable resources in the State Agency Investment Fund ("SAIF")
during the first part of the fiscal year. The deposits in the SAIF were returned
in late April 2013. The Legislature created a Voluntary Investment Program Fund,
which could provide additional short-term cash management borrowing resources,
but there are no current plans for use of this Fund.
Cash Management in Fiscal Year 2013-14
The State's cash management plan in Fiscal Year 2013-14 consists
primarily of internal borrowing from special funds and issuance of RANs in the
amount of $5.5 billion. In addition, pursuant to legislation enacted in the last
fiscal year, within Fiscal Year 2013-14 a payment of $250 million to the
California State University ("CSU") and a payment of $500 million to the
University of California are planned to be deferred. Such deferrals are at the
discretion of the Director of Finance and shall be repaid in May or June of
2014. The CSU has agreed that in lieu of a payment deferral it will deposit a
like amount into a fund in the State Treasury that can be borrowed by the
General Fund.
State fiscal officers constantly monitor the State's cash position
and if it appears that cash resources may become inadequate, they will consider
the use of other cash management techniques as described above, including
seeking additional legislation.
The Budget Process
The State's fiscal year begins on July 1 and ends on June 30 of the
following year. The State's General Fund Budget operates on a legal basis,
generally using a modified accrual system of accounting for its General Fund,
with revenues credited in the period in which they are measurable and available
and expenditures debited in the period in which the corresponding liabilities
are incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues for the ensuing fiscal year. Following the
submission of the Governor's Budget, the Legislature takes up the proposal. As
required by the Balanced Budget Amendment ("Proposition 58"), beginning with
fiscal year 2004-2005, the Legislature may not pass a budget bill in which
General Fund expenditures exceed estimated General Fund revenues and fund
balances at the time of the passage and as set forth in the budget bill.
Proposition 58 requires the adoption of a balanced budget and restricts future
borrowing to cover budget deficits.
Under the State Constitution, money may be drawn from the Treasury
only though an appropriation made by law. The primary source of annual
expenditure appropriations is the annual Budget Act as approved by the
Legislature and signed by the Governor. Pursuant to Proposition 25, enacted on
November 2, 2010, the Budget Act must be approved by a majority vote of each
House of the Legislature (prior to Proposition 25, a two-thirds majority vote
was required). The governor may reduce or eliminate specific line items in the
Budget Act or any other appropriations bill without vetoing the entire bill.
Such individual line-item vetoes are subject to override by a two-thirds
majority vote of each House of the Legislature.
Current Fiscal Year Budget
The 2013-14 Budget, including the 2013 Budget Act that was enacted
on June 27, 2013, provides a multi-year General Fund plan that is balanced. For
the current fiscal year, at the time of budget enactment, it projected a $1.1
billion reserve by year-end, and continues to pay down budgetary debt from past
years. For the first time in several years, corrective measures were not
necessary to avoid a year-end deficit in the fiscal year just ended. On
September 12, 2013, the Governor signed legislation appropriating an additional
$315 million during Fiscal Year 2013-14 to the Department of Corrections and
Rehabilitation in response to a court-ordered requirement to further reduce the
prison population.
General Fund revenues and transfers for Fiscal Year 2013-14 are
projected at $97.1 billion, a decrease of $1.1 billion or 1.1% compared with
revised estimates for Fiscal Year 2012-13. General Fund expenditures for Fiscal
Year 2013-14 are projected at $96.3 billion, an increase of $0.6 billion or 0.6%
compared with revised estimates for Fiscal Year 2012-13. It should be noted that
revenues, expenditures and reserve estimates are updated following the end of
the fiscal year; therefore, these estimates are subject to change.
The 2012 Budget Act
The 2012-13 Budget closed a projected budget gap of $15.7 billion
over the two fiscal years 2011-12 and 2012-13, and projected a $948 million
reserve by June 30, 2013, by enacting a total of $16.6 billion in solutions
(including a combination of expenditure reductions, additional revenues, and
other solutions). General Fund revenues and transfers for Fiscal Year 2012-13
were projected at $95.9 billion, an increase of $9.1 billion compared with
Fiscal Year 2011-12. General Fund expenditures for Fiscal Year 2012-13 were
projected at $91.3 billion, an increase of $4.3 billion compared to the prior
year. General Fund spending outside of Proposition 98 is projected to decline by
$1.5 billion, or 2.8%, excluding a required one-time repayment of $2.1 billion
the State borrowed from local governments in 2009. In approving the 2012 Budget
Act, the Governor exercised his line-item veto power to reduce General Fund
expenditures by about $129 million. The 2012 Budget Act also includes special
fund expenditures of $39.4 billion and bond fund expenditures of $11.7 billion.
The 2011 Budget Act
The 2011 Budget Act, enacted on June 30, 2011, projected that the
State would end Fiscal Year 2011-12 with a $543 million General Fund reserve.
General Fund revenues and transfers for Fiscal Year 2011-12 were projected at
$88.5 billion, a reduction of $6.3 billion compared with Fiscal Year 2010-11.
General Fund expenditures for Fiscal Year 2011-12 were projected at $85.9
billion - a reduction of $5.5 billion compared to the prior year. These amounts
compare to the following figures proposed in the 2011-12 Governor's Budget:
revenues and transfers of $89.7 billion, expenditures of $84.6 billion, and an
ending reserve of $955 million. In approving the 2011 Budget Act, the Governor
exercised his line-item veto power to reduce General Fund expenditures by about
$24 million, mostly in the Judicial Branch ($22.9 million related to parole
revocation workload). The 2011 Budget Act also includes special fund
expenditures of $34.2 billion and bond fund expenditures of $9.4 billion.
The estimated General Fund revenue reflected a combination of
factors, including expiration of temporary taxes and surcharges (which totaled
approximately $7.1 billion in Fiscal Year 2010-11) and transfer of about one
percent of the State sales tax rate to local governments to fund the realignment
described further below. Offsetting these reductions were improved revenue
estimates for the remaining State tax sources. Expenditures reflected increases
needed to offset the termination of federal stimulus funding (ARRA) which
supported about $4.2 billion of General Fund programs in Fiscal Year 2010-11.
Economic Overview
The State of California is by far the most populous state in the
nation, 50% larger than Texas, the second-ranked state, according to the 2010
U.S. Census. The State's 2012 population of about 37.8 million represented over
12% of the total United States population.
California's economy, the largest among the 50 states and most
diverse in the world, has major components in high technology, trade,
entertainment, agriculture, manufacturing, government, tourism, construction and
services. The relative proportion of the various components of the California
economy closely resembles the make-up of the national economy.
The California economy is experiencing a gradual and broadening
recovery. Continued growth in the high-technology sector, international trade,
and tourism are being supplemented by better residential construction and real
estate conditions. Fiscally strapped local governments remain a drag on the
recovery.
In 2012, per capita personal income in California averaged $46,477,
compared to $43,735 for the nation. The unemployment rate in 2012 was 10.5%,
compared to 8.1% for the nation. The trade, transportation and utilities sector
represented the largest component (18.9%) of California's non-farm workforce,
followed by federal, state and local government (16.5%), professional and
business services (15.5%), educational and health services (13.1%) and leisure
and hospitality (11.1%).
Litigation
The State is a party to numerous legal proceedings. Certain of these
proceedings have been identified by the State as having a potentially
significant fiscal impact upon the State's expenditures or its revenues.
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
Adviser considers to be undue risk. As a matter of fundamental policy, at
least 80% of the Portfolio's net assets will be so invested (except when the
Portfolio is in a temporary defensive position), although it is anticipated that
under normal circumstances substantially all of the Portfolio's assets will be
invested in such Arizona securities. As a matter of fundamental policy, the
Arizona Portfolio will invest at least 80% of its net assets in municipal
securities the interest on which is exempt from federal income tax.
The following is based on information obtained from the
Comprehensive Annual Financial Report of the State of Arizona for the fiscal
year ended June 30, 2012, as well as other State publications.
Economic Climate
Fueled by multiple consecutive years of substantial tax reductions,
Arizona's economy was fast-growing in the 1990s. Personal income taxes were
slashed by 31% across the board, and in 2001 the State's corporate income tax
was reduced to 6.9% from 7.9%. From 1993 through 1999, the strongest seven-year
period of job growth in Arizona history, almost 600,000 private sector jobs were
created. According to U.S. Census data, the population of Arizona grew by 40%
during the 1990s, second only to Nevada, and is projected to reach 11.17 million
by 2050 (a 118% increase from 5.13 million in 2000). Arizona is the second
fastest growing state in the United States, and from 1990 to 2006 its population
grew at a rate over three times that of the U.S. population. The continuing
population growth has been 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. However, Arizona's
population growth peaked at 3.6% in 2005 and 2006. Arizona's estimated
population as of December 31, 2012 was 6,482,505.
Arizona's main economic sectors include services, healthcare, trade,
and leisure/hospitality. During October 2013, the services sector (including
federal, state and local government services) employed approximately 875.4
million people (34.6% of the workforce); the healthcare sector employed
approximately 320.8 million people (12.7% of the workforce); the retail trade
sector employed approximately 301.6 million people (11.9% of the workforce), and
the leisure/hospitality sector employed approximately 274.9 million people
(10.9% of the workforce). Many of these jobs are directly related to tourism, an
industry that, according to a report prepared for the Arizona Office of Tourism,
produced $19.3 billion in direct spending in Arizona in 2012 and added $7.6
million to the State's gross domestic product.
In October 2013, total non-farm employment increased by 1.7% over
October 2012; the number of private sector jobs increased by 2.2%, while
government jobs decreased by -0.5%. Education and health services reported the
largest gain (3.0%); trade, transportation and utilities gained 1.9%; financial
activities gained 4.9%, the largest gain since June 2006; and professional and
business services gained 2.3%.
The seasonally adjusted unemployment rate in Arizona during the
second quarter of 2013 was 7.9% (0.4% above the national average), compared to
7.4% during the second quarter of 2012 and 9.5% during the second quarter of
2013.
Geographically, Arizona is the nation's sixth largest state (113,635
square miles). The State is divided into fifteen counties. Two of these
counties, Maricopa County (including Phoenix) and Pima County (including
Tucson), are more urban in nature and account for 75% of total population and
80% of total wage and salary employment in Arizona, based on 2008 estimates.
Per capita income levels in Arizona have traditionally lagged behind
the United States average. However, Arizona's increase in per capita personal
income was second in the nation in 1994 and led the nation in 1995. The
diversification of Arizona's economy, and its robust performance during the
1990s, 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. With per capita personal income of $35,979 in 2012, compared to
$42,693 nationwide, Arizona ranked 32nd nationwide (compared to 40th in 2011).
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, grant anticipation notes ("GANs") and lease purchase transactions
to finance capital projects. Each such project is individually rated based on
its specific creditworthiness.
GANs are an innovative financing mechanism secured by revenues
received from the Federal Highway Administration under a grant agreement and
certain other Federal-Aid revenues. The State issued GANs to help pay for the
costs of acquiring right-of-way for design and construction of certain
controlled-access highways within Maricopa County. Lease purchase transactions
are funded by certificates of participation ("COPs"). The State has used COPs
primarily to construct prisons and to purchase and construct other buildings for
State government operations. Additionally, the State has issued COPs to finance
new school facilities approved by voters under Proposition 301. As of June 30,
2012, there were $5.536 billion in revenue bonds, $335 million in GANs and
$3.424 billion in COPs outstanding.
Arizona's Constitution provides that the State may contract debts
not to exceed $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 6% of the taxable property in such county, city,
town, school district, or other municipal corporation without the assent of a
majority of the qualified electors thereof voting at an election provided by law
to be held for that purpose; provided, however, that (a) under no circumstances
may any county or school district of the State become indebted in an amount
exceeding 15% (or 30% in the case of a unified school district) of such taxable
property and (b) any incorporated city or town of the State with such assent may
be allowed to become indebted up to a 20% additional amount for (i) supplying
such city or town with water, artificial light, or sewers, when the works for
supplying such water, light, or sewers are or shall be owned and controlled by
the municipality, (ii) the acquisition and development by the incorporated city
or town of land or interests therein for open space preserves, parks,
playgrounds and recreational facilities, and (iii) the construction,
reconstruction, improvement or acquisition of streets, highways or bridges or
interests in land for rights-of-way for streets, highways or bridges.
Irrigation, power, electrical, agricultural improvement, drainage, flood control
and tax levying public improvement districts are, however, exempt from the
restrictions on debt set forth in Arizona's constitution and may issue
obligations for limited purposes, payable from a variety of revenue sources.
Arizona's local governmental entities are subject to certain other
limitations on their ability to assess taxes and levies which could affect their
ability to meet their financial obligations. Subject to certain exceptions, the
maximum amount of property taxes levied by any Arizona county, city, town or
community college district for its operations and maintenance expenditures
cannot exceed the amount levied in a preceding year by more than 2%. Certain
taxes are specifically exempt from this limit, including taxes levied for debt
service payments.
Arizona is required by law to maintain a balanced budget. To achieve
this objective, the State has, in the past, utilized a combination of spending
reductions and tax increases. For the 1990-91 budget, the Arizona Legislature
increased taxes by over $250 million, which led to a citizen's referendum
designed to repeal the tax increase until the voters could consider the measure
at a general election. After an unsuccessful court challenge, the tax increase
went into effect. In 1992, Arizona voters adopted Proposition 108, an initiative
and amendment to the State's Constitution that requires a two-thirds vote by the
Legislature and signature by the Governor for any net increase in State
revenues, including the imposition of a new tax, an increase in a tax rate or
rates and a reduction or elimination of a tax deduction. If the Governor vetoes
the measure, then the legislation will not become effective unless it is
approved by an affirmative vote of three-fourths of the members of each house of
the Legislature. This makes any future tax increase more difficult to achieve.
The conservative nature of Arizona's Legislature means that tax increases are
less likely. From 1992 through 1996, the State adopted substantial tax relief,
including the 20% individual income tax reduction described above. In 1996, the
Legislature reduced property taxes by $200 million, in part by repealing the
State tax levy of $.47 per $100 assessed valuation. Additional tax relief
initiatives were enacted in 1999 and 2001.
Arizona accounts for its revenues and expenditures within various
funds. The largest fund supporting the operation of State government is the
General Fund, which accounts for the majority of receipts from sales and income
taxes. The General Fund ended the June 30, 2012 fiscal year with a total fund
balance deficit of $79.7 million, compared to the previous year's total fund
balance deficit of $703.2 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 ended the June 30, 2012 fiscal year with net assets of
$10.0 million and generated $247.1 million of operating revenues during that
period, compared to $5.6 million and $551.8 million, respectively, in the June
30, 2011 fiscal year.
Litigation
The State has a variety of claims pending against it that arose
during the normal course of its activities. Management believes, based on advice
of legal counsel, that losses, if any, resulting from settlement of these claims
will not have a material effect on the financial position of the State.
MASSACHUSETTS PORTFOLIO
The Massachusetts Portfolio seeks the highest level of current
income exempt from both federal income tax and Commonwealth of Massachusetts
("Massachusetts" or the "Commonwealth") personal income tax that is available
without assuming what the Adviser considers to be undue risk. As a matter of
fundamental policy, at least 80% of the Portfolio's net assets will be so
invested (except when the Portfolio is in a temporary defensive position),
although it is anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Massachusetts securities. As a
matter of fundamental policy, the Massachusetts Portfolio will invest at least
80% of its net assets in municipal securities the interest on which is exempt
from federal income tax.
The following was obtained from an Official Statement, dated
September 18, 2013, relating to $800,000,000 General Obligation Revenue
Anticipation Notes, Series A, B and C, and The Commonwealth of Massachusetts
Information Statement dated September 9, 2013.
Economic Climate
Massachusetts is a densely populated 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 25 years, the next 25 years are expected to
bring about a continued change in the age distribution of the population. The
share of the 65 and over age group, and especially the 85 and over age group,
will continue to grow. 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, with the exception of the
recession of the early 1990s and a seventeen-month period between 2006 and 2007,
considerably lower unemployment rates in Massachusetts than in the United States
since 1980. In June 2013, the Massachusetts unemployment rate was 7.0%, 0.6%
below the national rate.
Average per capita personal income for Massachusetts residents was
$54,687 in 2012, as compared to the national average of $42,693. 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 49.5% of the
non-agricultural work force in 2011-2012, is the largest sector in the
Massachusetts economy. Government employment represents 13.5% of total
non-agricultural employment in Massachusetts. After significant declines in 2002
and 2003, total non-agricultural employment in Massachusetts increased 0.5% in
2005 and continued to increase every year through 2008. After a 0.6% increase in
2011, employment grew 2.0% in 2012, still 2.0% below the last peak in 2001. The
comparable growth rate for the nation in 2012 was up 1.7% from 2011 and up 1.4%
from 2001. The latest seasonally adjusted estimate (3.3 million for June 2013)
is about 65,400 below the peak month in 2001 (3.4 million in February 2001) and
about 15,300 more than the last peak in April 2008 (3.3 million). In 2004,
manufacturing employment declined 3.5% from 2003, a much smaller decline than
the annual declines in the previous two years (10.2% in 2002 and 7.0% in 2003).
After a steep decline of 9.5% in 2009, the decline in 2010 was 2.2%, followed
by a slight uptick of 0.2% in 2011, and another drop of 1.8% in 2012.
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. Legislation enacted in December 1989 imposes a limit on the
amount of outstanding "direct" bonds of the Commonwealth. The limit was set at
$6.8 billion in fiscal year 1991 and provided that the limit for each subsequent
fiscal year was to be 105% of the previous fiscal year's limit. As most recently
amended, the law sets a statutory limit on direct debt during fiscal 2014 of
approximately $18.82 billion.
The Commonwealth is authorized to issue three types of direct debt
- general obligation debt, special obligation debt and federal grant
anticipation debt.
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.
Fiscal 2012
The fiscal 2012 budget was enacted by the Legislature on July 1,
2011 and approved by the Governor on July 11, 2011. A $1.250 billion interim
budget for the first ten days of fiscal 2012 had been enacted by the Legislature
and approved by the Governor on June 27, 2011. Total spending in the final
fiscal 2012 budget approved by the Governor amounted to approximately $30.598
billion. The budget assumed tax revenues of $20.615 billion, reflecting the
fiscal 2012 consensus tax estimate of $20.525 billion, which was adjusted for
the impact of revenue initiatives enacted as part of the budget. The fiscal 2012
budget authorized a $200 million withdrawal from the Stabilization Fund, the use
of fiscal 2012 interest earnings on the Stabilization Fund and an additional
$103.7 million in savings achieved by suspending the statutorily required
deposit into the Stabilization Fund of 0.5% of total tax revenue. The fiscal
2012 budget projections assumed a transfer of $185 million from the
Stabilization Fund rather than the authorized $200 million. On that assumption
the Stabilization Fund was projected to have $884.9 million balance at the end
of fiscal 2012.
Fiscal 2012 ended on June 30, 2012, but, as is customary, the
Executive Office of Administration & Finance and the State Comptroller continue
to work to close out the fiscal year with supplemental funding requests. After
accounting for all supplemental appropriations and updated revenue and spending
projections, the Executive Office for Administration and Finance expects fiscal
2012 to end in balance without requiring any unbudgeted withdrawals from the
Stabilization Fund. In fact, this projection assumes a net deposit to the
Stabilization Fund in fiscal 2012 of $159.9 million, due to $375 million in
one-time tax settlements in excess of $10 million being deposited to the
Stabilization Fund. These deposits are partially offset by the budgeted $200
million withdrawal of Stabilization Fund reserves to support the operating
budget. After accounting for these changes, the Stabilization Fund is projected
to have a balance of $1.539 billion at the end of fiscal 2012.
Fiscal 2013
The fiscal 2013 budget was enacted by the legislature on June 28,
2012 and approved by the Governor on July 8, 2012. A $1.250 billion interim
budget for the first ten days of fiscal 2013 had been enacted by the Legislature
and approved by the Governor on June 26, 2012. Total spending in the fiscal 2013
budget approved by the Governor amounted to approximately $32.508 billion, after
accounting for $31.7 million in veto overrides. Spending contemplated by the
fiscal 2013 budget was approximately $1.225 billion, or 3.93%, greater than
fiscal 2012 estimated spending levels at the time of the signing of the budget.
The fiscal 2013 budget relied on $616 million in one-time resources
to support recurring spending, down from the fiscal 2012 assumption of $669
million. Among the one-time resources assumed as part of the fiscal 2013 budget
was a $350 million withdrawal from the Stabilization Fund, the use of fiscal
2013 interest earnings on the Stabilization Fund and an additional $110.1
million in savings achieved by suspending the statutorily required deposit into
the Stabilization Fund of 0.5% of total tax revenue.
On October 15, 2012, the Secretary for Administration and Finance
certified that projected operating revenues remained sufficient to support
projected expenses for fiscal 2013. He noted that while tax receipts, at the
time of the certification, were $95 million below budgeted estimates, it was
premature to conclude that tax revenues would end the year below the budgeted
estimate or to estimate the extent of any such shortfall that might occur. The
Secretary also noted, however, that there were a number of risks to tax revenues
meeting the budgeted estimate for the fiscal year, including
slower-than-projected economic growth, a potential automatic reduction in the
state's income tax rate and the potential failure of the federal government to
address the so-called "fiscal cliff." Accordingly, the Secretary announced the
immediate implementation of spending and hiring controls and launched
contingency planning measures.
On December 4, 2012, the Governor filed legislation containing
proposed solutions to the projected $540 million tax revenue shortfall,
including $225 million in spending reductions across executive branch agencies.
Fiscal 2014
The fiscal 2014 budget was enacted by the Legislature on July 1,
2013 and approved by the Governor on July 12, 2013 with certain line item
vetoes. The fiscal 2014 budget relies on $696 million in one-time resources to
support recurring spending, down from the fiscal 2013 assumption of $920
million. A $4.075 billion interim budget for the first 30 days of fiscal 2014
had been enacted by the Legislature and approved by the Governor on June 21,
2013. Total spending in the fiscal 2014 budget approved by the Governor amounts
to approximately $33.667 billion, after accounting for $435.4 million in vetoes
and accompanying fiscal 2014 legislation proposed by the Governor that included
$40.0 million in supplemental appropriations. The fiscal 2014 budget is
approximately $1.132 billion, or 3.5% greater than fiscal 2013 estimated
spending.
Litigation
There are pending in courts within the Commonwealth and in the
Supreme Court of the United States various suits in which the Commonwealth is a
party. In the opinion of the Attorney General, no litigation is pending or, to
her knowledge, threatened that is likely to result, either individually or in
the aggregate, in final judgments against the Commonwealth that would affect
materially its financial condition.
MICHIGAN PORTFOLIO
The Michigan Portfolio seeks the highest level of current income
exempt from both federal income tax and State of Michigan ("Michigan" or the
"State") personal income tax that is available without assuming what the Adviser
considers to be undue risk. As a matter of fundamental policy, at least 80% of
the Portfolio's net assets will be so invested (except when the Portfolio is in
a temporary defensive position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be invested in
such Michigan securities. As a matter of fundamental policy, the Michigan
Portfolio will invest at least 80% of its net assets in municipal securities the
interest on which is exempt from federal income tax.
The following is based on information obtained from an Official
Statement, dated November 6, 2013, relating to $30,000,000 State of Michigan
General Obligation Environmental Program Refunding Bonds, Series 2013A.
Economic Climate
In recent years, Michigan's economy has been diversifying, although
manufacturing is still an important component of the State's economy. In 2012,
total manufacturing employment averaged 536,900, compared to 509,700 in 2011.
Michigan's average unemployment rate in 2012 was 9.1%, down from 10.4% in 2011.
Legislation requires that the administration and legislative fiscal
agencies prepare two economic forecasts and revenue estimates each year. These
are presented to a Consensus Revenue Estimating Conference in January and May of
each year. In addition, any one of the three conference principals may call a
special revenue conference at any time during the year. The May 2013 conference
was held on May 15, 2013. The May 2013 forecast is summarized below.
The State's U.S. economic forecast projects the U.S. economy to grow
1.9% in 2013, followed by 2.7% growth in 2014 and 2.9% growth in 2015. Light
vehicle sales will rise to 15.3 million units in 2013 and then rise to 15.6
million units in 2014 and 15.9 million units in 2015.
The U.S. Consumer Price Index (CPI) is projected to increase 1.7% in
2013, 1.9% in 2014 and 0.2% in 2015. Ninety-day T-bill rates are expected to
average 0.1% in 2013 and 0.2% in 2014 and 2015.
Total Michigan wage and salary employment is projected to increase
1.3% in 2013 and 1.2% in 2014 and 2015. The State's unemployment rate is
projected to fall to 8.6% in 2013, 8.1% in 2014 and 7.7% in 2015.
Michigan personal income is expected to rise 2.5% in 2013, 4.0% in
2014 and 4.2% in 2015. Prices, as measured by the Detroit CPI, are forecast to
increase 1.7% in 2013, 1.6% in 2014 and 1.8% in 2015. Consequently, real
(inflation adjusted) State personal income is projected to increase 0.7% in 2013
before rising 2.2% in 2014 and 2015.
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. 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. Any excesses of less than one percent may be transferred into
Michigan's Counter Cyclical Budget and Economic Stabilization Fund ("BSF"),
Michigan's "Rainy Day Fund." Michigan may raise taxes in excess of the limit in
emergency situations when deemed necessary by the Governor and two-thirds of the
members of each house of the Legislature.
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%. The proportion has since been
recalculated and is now 48.97%. 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
1993-94 through 2011-2012.
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 2011-12 were $9,672.2 million and were projected to
be $9,799.1 million for Fiscal Year 2012-13.
Expenditures and other uses of funds for governmental operations in
Fiscal Year 2011-12 were $8,693.0 million, of which $1,229.8 million supported
K-12 and higher education and $3,655.3 million supported health services.
Expenditures and other uses of funds for governmental operations in Fiscal Year
2012-13 were projected to be $9,146.3 million, of which $1,561.5 million
supported K-12 and higher education and $3,816.4 million supported health
services.
The BSF was established in 1977 to serve as the State's "savings"
account. Calculated on an accrual basis, the unreserved ending balance of the
BSF was $2.2 million on September 30, 2008, $2.2 million on September 30, 2009,
$2.2 million on September 30, 2010. During fiscal year 2011, the BSF was
reclassified and accounted for as a subfund of the General Fund where its
committed balance was $2.2 million on September 30, 2011, and $365.1 million on
September 30, 3012. An additional $140.0 million was deposited into the BSF in
Fiscal Year 2012-13 and the enacted budget for Fiscal Year 2013-14 appropriates
$75.0 million into the BSF.
The Michigan Constitution limits Michigan general obligation debt to
(i) short-term debt for State operating purposes which must be repaid in the
same fiscal year in which it is issued and which cannot exceed 15% of the
undedicated revenues received by Michigan during the preceding fiscal year, (ii)
short-and long-term debt unlimited in amount for the purpose of making loans to
school districts and (iii) long-term debt for voter-approved purposes.
The amount of debt incurred by the State for the purpose of making
loans to school districts is recommended by the State Treasurer, who certifies
the amounts necessary for loans to school districts for the ensuing two calendar
years. The bonds may be issued in whatever amount is required without voter
approval. All other general obligation bonds issued by the State must be
approved as to amount, purpose and method of repayment by a two-thirds vote of
each house of the Legislature and by a majority vote of the public at a general
election. There is no limitation as to number or size of such general obligation
issues.
2011-12 Budget
The Governor's Fiscal Year 2011-12 Executive Budget was submitted to
the Legislature on February 17, 2011 and signed by the Governor on June 21,
2011. Revenues for Fiscal Year 2011-12 for the Executive Budget were estimated
at the January 14, 2011 Consensus Revenue Estimating Conference. These estimates
were revised at the regularly scheduled Consensus Revenue Estimating Conference
held on May 16, 2011. The legislature enacted a balanced budget on May 26, 2011.
Actual revenues for Fiscal Year 2011-12 will vary from the current estimates.
General Purpose revenue generated from enacted ongoing sources and
estimated at the Consensus Revenue Estimating Conference is estimated to be
$7,650.8 million. After factoring in revenue items not included in the revenue
estimates, including the impact of the recently enacted personal income tax and
business tax reforms, certain transfers, other revenue adjustments, and the
beginning balance, total available General Fund - General Purpose resources are
forecast to be $8,703.5 million.
Income tax collections will total an estimated $6,797.5 million
including $559 million in new revenue from the recently enacted changes. The
General Fund - General Purpose portion of net income tax collections will equal
an estimated $4,697.7 million for Fiscal Year 2011-12.
The Michigan business tax, which has been eliminated for most
businesses effective January 1, 2012, will generate an estimated $604.5 million
in fiscal year 2011-12. The Michigan business tax will be replaced by a
corporate income tax (effective January 1, 2012) and this new tax is expected to
generate $460.2 million in Fiscal Year 2011-12. All of the Michigan business tax
and corporate income tax revenue generated in Fiscal Year 2011-12 will go to the
General Fund.
2012-13 Budget
The Governor's Fiscal Year 2012-13 Executive Budget was submitted to
the Legislature on February 9, 2012 and signed by the Governor in June 2012.
Revenues for Fiscal Year 2012-13 for the Executive Budget were estimated at the
January 13, 2012 Consensus Revenue Estimating Conference, and these estimates
were revised at the May 16, 2012 conference. Actual revenues for Fiscal Year
2012-13 will vary from the current estimates.
General Purpose revenue generated from enacted ongoing sources and
estimated at the Consensus Revenue Estimating Conference is estimated to be
$8,969.9 million. After factoring in revenue items not included in the revenue
estimates, including certain transfers, tax changes enacted subsequent to the
revenue conference, other revenue adjustments, and the beginning balance, total
available General Fund - General Purpose resources are forecast to be $9,137.0
million.
Income tax collections will total an estimated $7,907.5 million,
including $1,249.5 million in new revenue from the recently enacted changes. The
General Fund - General Purpose portion of net income tax collections will equal
an estimated $5,576.4 million for Fiscal Year 2012-13.
The Michigan business tax, which was repealed for most businesses
effective January 1, 2012, will pay out more in refunds than will be collected
in revenue in Fiscal Year 2012-13 and, as a result, net collections are
estimated at a negative $552.4 million. The new corporate income tax is expected
to generate $838.9 million in Fiscal Year 2012-13. All of the loss in Michigan
business tax revenue in Fiscal Year 2012-13 will impact the General Fund, and
all of the revenue generated by the new corporate income tax will go to the
General Fund.
2013-14 Budget
The Governor's Fiscal Year 2013-14 Executive Budget was submitted to
the Legislature on February 7, 2013 and signed by the Governor in June 2013.
Revenues for Fiscal Year 2013-14 for the Executive Budget were initially
estimated at the January 11, 2013 Consensus Revenue Estimating Conference and
these estimates were revised at the May 15, 2013 conference. Actual revenues for
Fiscal Year 2013-14 will vary from the current estimates.
General Purpose revenue generated from enacted ongoing sources and
estimated at the Consensus Revenue Estimating Conference is estimated to be
$9,446.1 million. After factoring in revenue items not included in the revenue
estimates, including certain transfers, other revenue adjustments, and the
beginning balance, total available General Fund - General Purpose resources are
forecast to be $9,686.1 million.
Income tax collections will total an estimated $8,268.9 million. The
General Fund - General Purpose portion of net income tax collections will equal
an estimated $5,914.1 million for Fiscal Year 2013-14.
The Michigan business tax, which was repealed for most businesses
effective January 1, 2012, will once again pay out more in refunds than will be
collected in revenue in Fiscal Year 2013-14 and as a result, net collections are
estimated at a negative $550.0 million. The new corporate income tax is expected
to generate $957.0 million in Fiscal Year 2013-14.
Litigation
The State is party to various legal proceedings seeking damages or
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. 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 the Fund's balance. The ultimate dispositions and consequences of
all of these proceedings are not presently determinable.
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 Adviser
considers to be undue risk. As a matter of fundamental policy, at least 80% of
the Portfolio's net assets will be so invested (except when the Portfolio is in
a temporary defensive position), although it is anticipated that under normal
circumstances substantially all of the Portfolio's assets will be invested in
such Minnesota securities. As a matter of fundamental policy, the Minnesota
Portfolio will invest at least 80% of its net assets in municipal securities the
interest on which is exempt from federal income tax.
The following is based on information obtained from an Official
Statement, dated November 6, 2013, relating to $769,760,000 State of Minnesota
General Obligation State Bonds, consisting of $283,820,000 General Obligation
State Various Purpose Bonds, Series 2013D, $112,000,000 General Obligation State
Trunk Highway Bonds, Series 2013E, and $373,940,000 General Obligation State
Various Purpose Refunding Bonds, Series 2013F.
Economic Climate
Minnesota's population grew by 12.4% from 1990 to 2000, about the
same as the United States as a whole during that period. During the period
2000-2010 the population in Minnesota grew by 7.2%, compared to 9.5% nationally.
Minnesota population is currently forecast to grow at an annual compounded rate
of 0.79% through 2030, compared to 0.87% nationally.
In 2012, the structure of Minnesota's economy paralleled the
structure of the United States economy as a whole. State employment in fourteen
major sectors was distributed in approximately the same proportions as national
employment. In all sectors except one (education and health services), the share
of total State employment was within two percentage points of national
employment share.
In the period 1990 to 2000, overall employment growth in Minnesota
increased by 25.70%, exceeding the nation, whose growth increased by 20.45%.
Manufacturing has been a strong sector, with Minnesota employment growth
outperforming that of the United States in the 1990-2000 and 2000-2010 periods.
In the durable goods industries, the State's employment in 2012 was highly
concentrated in computers and electronics, fabricated metal products, and
machinery categories. Of particular importance is the computers and electronics
category in which 23.5% of the State's durable goods employment was concentrated
in 2012, as compared to 14.7% 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
2012, 39.9% of Minnesota's non-durable goods employment was concentrated in food
manufacturing, compared to 33.0% for the United States as a whole. Food
manufacturing relies heavily on renewable resources in the State. Over half of
the State's acreage is devoted to agricultural purposes. Printing and publishing
is also relatively more important in the State than in the United States as a
whole.
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, and logging dropped from 8.4 thousand employed in 1990 to 6.0 thousand
employed in 2010. However, Minnesota retains vast quantities of taconite as well
as copper, nickel, cobalt, and peat which may be utilized in the future.
Since 1990, State per capita personal income has usually been within
nine percentage points of national per capita personal income and has generally
remained above the national average. In 2012, Minnesota per capita personal
income was estimated to be 108.3% of its U.S. counterpart. In level of personal
income, Minnesota ranked seventh in 1990 and fourth in 2010 among 12 states in
the North Central Region. During the period 1990 to 2000, Minnesota ranked first
in growth of personal income and sixth during the period 2000 to 2010 among the
12 states in the North Central Region. Over the period 1990 to 2000, Minnesota
non-agricultural employment grew 25.7% while the entire North Central Region
grew 18.7%. During the 2000-2010 period, Minnesota non-agricultural employment
declined by 1.6%, while regional non-agricultural employment declined by 6.9%.
In 2008, Minnesota's unemployment rate averaged 5.4%, compared to
the national average of 5.8%. In 2009, Minnesota's unemployment rate averaged
8.0%, compared to the national average of 9.3%. In 2010, Minnesota's
unemployment rate averaged 7.4%, compared to the national average of 9.6%. In
2011, Minnesota's unemployment rate averaged 6.5%, compared with the national
average of 9.0%. In 2012, Minnesota's unemployment rate averaged 5.7%, compared
with the national average of 8.1%.
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 non-dedicated 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.
Prior to 1995, Minnesota law established a Budget Reserve and Cash
Flow Account in the 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 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 Legislature established the Cash Flow Account at $350 million
for the Current Biennium (July 1, 2013 - June 30, 2015).
The Budget Reserve Account was established in the 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 is governed by statute. The
Budget Reserve Account balance was set for the Current Biennium at $656 million.
Previous Biennium (2011-2013)
The February 2013 forecast updated General Fund revenues and
expenditures projected for the Previous Biennium. Forecast revenues were
expected to be $35.161 billion, up $217 million (0.6%) from November's estimates
after adjusting for 2013 legislative action to conform to federal law changes.
In the absence of the conformity changes, an additional $19 million in revenue
would have been reported for fiscal 2013. Forecast spending is expected to be
$35.159 billion, $63 million below previous projections. These changes, coupled
with a $15 million reduction in the projected Stadium Reserve, yielded a
forecast balance of $295 million.
After the November 2012 forecast, total General Fund reserves were
$944 million: $350 million in the Cash Flow Account and $644 million in the
Budget Reserve. Current law requires any forecast balance be first allocating in
restoring reserves to a statutory maximum of $653 million - $9 million was
allocated for this purpose. Additionally, a residual $4 million forecast balance
was added to the Budge Reserve after a required school shift repayment,
increasing the Budget Reserve to $656 million. The Biennium will end with $1.006
billion in General Fund reserves and an estimated $1 million in the Stadium
Reserve Account.
Current Biennium (2013-2015)
The November 2012 forecast provided the first official forecast for
the Current Biennium, as well as revenue and expenditure planning estimates for
the Next Biennium. In November 2012, a shortfall of just under $1.1 billion was
projected for the Current Biennium. Revisions in the February 2013 forecast
reduced the projected budget shortfall to $627 million. General Fund revenues
for the Current Biennium were forecasted to be $36.116 billion, $955 million
(2.7%) higher than estimates for the Previous Biennium. Projected current law
spending was expected to be $36.744 billion, $1.302 billion (3.7%) higher than
the Previous Biennium.
The reserve amounts for the Current Biennium are unchanged from
levels in the Previous Biennium. Total General Fund reserves were $1.006
billion: $350 million in the Cash Flow Account and $656 million in the Budget
Reserve. The projected reserve balance in the Stadium Reserve Account was zero.
Similar to the Previous Biennium, the forecast reduction in lawfully gambling
revenues for the Next Biennium reflects a slower than expected implementation of
electronic gaming options and reduced estimates for daily revenue per gaming
device. This has reduced amounts previously projected for the reserve.
Litigation
There are now pending against the State certain legal actions which
could, if determined adversely to the State, have a material adverse effect in
excess of $15 million on the State's expenditures and revenues during the
Current Biennium.
NEW JERSEY PORTFOLIO
The New Jersey Portfolio seeks the highest level of current income
exempt from both federal income tax and State of New Jersey ("New Jersey" or the
"State") personal income tax that is available without assuming what the Adviser
considers to be undue risk. As a matter of fundamental policy, at least 80% of
the Portfolio's net assets will be so invested (except when the Portfolio is in
a temporary defensive position). The Fund will invest at least 80% of its net
assets in securities the interest on which is exempt from New Jersey personal
income tax (i.e., New Jersey municipal securities). In addition, during periods
when the Adviser believes that New Jersey municipal securities that meet the
Portfolio's standards are not available, the Portfolio may invest a portion of
its assets in securities whose interest payments are only federally tax-exempt.
However, it is anticipated that under normal circumstances substantially all of
the Portfolio's total assets will be invested in New Jersey municipal
securities. As a matter of fundamental policy, the New Jersey Portfolio will
invest at least 80% of its net assets in municipal securities the interest on
which is exempt from federal income tax.
The following is based on information obtained from an Official
Statement, dated November 14, 2013, relating to $47,620,000 State Building
Revenue Bond Anticipation Notes, 2013 Series.
Economic Climate
New Jersey is the eleventh largest state in population and the fifth
smallest in land area. With an average of 1,196 persons per square mile, per the
2010 Census, it is the most densely populated of all the states. Between 1980
and 1990 the annual population growth rate was 0.49% and between 1990 and 2000
the growth rate accelerated to 0.85%. While this rate of growth compared
favorably with other Middle Atlantic States, it was less than the national rate
of increase. The growth rate decreased to 0.44% between 2000 and 2010.
Furthermore, New Jersey is located at the center of the megalopolis that extends
from Boston to Washington, and that 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 1978, casino gambling in Atlantic
City has been an important State tourist attraction.
According to the United States Commerce Department, Bureau of
Economic Analysis, New Jersey's real gross domestic product ("GDP") rose 1.3%
from 2011 to 2012, adjusted for inflation, compared to the national increase in
GDP of 2.5%. The State's increase in GDP ranked thirty-sixth among the 50
states.
The housing sector is recovering. Nearly 18,000 building permits
were granted in 2012, an increase of approximately 39% from 2011. The housing
activity is anticipated to continue, as reduced prices, low mortgage rates, and
higher rental costs have increased the attractiveness of homeownership. However,
the significant number of housing properties still in the judicial foreclosure
process may temper the recovery in the housing sector.
New Jersey payroll employment in June 2013 was 3.97 million, which
was 1.9% higher than in June 2012. The unemployment rate as of June 2013 was
8.7%, compared to 9.6% in June 2012. According to the Bureau of Economic
Analysis, the growth rate for New Jersey's personal income increased at a rate
of 1.2% over the four-quarter period ending in the first quarter of 2013 and was
lower than the 2.8% increase for the nation as a whole for the same period.
Certain Constitutional Provisions
The State Constitution provides, in part, that no money shall be
drawn from the State Treasury but for appropriations made by law and that no law
appropriating money for any State purpose shall be enacted if the appropriations
contained therein, together with all prior appropriations made for the same
fiscal period, shall exceed the total amount of the revenue on hand and
anticipated to be available to meet such appropriations during such fiscal
period, as certified by the Governor.
The State Constitution further provides, in part, that the State
Legislature shall not, in any manner, create in any fiscal year a debt or
liability of the State, which, together with any previous debts or liabilities,
shall exceed at any time one percent of the total appropriations for such year,
unless the same shall be authorized by a law for some single object or work
distinctly specified therein. No such law shall take effect until it shall have
been submitted to the people at a general election and approved by a majority of
the legally qualified voters voting thereon; provided however, no such voter
approval is required for any such law authorizing the creation of a debt for a
refinancing of all or any portion of the outstanding debts or liabilities of the
State, so long as such refinancing shall produce a debt service savings.
The Debt Limitation Clause was amended by the voters on November 4,
2008. The amendment provides that the State Legislature is prohibited from
enacting any law that creates or authorizes the creation of a debt or liability
of an autonomous State corporate entity, which debt or liability has a pledge of
an annual appropriation as the means to pay the principal of and interest on
such debt or liability, unless a law authorizing the creation of that debt or
liability for some single object or work distinctly specified therein shall have
been submitted to the people and approved by a majority of the legally qualified
voters of the State voting thereon at a general election.
The State's governmental funds reported June 30, 2012 combined
ending fund balances of $6.9 billion, a decrease of $1.4 billion from the prior
fiscal year.
State Indebtedness
During the fiscal year ended June 30, 2012, the State's long-term
debt obligations for governmental activities totaled $71.1 billion, a 9.3%
increase over the prior fiscal year. During Fiscal Year 2012, the State issued
$3.4 billion in bonds. New money issuances represented $1.3 billion, primarily
for transportation system improvements, while $2.1 billion represented five
refunding transactions that provided the State with $156.9 million in net
present value savings. During Fiscal Year 2012, the State paid $3.7 billion in
debt service on its long-term debt obligations. Non-bonded portions of the
State's long-term debt totaled $32.3 billion. This amount represents a $5.3
billion increase from the prior fiscal year and is mainly attributable to
increases in net pension obligations.
State Authorities
The State has entered into a number of leases and contracts, some of
which are described below, with several governmental authorities to secure the
financing of various State projects. Under the agreements, the State has agreed
to make payments equal to the debt services on, and other costs related to, the
obligations sold to finance the projects.
Legislation enacted in 1992 by the State authorizes the New Jersey
Sports and Exposition Authority ("NJSEA") to issue bonds for various purposes,
related to sports and entertainment facilities, payable from State
appropriations. Pursuant to this legislation, the NJSEA and the State Treasurer
have entered into an agreement (the "NJSEA State Contract") pursuant to which
the NJSEA will undertake certain projects, including the refunding of certain
outstanding bonds of the NJSEA, and the State Treasurer will credit to the NJSEA
amounts from the General Fund sufficient to pay debt service and other costs
related to the bonds. The payment of all amounts under the NJSEA State Contract
is subject to and dependent upon appropriations being made by the State
Legislature. As of June 30, 2013 there were approximately $486,830,000 aggregate
principal amount of NJSEA bonds outstanding, the debt service on which is
payable from amounts credited to the NJSEA 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, as amended in June 2012, the principal amount of the TTFA's
bonds, notes or other obligations which may be issued in any fiscal year
generally may not exceed $1,247,000,000 for the fiscal year beginning July 1,
2012, $849,200,000 for the fiscal year beginning July 1, 2013, $735,300,000 for
the fiscal year beginning July 1, 2014, and $626,800,000 for the fiscal year
beginning July 1, 2015, except that if the permitted amount of debt, or any
portion thereof, is not incurred in a fiscal year, it may be issued in a
subsequent fiscal year. 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, 2013,
there were approximately $13,429,810,716 aggregate principal amount of TTFA
issues outstanding. To the extent these notes are not paid by the State
Treasurer, 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 "NJEDA") has been authorized to issue bonds for various purposes,
including Economic Recovery Bonds, State Pension Funding Bonds and Market
Transition Facility Bonds. The Economic Recovery Bonds have been issued pursuant
to legislation enacted in 1992 to finance various economic development purposes.
Pursuant to that legislation, NJEDA and the State Treasurer have entered into an
agreement (the "ERF Contract") through which NJEDA 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, 2013, there were approximately $139,937,727 aggregate principal amount of
Economic Recovery Fund Bonds outstanding.
Legislation enacted in June 1997 authorizes the NJEDA to issue bonds
to pay a portion of the State's unfunded accrued pension liability for the
State's retirement systems (the "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. As of June 30, 2013, there were
approximately $2,378,939,686 aggregate principal amount of State Pension Funding
Bonds outstanding. The EDA and the State Treasurer have entered into an
agreement that 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 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, 2013
stood at an aggregate principal amount of $2,778,765,000. Of this total,
$21,135,000 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 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
$2,486,155,000 and $271,475,000, 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
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 Tort 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.
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 Adviser considers to be
undue risk. As a matter of fundamental policy, at least 80% of the Portfolio's
net assets will be so invested (except when the Portfolio is in a temporary
defensive position), although it is anticipated that under normal circumstances
substantially all of the Portfolio's assets will be invested in such Ohio
securities. As a matter of fundamental policy, the Ohio Portfolio will invest at
least 80% of its net assets in municipal securities the interest on which is
exempt from federal income tax. Shares of the Ohio Portfolio are available only
to Ohio residents.
The following is based on information obtained from an Official
Statement, dated November 13, 2013, relating to $85,000,000 State of Ohio
General Obligation Bonds.
Economic Climate
Ohio's 2010 decennial census population of 11,536,504 indicated a
1.6% population growth since 2000 and ranked Ohio seventh among the states in
population.
Although manufacturing (including auto-related manufacturing) in
Ohio remains an important part of the State's economy, the greatest growth in
Ohio's economy in recent years has been in the non-manufacturing sectors. In
2011, Ohio ranked eighth in the nation with approximately $490.3 billion in
gross state product and was fifth in manufacturing with an approximate value of
$81.4 billion and sixth in durable goods with an approximate value of $43.5
billion. As a percentage of Ohio's 2011 gross state product, manufacturing was
responsible for 16.6%, with 21.1% attributable to the goods-producing sectors
and 33.7% to business services sectors, including finance, insurance and real
estate. Ohio is the ninth largest exporting state, with 2011 merchandise exports
totaling $46.4 billion. The State's three leading export industries are
machinery, motor vehicles, and aircraft/spacecraft, which together accounted for
51.0% of the value of Ohio's merchandise exports in 2011.
Payroll employment in Ohio, in the diversifying employment base,
decreased in 2001 through 2003, increased in 2004 through 2006, decreased in
2007 through 2010 and increased in 2011 and 2012. Growth in recent years has
been concentrated among non-manufacturing industries, with manufacturing
employment tapering off since its 1969 peak. The non-manufacturing sector
employs approximately 87% of all non-agricultural payroll workers in Ohio.
With 13.6 million acres (of a total land area of 26.4 million acres)
in farmland and an estimated 73,700 individual farms, agriculture and related
agricultural sectors combined is an important segment of Ohio's economy. Ohio's
2011 crop production value of $6.5 billion represented 3.1% of total U.S. crop
production value. In 2011, Ohio's agricultural sector total output (consisting
of crops, livestock, poultry and dairy, and services and forestry) reached $11.0
billion with agricultural exports (primarily soybeans, feed grains and wheat,
and their related products) estimated at a value of $5.0 billion.
Financial Condition
Consistent with the constitutional provision that no appropriation
may be made for a period longer than two years, the State operates on the basis
of a fiscal biennium for its appropriations and expenditures. The Constitution
requires the 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 Revised Code provides that if the Governor ascertains that the
available revenue receipts and balances for the General Revenue Fund ("GRF") or
other funds for the then current fiscal year will in all probability be less
than the appropriations for that year, he shall issue such orders to State
agencies as will prevent their expenditures and incurred obligations from
exceeding those revenue receipts and balances. The Governor implemented this
directive in the 2008-2009 Biennium as had been done several times in prior
fiscal years.
Most State operations are financed through the GRF. Personal income
and sales-use taxes are the major GRF sources. The GRF fund balance for Fiscal
Year ended June 30, 2013 was $1.11 billion. The State also has maintained a
"rainy day" fund, the Budget Stabilization Fund ("BSF"), which under current law
and until used (as occurred in the 2008-09 Biennium) may carry a balance of up
to 5% of the GRF revenue for the preceding fiscal year. The BSF had a balance of
$1.48 billion at the end of Fiscal Year 2013.
At present the State itself does not levy ad valorem taxes on real
or tangible personal property. Those taxes are levied by political subdivisions
and local taxing districts. The Constitution has, since 1934, limited the amount
of the aggregate levy of ad valorem property taxes, without a vote of the
electors or municipal charter provision, to 1% of true value in money, and
statutes limit the amount of the aggregate levy without a vote or charter
provision to 10 mills per $1 of assessed valuation - commonly referred to in
the context of Ohio local government finance as the "ten-mill limitation".
The Constitution directs or restricts the use of certain revenues.
Highway fees and excises, including gasoline taxes, are limited in use to
highway-related purposes. Not less than 50% of the receipts from State income
taxes and estate taxes must be returned to the originating political
subdivisions and school districts. State lottery net profits are allocated to
elementary, secondary, vocational and special education program purposes
including, as provided for in the recently passed constitutional amendment,
application to debt service on obligations issued to finance capital facilities
for a system of common schools.
Under the State's current biennial appropriations Act, State
personal income tax rates, applying generally to federal adjusted gross income,
are being reduced 10% over a three-year period (8.5% in calendar year 2013, an
additional 0.5% in calendar year 2014, and an additional 1.0% in calendar year
2015). The indexing of the State income tax brackets and the personal exemption
are suspended for tax years 2013 through 2015 until these rate reductions are
fully implemented. That legislation also established a deduction for
pass-through entity business income of 50% of annual adjusted gross income up to
$250,000.
Municipalities and school districts may also levy certain income
taxes. Any municipal rate (applying generally to wages and salaries, and net
business income) over 1%, and any school district income tax (applying generally
to the State income tax base for individuals and estates), requires voter
approval. Most cities and villages levy a municipal income tax. The highest
municipal rate in 2011 was 3%. A school district income tax is currently
approved in 184 districts. Effective July 1, 2005, there may also be proposed
for voter approval municipal income taxes to be shared with school districts,
but these taxes may not be levied on non-residents.
Since 1970 the ratio of Ohio to U.S. aggregate personal income has
declined, with Ohio's ranking moving from fifth among the states in 1970 to
seventh in 1990, moving to between seventh and eighth in 1994 through 2003, and
eighth since 2004. This movement in significant measure reflects "catching up"
by several other states and a trend in Ohio toward more service sector
employment.
2012-2013 Biennium
Consistent with State law, the Governor's Executive Budget for the
2012-13 biennium was released in March 2011 and introduced in the General
Assembly. After extended hearings and review, the 2012-13 biennial
appropriations Act was passed by the General Assembly and signed (with selective
vetoes) by the Governor on June 30, 2011. To address the use of non-recurring
funding sources in the prior 2010-11 biennium, the Act included targeted
spending cuts across most State agencies and major new Medicaid reform and cost
containment measures. Reflecting certain tax law changes and a conservative
underlying economic forecast, that Act provided for total GRF biennial
appropriations of approximately $55.78 billion (an 11% increase from the 2010-11
GRF biennial expenditures) and total GRF biennial revenue of approximately
$56.07 billion (a 6% increase from 2010-11 GRF biennial revenues).
The State ended Fiscal year 2013 with GRF cash and fund balances of
$2.64 billion and $2.28 billion, respectively. Of that ending GRF fund balance
the State deposited $995.9 million into the BSF, increasing its balance to $1.48
billion, which is the statutorily designated 5% of Fiscal Year 2013 GRF
revenues.
Current Biennium
Consistent with State law, the Governor's Executive Budget for the
2014-15 biennium was released in February 2013 and introduced in the General
Assembly. After extended hearings and review, the 2014-15 biennial
appropriations Act was passed by the General Assembly and signed (with selective
vetoes) by the Governor on June 30, 2013. Reflecting a stated focus on job
creation and continued spending restraint, and based on a conservative economic
forecast, that Act provides for total GRF biennial appropriations of
approximately $62.0 billion (a 15.1% increase from the 2012-13 GRF biennial
expenditures) and total GRF biennial revenue (not including $963.2 million
carry-forward from the 2012-13 biennium) of approximately $61.1 billion (a 7.7%
increase from 2012-13 GRF biennial revenues).
The Executive Budget, the GRF appropriations Act and the separate
appropriations acts for the biennium included all necessary debt service and
lease rental payments related to State obligations.
OBM is currently projecting a positive GRF fund balance at the end
of Fiscal Year 2014. As noted above, the State is effectively precluded by its
Constitution from ending a Fiscal Year or a biennium in a "deficit" position.
Municipalities
Ohio has a mixture of urban and rural population, with approximately
three-quarters urban. There are 932 incorporated cities and villages
(municipalities with populations under 5,000) in the State. Five cities have
populations of over 100,000 and 16 over 50,000.
A 1979 act established procedures for identifying and assisting
those few cities and villages experiencing defined "fiscal emergencies". A
commission composed of State and local officials, and private sector members
experienced in business and finance appointed by the Governor, is to monitor the
fiscal affairs of a municipality facing substantial financial problems. That act
requires the municipality to develop, subject to approval and monitoring by its
commission, a financial plan to eliminate deficits and cure any defaults and
otherwise remedy fiscal emergency conditions, and to take other actions required
under its financial plan. It also provides enhanced protection for the
municipality's bonds and notes and, subject to the act's stated standards and
controls, permits the State to purchase limited amounts of the municipality's
short-term obligations (used only once, in 1980).
The fiscal emergency legislation was amended in 1996 to extend its
application to counties and townships. In 2011, the fiscal emergency legislation
was further amended to establish a "fiscal caution" category. There are
currently 21 local governments in fiscal emergency status, two in fiscal watch
status, and eight in fiscal caution status.
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.
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 Adviser considers to be undue risk. As a matter of
fundamental policy, at least 80% of the Portfolio's net assets will be so
invested (except when the Portfolio is in a temporary defensive position),
although it is anticipated that under normal circumstances substantially all of
the Portfolio's assets will be invested in such Pennsylvania securities. As a
matter of fundamental policy, the Pennsylvania Portfolio will invest at least
80% of its net assets in municipal securities the interest on which is exempt
from federal income tax. Shares of the Pennsylvania Portfolio are available only
to Pennsylvania residents.
The following was obtained from an Official Statement, dated October
22, 2013, relating to the issuance of $750,000,000 Commonwealth of Pennsylvania
General Obligation Bonds, Second Series of 2013.
Economic Climate
The Commonwealth of Pennsylvania is one of the most populous states,
ranking sixth behind California, Texas, New York, Florida and Illinois.
Pennsylvania is an established state with a diversified economy. Pennsylvania
had been historically identified as a heavy industrial state. That reputation
has changed over the last thirty years as the coal, steel and railroad
industries declined and the Commonwealth's business environment readjusted to
reflect a more diversified economic base. This economic readjustment was a
direct result of a long-term shift in jobs, investment, and workers away from
the northeast part of the nation. Currently, the major sources of growth in
Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions.
Pennsylvania's agricultural industries remain an important component
of the Commonwealth's economic structure, accounting for more than $5.4 billion
in crop and livestock products annually. Agribusiness and food related
industries reached record export sales, exceeding $1.3 billion in economic
activity in 2012. Over 63,000 farms form the backbone of the State's
agricultural economy. Farmland in Pennsylvania includes over four million acres
of harvested cropland and three million acres of pasture and farm woodlands -
nearly one-third of the Commonwealth's total land area. Agricultural diversity
in the Commonwealth is demonstrated by the fact that Pennsylvania ranks among
the top ten states in the production of a number of agricultural products.
Pennsylvania's extensive public and private forests provide a vast
source of material for the lumber, furniture and paper products industries. The
forestry and related industries account for 1.5% of employment with economic
activity of nearly $5 billion in domestic and international trade. Additionally,
the Commonwealth derives a good water supply from underground sources, abundant
rainfall and a large number of rivers, streams and lakes. Other natural
resources include major deposits of coal, petroleum and natural gas. Annually,
about 66 million tons of anthracite and bituminous coal, 1,310 billion cubic
feet of natural gas and about 2.2 million barrels of oil are extracted from
Pennsylvania. Pennsylvania is one of the top 10 producing states in the country
for aggregate/crushed stone. The value of non-coal mineral production in
Pennsylvania is approximately $1 billion annually.
Pennsylvania is a Mid-Atlantic state within easy reach of the
populous eastern seaboard and, as such, is a gateway to the Midwest. The
Commonwealth's strategic geographic position is enhanced by a comprehensive
transportation grid. The Commonwealth's water systems afford the unique feature
of triple port coverage, a deep water port at Philadelphia, a Great Lakes port
at Erie and an inland water port at Pittsburgh. Pennsylvania is easily
accessible for inter and intra state trade and commerce.
The Commonwealth is highly urbanized. Of the Commonwealth's 2012
mid-year population estimate, 79% resided in the 15 Metropolitan Statistical
Areas ("MSAs") of the Commonwealth. The largest MSAs in the Commonwealth are
those which include the cities of Philadelphia and Pittsburgh, which together
contain almost 44% of the State's total population. The population of
Pennsylvania, 12.7 million people in 2012, according to U.S. Bureau of the
Census, represents a population growing more slowly than the nation with a
higher portion than the nation or the region comprised of persons between 45 or
over.
Non-agricultural employment in Pennsylvania over the ten years
ending in 2012 increased at an annual rate of 0.02%. This rate compares to a
0.03% rate for the Mid-Atlantic Region and 0.03% for the nation during the same
period.
Non-manufacturing employment in Pennsylvania has increased in recent
years to 90.2% of total employment in 2012. Consequently, manufacturing
employment constitutes a diminished share of total employment within the
Commonwealth. Manufacturing, contributing 9.8% of 2012 non-agricultural
employment, has fallen behind both the services sector, the trade sector and the
government sector as the fourth largest single source of employment within the
Commonwealth. In 2012, the services sector accounted for 48.8% of all
non-agricultural employment, the trade sector accounted for 14.9%, and the
government sector accounted for 12.5%.
Within the manufacturing sector of Pennsylvania's economy, which now
accounts for about one-tenth of total non-agricultural employment in
Pennsylvania, the fabricated metals industries employed the largest number of
workers. Employment in the fabricated materials industries was 14.4% of
Pennsylvania manufacturing employment but only 1.4% of total Pennsylvania
non-agricultural employment in 2012.
Pennsylvania's annual average unemployment rate has been equivalent
to the national average throughout the 2000s. Slower economic growth caused the
unemployment rate in the Commonwealth to rise to 8.4% in 2012, compared to the
4.4% annual unemployment rate in 2007. As of August 2013, the most recent month
for which data are available, the seasonally adjusted unemployment rate for the
Commonwealth was 7.7%.
Personal income in the Commonwealth for 2012 was $556.7 billion, an
increase of 3.3% over the previous year. During the same period, national
personal income increased at a rate of 4.2%. Based on the 2012 personal income
estimates, per capita income for 2012 was at $43,616 in the Commonwealth
compared to per capita income in the United States of $42,693.
The Commonwealth's 2012 average hourly wage rate of $18.26 for
manufacturing and production workers compared to the national average of $19.77
for 2011.
Financial Condition
The Commonwealth utilizes the fund method of accounting. The General
Fund, the Commonwealth's largest 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. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("GAAP").
Financial Results for Recent Fiscal Years (Budgetary Basis)
Fiscal 2013. The subdued level of economic recovery from the most
recent national recession continued to impact the Commonwealth's revenue
receipts during Fiscal Year 2013. General Fund revenues of the Commonwealth were
above the certified estimate by $56.9 million or 0.2% during Fiscal Year 2013.
Final Commonwealth General Fund revenues for the fiscal year totaled $28,646.9
million. Total Fiscal Year 2013 revenues, net of reserves for tax refunds and
including public health and human services assessments, totaled $27,258.2
million. Total expenditures, net of appropriation lapses and including public
health and human services assessments and expenditures from additional sources,
were $27,717.3 million, resulting in a preliminary operating balance for Fiscal
Year 2014 of $320.347 million. However, after accounting for a positive Fiscal
Year 2013 beginning balance of $672.581 million, the Commonwealth ended Fiscal
Year 2013 with an unappropriated surplus balance of $540.918 million, which was
the third straight year of securing a significant year-end unappropriated
balance.
General Fund revenues increased $968.9 million, or 3.5%, during
Fiscal Year 2013 when measured on a year-over-year basis as compared to Fiscal
Year 2012. Tax revenue collections grew $918.6 million, or 3.4%, on a
year-over-year basis from Fiscal Year 2012 to Fiscal Year 2013 while non-tax
revenue collections increased $50.3 million, or 9.5%, primarily from an increase
in escheats from Fiscal Year 2012 to Fiscal Year 2013. Corporate tax receipts
were $226.0 million higher than Fiscal Year 2012 levels.
Fiscal 2012. The subdued level of the economic recovery from the
most recent national recession continued to affect the Commonwealth's revenue
receipts during Fiscal Year 2012. General Fund revenues of the Commonwealth were
below the certified estimate by $162.8 million or 0.6% during Fiscal Year 2012.
Final Commonwealth General Fund revenues for the fiscal year totaled $27,680.0
million. Total Fiscal Year 2012 revenues, net of reserves for tax refunds and
including public health and human services assessments, totaled $27,101.3
million. Total expenditures, net of appropriation lapses and including public
health and human services assessments and expenditures from additional sources,
were $27,534.4 million, resulting in a preliminary operating balance for Fiscal
Year 2012 of -$433.3 million. However, after accounting for a positive fiscal
year 2012 beginning balance of $1,072.8 million, the Commonwealth ended Fiscal
Year 2012 with an unappropriated surplus balance of $659.0 million, which was
the second largest (following the $1,072.8 million ending balance from Fiscal
Year 2011) such unappropriated ending balance since prior to the last recession.
General Fund revenues increased $180.8 million or 0.7% during Fiscal
Year 2012 when measured on a year-over-year basis as compared to Fiscal Year
2011. Tax revenue collections grew $687.8 million or 2.6% on a year-over-year
basis from Fiscal Year 2011 to Fiscal Year 2012 while non-tax revenue
collections declined $507.2 million or 48.9%, primarily from a reduction in
balance transfers from Fiscal Year 2011 to Fiscal Year 2012. Corporate tax
receipts were $91.2 million lower than Fiscal Year 2011 levels. Year-over-year
growth in corporate taxes was -3.1% during Fiscal Year 2012 as corporate net
income tax collections decreased 5.1% and capital stock and franchise tax
receipts increase 2.2% while collections from the gross receipts tax increased
8.6% on a year-over-year basis. Personal income taxes were $364.8 million above
Fiscal Year 2011 actual collection and the year-over-year growth in personal
income tax receipts was 3.5%. Personal income tax collections attributable to
withholding increased by 3.5% or $282.9 million during Fiscal Year 2012 and tax
collections from the non-withholding portion of the personal income tax
increased 3.4% or $81.9 million on a year-over-year basis.
Fiscal 2011. While unemployment rates remained at elevated levels
within Pennsylvania, the Commonwealth's revenues and receipts benefitted from
the moderate uptick in the national economy experienced during a portion of
fiscal year 2011. General Fund revenues of the Commonwealth were above the
certified estimate by $785.5 million or 2.9% during fiscal year 2011, the first
time since fiscal year 2008. Final Commonwealth General Fund revenues for the
fiscal year totaled $27,497.2 million. Total fiscal year 2011 revenues, net of
reserves for tax refunds and including public health and human services
assessments, totaled $26,983.8 million. Total expenditures, net of appropriation
lapses and including public health and human services assessments and
expenditures from additional sources (federal ARRA funding), were $25,616.8
million, resulting in a preliminary operating balance for fiscal year 2011 of
$1,367.0 million. However, after accounting for a negative fiscal year 2010
beginning balance of $294.2 million, the Commonwealth ended fiscal year 2011
with an unappropriated surplus balance of $1,072.8 million, which was the
largest such unappropriated ending balance since at least 1949, the earliest
period for which such records are available. Additionally, the $1,072.8 million
unappropriated ending balance during fiscal year 2011 was the largest such
balance as a percent of the Commonwealth budget since at least fiscal year 1975.
Revenues available to the Commonwealth, net of reserves for tax
refunds and transfers from the Budget Stabilization Reserve Fund but including
public health and human service assessments, decreased $184.8 million or 0.7%
during fiscal year 2011. Public health and human service assessments decreased
$8.8 million during fiscal year 2011 to $636.6 million.
General Fund revenues decreased $150.9 million or 0.5% during fiscal
year 2011 when measured on a year-over-year basis as compared to fiscal year
2010. However, this decline is due primarily to the use of the Budget
Stabilization Reserve Fund and other such one-time balance transfers utilized
during the 2010 fiscal year. Tax revenue collections grew $1,550.7 million or
6.2% on a year-over-year basis from fiscal year 2010 to fiscal year 2011 while
non-tax revenue collections declined $1,701.6 million or 62.1%. Corporate tax
receipts were $398.6 million above fiscal year 2010 levels.
Financial Results for Recent Fiscal Years (GAAP Basis)
Fiscal 2013. GAAP basis information for Fiscal Year 2013 is not
available at this time.
Fiscal 2012. At June 30, 2012, the General Fund reported a fund
balance of $1,260.0 million, a decrease of $361.0 million (22.3%) from the
reported $1,621.0 million balance at June 30, 2011. On a net basis, total assets
increased by $261.0 million to $10,839.0 million. Liabilities increased by $622
million to $9,840.0 million. The negative change in fund balance for the General
Fund for Fiscal Year 2012 of $361.0 million represents a decline from the net
amount of changes in the fund balance of $1,336.0 million, which occurred during
Fiscal Year 2011.
General Fund tax revenues increased overall by $693 million (2.68%)
during the Fiscal Year ended June 30, 2012. This overall increase is
attributable to all tax types except the Corporation taxes and Cigarette taxes,
which decreased by $154 million and $23 million when compared to the Fiscal Year
ended June 30, 2011.
Total General Fund expenditures decreased by 2.9% during the Fiscal
Year ended June 30, 2012, by nearly $1.5 billion.
Fiscal 2011. The General Fund balance at June 30, 2011, was $1,503.5
million, a $157.9 million (9.5%) decrease from the June 30, 2010 General Fund
balance. Over the five fiscal years 2007 through 2011, revenues and other
sources averaged an annual 1.9% increase. Expenditures and other uses during the
same period averaged a 2.0% annual increase.
Overall, total revenues decreased by $770 million during the fiscal
year ended June 30, 2011; this represents a 13% decrease from the prior fiscal
year. The most significant factor was an $859 million decrease in
intergovernmental revenues, where Fiscal Year 2011 payments received from the
Pennsylvania Turnpike Commission (PTC) under Act 44 of 2007 decreased by $300
million. Federal revenues (and transportation expenditures) decreased by $191
million due to Fiscal Year 2011 elimination of previously reported Federal
pass-through grant amounts to political subdivisions. In addition, Federal
revenues (and transportation expenditures) decreased by the return of $176
million in Federal revenues received on projects that did not result in
construction and were subsequently converted to state-only projects during
Fiscal Year 2011. Partially offsetting the intergovernmental revenues decrease
were increases in tax revenues and licenses and fees.
Overall, total expenditures decreased by $477 million during the
fiscal year ended June 30, 2011; this represents a 9% decrease from the prior
fiscal year. The combination of year-over-year changes in capital outlay ($46
million increase) and transportation ($533 million decrease) expenditures
accounted for nearly all of the decrease in expenditures.
Fiscal 2014 Budget
The enacted Fiscal Year 2014 budget provides appropriations and
executive authorizations, net of lapses and other reductions, totaling
$28,375.869 million of Commonwealth funds against estimated revenues, net of tax
refunds and including public health and human services assessments. The $534.969
million negative difference between estimated revenues and budgeted
appropriations is to be mitigated by the drawdown of the $540.918 million ending
balance from Fiscal Year 2013 and an estimated modest lapse of $1.5 million from
prior-year legislative lapses. General Fund appropriations are anticipated to
increase by $658.576 million, or 2.4% on a year-over-year basis, during Fiscal
Year 2014.
General Fund revenues from all sources are estimated to increase
$443.954 million, or 1.6%, on a year-over-year basis during Fiscal Year 2014
after factoring in planned tax refunds expenditures. The enacted budget does not
include any tax increases, but does implement several tax changes intended to
catalyze positive economic growth and therefore increased state revenue proposed
in the Governor's Executive Budget.
The current Fiscal Year 2014 General Fund budget aims to keep
spending in line with available resources without raising taxes in Pennsylvania.
Administrative spending of the Commonwealth was again reduced and included the
proposed elimination of more than 900 positions. There are approximately 3,000
fewer Commonwealth employees than there were three years ago.
City of Philadelphia
Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,526,006 according to the 2010 U.S. Census.
The Pennsylvania Intergovernmental Cooperation Authority ("PICA")
was created by Commonwealth legislation in 1991 to assist Philadelphia 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 September 17, 2013.
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, 1995. Its ability to
refund existing outstanding debt is unrestricted. PICA had $409.3 million in
special tax revenue bonds outstanding as of June 30, 2013. Neither the taxing
power nor the credit of the Commonwealth is pledged to pay debt service on
PICA's bonds.
Commonwealth Debt
The Constitution permits the Commonwealth to incur 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. Debt service on Commonwealth
general obligation debt is paid from appropriations out of the General Fund
except for highway purposes, which is paid from Motor Vehicle Fund
appropriations.
Net outstanding general obligation debt totaled $10,860.3 million at
June 30, 2013, a net increase of $132.8 million from June 30, 2012. Over the
10-year period ending June 30, 2013, total outstanding general obligation debt
increased at an annual rate of 4.8%. Within the most recent 5-year period,
outstanding general obligation debt has increased at an annual rate of 5.8%.
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
In 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 has held that
this limitation is constitutional. Approximately 3,150 suits against the
Commonwealth remain open. Tort claim payments for the departments and agencies,
other than the Department of Transportation, are paid from departmental and
agency operating and program appropriations. Tort claim payments for the
Department of Transportation are paid from an appropriation from the Motor
License Fund. The Motor License Fund tort claim appropriation for Fiscal Year
2013 is $20.0 million.
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 Adviser considers to be undue risk. As a matter of fundamental policy at
least 80% of the Portfolio's net 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% of its net assets in municipal
securities the interest on which is exempt from federal income tax. Shares of
the Virginia Portfolio are available only to Virginia residents.
The following is based on information obtained from an Official
Statement, dated November 5, 2013, relating to Virginia Public School Authority
$45,075,000 School Financing Bonds (1997 Resolution) Series 2013B.
Economic Climate
The Commonwealth's 2012 estimated population of 8,185,867 was 2.6%
of the United States' total. Among the 50 states, it ranked twelfth in
population. With 39,594 square miles of land area, its 2012 population density
was 206.7 persons per square mile, compared with 88.7 persons per square mile
for the United States.
The Commonwealth is divided into five distinct regions -- a coastal
plain cut into peninsulas by four large tidal rivers, a piedmont plateau of
rolling farms and woodlands, the Blue Ridge Mountains, the fertile Shenandoah
Valley and the Appalachian plateau extending over the southwest corner of the
Commonwealth. Approximately one-third of all land in Virginia is used for
farming and other agricultural services. This variety of terrain, the location
of the Commonwealth on the Atlantic Seaboard at the southern extremity of the
northeast population corridor and its close proximity to the nation's capital
have had a significant influence on the development of the present economic
structure of the Commonwealth.
The largest metropolitan area is the Northern Virginia portion of
the Washington, D.C. metropolitan area. This is the fastest growing metropolitan
area in the Commonwealth and had a 2012 population of 5,860,342 (including
Washington's and Maryland's population of 1,876,614). 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.
According to the U.S. Department of Commerce, Virginians received
over $385 billion in personal income in 2012. In 2012, Virginia had per capita
income of $47,082, ranking seventh among the states and greater than the
national average of $42,693. From 2003 to 2012, the Commonwealth's 3.4% average
annual rate of growth in per capita income was more than the national growth
rate of 3.2%. 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.
Employment in the Information Services sector decreased by 17.8%
from 2008 to 2012, which may in part be due to intense telecommunications
competition. The Professional and Business Services sector, however, gained 3.2%
over the same period. From 2008 to 2012, employment in the Financial Activities
sector decreased by 0.3%. The Private Education and Health sector employment
level increased by 8.8% from 2008 to 2012. The Leisure and Hospitality sector
employment level increased by 2.3% over the same period.
The Retail Trade sector decreased by 0.9% from 2008 to 2012. The
Wholesale Trade sector decreased by 15.4% from 2007 to 2012.
With Northern Virginia and Hampton Roads, the home of the nation's
largest concentration of military installations, the federal government has a
greater impact on the Commonwealth relative to its size than all states except
Alaska and Hawaii. In 2012, federal government civilian employment in the
Commonwealth averaged approximately 174,100, for an 8.9% gain between 2008 and
2012.
State government employment averaged 158,100 in the Commonwealth for
2012, for a 2.7% increase between 2008 and 2012. Approximately 50% of state
government employment is related to general government administration and 50% is
related to higher education.
Manufacturing employment dropped 12.3% between 2008 and 2012.
The Commonwealth typically has one of the lowest unemployment rates
in the nation, due in large part to the diversity of the Commonwealth's economy.
During 2012, an average of 5.9% of the Commonwealth's population was unemployed,
compared to 8.1% for the nation.
Budgetary Process
The Governor is required by statute to present a bill detailing his
budget (the "Budget Bill") for the next biennium and a narrative summary of the
bill to the General Assembly by December 20th in the year immediately prior to
each even-year session. Under constitutional provisions, the Governor retains
the right, in his review of legislative action on the Budget Bill, to suggest
alterations to or to veto appropriations made by the General Assembly. After
enactment, the Budget Bill becomes law (the "Appropriation Act").
In the odd-year sessions of the General Assembly, amendments are
considered to the Appropriation Act enacted in the previous year. The Governor
submits a Budget Bill by December 20th that includes his proposed amendments.
The Appropriation Act enacted in the odd-year session is effective upon passage
by the General Assembly, whereas the regular biennial Appropriation Act is
effective July 1, the beginning of the biennium.
The 2010-12 Appropriation Act
On December 18, 2009, then Governor Timothy M. Kaine presented the
Budget Bill for the 2010-2012 biennium (House Bill 30/Senate Bill 30) (the "2010
Budget Bill").
The 2010 General Assembly convened on January 13, 2010 and on
January 16, 2010 Robert F. McDonnell was sworn in as the 71st Governor of
Virginia. With the Commonwealth facing a budget shortfall of $4.2 billion, House
Bill 30/Senate Bill 30 as introduced by former Governor Kaine was debated and
amended.
On March 14, 2010 the General Assembly adjourned. House Bill
30/Senate Bill 30 as approved by the General Assembly was transmitted to the
Governor for review. Highlights of the General Assembly's spending action for
the 2010-2012 biennium included: depositing $50 million into the Revenue
Stabilization Fund in Fiscal Year 2012; providing $29.5 million to unfreeze the
Local Composite Index (LCI) in Fiscal Year 2011; providing $174.1 over the
biennium to those school divisions whose LCI is increasing; restoring $115.6
million to school divisions for Virginia Public School Authority technology
grants; restoring $36.1 million in Medicaid waiver provider rates over the
biennium; and providing $43.8 million towards Governor McDonnell's economic
development promotion package.
Budget reductions over the biennium included: $250 million over the
biennium in targeted K-12; $360.2 million over the biennium in health and human
resources mitigated by the receipt of enhanced Federal Medical Assistance
Percentage (FMAP) funds; and $120 million in across the board reductions in aid
to localities.
On April 13, 2010, Governor McDonnell offered 96 amendments to House
Bill 30/Senate Bill 30 to be considered at the reconvened session of the General
Assembly on April 21, 2010. These amendments addressed three overarching themes:
economic development and job creation; the provision of critical services; and
technical amendments. The spending amendments totaled $42.1 million and were
offset by amendments that would result in $51.0 million in savings or additional
revenue over the biennium.
The 2010 General Assembly reconvened on April 21, 2010 and on May
17, 2010, the 2010 Budget Bill was approved by Governor McDonnell and enacted as
the 2010-12 Appropriation Act.
The 2011 Amendments to the 2010-2012 Appropriation Act
On December 17, 2010, Governor McDonnell presented his proposed
amendments to Chapter 874, the 2010 Virginia Acts of Assembly (the "2011 Budget
Bill") affecting the remainder of the 2010-2012 biennium. The Governor addressed
unfunded liabilities and core services focusing on four top priorities:
Government Reform, Economic Development, Transportation, and Higher Education.
The revised revenue forecast added $133.9 million in total net
revenue for Fiscal Year 2011 and $149.1 million in Fiscal Year 2012, for a total
of $283 million over the biennium. Although the revised revenue forecast went up
slightly, the Governor called for $191.6 million in cuts, savings, and
reprioritization across state government. Utilizing the work of the Government
Reform and Restructuring Commission, the Governor identified savings from
multiple sources, including: $24 million in reduced interest on bonds for
college buildings; $1.4 million by reducing consultants in the tax department;
and additional savings from reducing administrative expenses in the offices of
the Governor, Lieutenant Governor, and Attorney General.
The 2011 Budget Bill included the following initiatives: $25 million
for a technology and research fund to leverage private and federal research
dollars to develop commercialized products resulting from research; $3 million
to support non-credit courses in the Virginia Community College System to
strengthen workforce development efforts; and amendments to seek new money to
recapitalize the Virginia Small Business Financing Authority, enhance tourism
and marketing activities, and revitalize and redevelop rural and urban areas.
The 2011 Budget Bill was considered by the 2011 General Assembly,
which convened on January 12, 2011, and adjourned on February 26, 2011. The 2011
Budget Bill, as amended by the General Assembly, was submitted to the Governor
for his approval. The Governor returned the amended bill to the General Assembly
with 86 amendments for consideration at its one-day reconvened session held
April 6, 2011. The General Assembly upheld all but 20 of the Governor's
amendments. On May 2, 2011, the Governor vetoed one item and signed the bill.
The 2011 Budget Bill became law on May 2, 2011, as Chapter 890 of the 2011
Virginia Acts of Assembly (the "2011 Appropriation Act").
The 2012-14 Appropriation Act
On December 19, 2011. Governor McDonnell presented the Budget Bill
for the 2012-14 biennium that began July 1, 2012. The proposed 2012 Budget Bill
was considered by the 2012 Session of the Virginia General Assembly, which
convened on January 11, 2012. The General Assembly adjourned on March 10, 2012,
without adopting a biennial budget and immediately convened in a special session
to consider the reintroduced 2012 Budget Bill. On April 18, 2012, the General
Assembly approved the 2012 Budget Bill and sent it to the Governor for
signature. On May 4, 2012, the Governor offered 99 amendments, the most
significant of which addressed two overarching themes: job creation and K-12
education. Other amendments were technical in nature.
The General Assembly reconvened on May 14, 2012 and rejected 24 of
the Governor's proposed amendments. On June 11, 2012, Governor McDonnell vetoed
one item, ruled a second item unconstitutional, and signed the 2012 Budget Bill
into law.
The 2012-14 Appropriation Act became effective July 1, 2012, and
honors the priorities Governor McDonnell set in the introduced budget. It
prioritizes spending on the core functions of government; reduces the unfunded
liabilities in the Virginia Retirement System; provides $33.7 million in new
funding for economic development and private sector job creation; furnishes $30
million in Fiscal Year 2013 in new mental health funding; and directs $880.9
million in new funding to K-12 and higher educations systems. The 2012-14
Appropriation Act also provides additional deposits into the Revenue
Stabilization Fund of $132.7 million in 2013 and $166.4 million as a preliminary
appropriation for 2014.
2013 Amendments to the 2012-14 Appropriation Act
On December 17, 2012, Governor McDonnell presented his proposed
amendments to the 2012-14 Appropriation Act. In these amendments, the Governor
addressed increased liquidity to guard against future economic uncertainty and
the potential impact of federal spending reductions; increased support for
instructional spending in public education; continued investments in higher
education; improvements in funding availability for transportation; and
improvements in support of localities.
The Governor called for spending reductions through a combination of
targeted savings, reduction plans, and other appropriation reductions. The
Governor asked agencies to submit reduction plans equating to 4% of their
general fund budgets. These plans produced a total of $58.8 million in savings.
In addition, targeted reductions in Medicaid and Direct Aid to Public Education
totaled $33.9 million.
The 2013 amendments to the 2012 Appropriation Act became effective
May 3, 2013.
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, any ultimate liability
resulting from these suits is not expected to have a material adverse effect on
the financial condition of the Commonwealth.
Additional Investment Policies and Practices
The following information about the Portfolios' investment policies
and practices supplements the information set forth in the Prospectus.
General. Municipal securities include municipal bonds as well as
short-term (i.e., maturing in under one year to as much as three years)
municipal notes, demand notes and tax-exempt commercial paper. In the event a
Portfolio invests in demand notes, the Adviser will continually monitor the
ability of the obligor under such notes to meet its obligations. Typically,
municipal bonds are issued to obtain funds used to construct a wide range of
public facilities, such as schools, hospitals, housing, mass transportation,
airports, highways and bridges. The funds may also be used for general operating
expenses, refunding of outstanding obligations and loans to other public
institutions and facilities.
Municipal bonds have two principal classifications: general
obligation bonds and revenue or special obligation bonds. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue or special obligation bonds
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source but not from general tax and other unrestricted
revenues of the issuer. The term "issuer" means the agency, authority,
instrumentality or other political subdivision whose assets and revenues are
available for the payment of principal of and interest on the bonds. Certain
types of private activity bonds are also considered municipal bonds if the
interest thereon is exempt from federal income tax.
Private activity bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The payment of the principal and interest on such private activity
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
Each Portfolio may invest a portion of its assets in municipal
securities that pay interest at a coupon rate equal to a base rate plus
additional interest for a certain period of time if short-term interest rates
rise above a predetermined level or "cap." Although the specific terms of these
municipal securities may differ, the amount of any additional interest payment
typically is calculated pursuant to a formula based upon an applicable
short-term interest rate index multiplied by a designated factor. The additional
interest component of the coupon rate of these municipal securities generally
expires before the maturity of the underlying instrument. These municipal
securities may also contain provisions that provide for conversion at the option
of the issuer to constant interest rates in addition to standard call features.
The Portfolios may invest in zero-coupon municipal 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 municipal securities are
generally more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities having similar maturities and credit quality that do
pay periodic interest.
Each Portfolio may also invest in municipal securities, the interest
rate on which has been divided into two different and variable components, which
together result in a fixed interest rate. Typically, the first of the components
(the "Auction Component") pays an interest rate that is reset periodically
through an auction process, whereas the second of the components (the "Residual
Component") pays a current residual interest rate based on the difference
between the total interest paid by the issuer on the municipal securities and
the auction rate paid on the Auction Component. A Portfolio may purchase both
Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the extent of the
increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate municipal security having similar credit quality, redemption
provisions and maturity.
Municipal notes in which a Portfolio may invest include demand
notes, which are tax-exempt obligations that have stated maturities in excess of
one year, but permit the holder to sell back the security (at par) to the issuer
within 1 to 7 days notice. The payment of principal and interest by the issuer
of these obligations will ordinarily be guaranteed by letters of credit offered
by banks. The interest rate on a demand note may be based upon a known lending
rate, such as a bank's prime rate, and may be adjusted when such rate changes,
or the interest rate on a demand note may be a market rate that is adjusted at
specified intervals.
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.
Each Portfolio (other than the High Income Portfolio) will invest at
least 75% of its total assets in municipal securities rated at the time of
purchase Baa or higher (including Baa1, Baa2 and Baa3) by Moody's Investor
Service, Inc. ("Moody's") or BBB or higher (including BBB+ and BBB-) by Standard
& Poor's Ratings Services ("S&P") or Fitch Ratings ("Fitch") or, if unrated,
determined by the Adviser to be of comparable quality. For additional
information on securities ratings, please see Appendix A.
There are, of course, variations in the terms of, and the security
underlying, municipal securities, both within a particular rating classification
and between such classifications, depending on many factors. The ratings of
Moody's, S&P and Fitch represent their opinions of the quality of the municipal
securities rated by them. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and rating may have different yields, while the
municipal securities of the same maturity and coupon, but with different
ratings, may have the same yield. The Adviser appraises independently the
fundamental quality of the securities included in the Portfolios' portfolios.
Yields on municipal securities are dependent on a variety of
factors, including the general conditions of the municipal securities market,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. An increase in interest rates generally will reduce the market
value of portfolio investments, and a decline in interest rates generally will
increase the value of portfolio investments. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. Under normal
circumstances the average weighted maturity of the securities in each Portfolio
will range between 10 and 30 years. However, no Portfolio has any restrictions
on the maturity of municipal securities in which it may invest. Since the
Portfolios' objective is to provide high current income, they will emphasize
income rather than stability of net asset values ("NAVs"), 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
Portfolios invest 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 ("SEC"), 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, its rating may be reduced below the minimum required for purchase by such
Portfolio or it may default. These events do not require sales of such
securities by the Portfolio, but the Adviser will consider such event in its
determination of whether the Portfolio should continue to hold the security. To
the extent that the ratings given by Moody's, S&P or Fitch may change as a
result of changes in such organizations or their rating systems, the Adviser
will attempt to use such changed ratings in a manner consistent with a
Portfolio's quality criteria as described in the Prospectus.
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.
Proposals have been considered by Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
municipal securities. If such a proposal were enacted, the availability of
municipal securities for investment by a Portfolio and the NAV and yield of the
Portfolio would be affected. In addition, the Adviser would likely need to
reevaluate the Portfolios' investment objectives and policies.
Asset-Backed Securities, Mortgage-Related Securities and Structured Securities
Each Portfolio may also invest in (i) asset-backed securities, which
are securities issued by special purpose entities whose primary assets consist
of, for the purposes of a Portfolio's investment, a pool of municipal
securities, or (ii) partnership and grantor trust-type derivative securities,
whose ownership allows the purchaser to receive principal and interest payments
on underlying municipal securities. The securities may be in the form of a
beneficial interest in a special purpose trust, limited partnership interest, or
other debt securities issued by a special purpose corporation. Although the
securities may have some form of credit or liquidity enhancement, payments on
the securities depend predominately upon the municipal securities held by the
issuer. There are many types of these securities, including securities in which
the tax-exempt interest rate is determined by an index, a swap agreement, or
some other formula, for example, the interest rate payable on the security may
adjust either at pre-designated periodic intervals or whenever there is a change
in the market rate to which the security's interest rate is tied. Other features
may include the right of the Portfolio to tender the security prior to its
stated maturity. A Portfolio will not purchase an asset-backed or derivatives
security unless it has opinion of counsel in connection with the purchase that
interest earned by the Portfolio from the securities is exempt from, as
applicable, Federal and state income taxes.
The Portfolios may invest in mortgage-related securities, which are
typically securities representing interests in pools of mortgage loans made by
lenders such as savings and loan associations, mortgage bankers and commercial
banks, and which are assembled for sale to investors (such as the Portfolio) by
governmental, government-related or private organizations. Private organizations
include commercial banks, savings associations, mortgage companies, investment
banking firms, finance companies, special purpose finance entities (called
special purpose vehicles or SPVs) and other entities that acquire and package
loans for resale as mortgage-related securities. Specifically, these securities
may include pass-through mortgage-related securities, collateralized mortgage
obligations ("CMOs"), stripped mortgage-backed securities ("SMRSs"), commercial
mortgage-backed securities, "to be announced" ("TBA") mortgage-backed
securities, mortgage dollar rolls, collateralized obligations and other
securities that directly or indirectly represent a participation in or are
secured by and payable from mortgage loans on real property and other assets.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment consisting of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs that may be incurred. Some mortgage-related
securities, such as securities issued by the Government National Mortgage
Association ("GNMA"), are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, regardless of whether or not the mortgagor
actually makes the payment.
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions. As
prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions. The assumed average life of pools of mortgages having terms of less
than 30 years, is less than 12 years, but typically not less than 5 years.
Yields on pass-through securities are typically quoted by investment dealers and
vendors based on the maturity of the underlying instruments and the associated
average life assumption. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Historically, actual average life has been consistent
with the 12-year assumption referred to above. Actual prepayment experience may
cause the yield to differ from the assumed average life yield. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, thus affecting the yield of the Portfolio. The compounding effect
from reinvestment of monthly payments received by the Portfolio will increase
the yield to shareholders compared with bonds that pay interest semi-annually.
The principal governmental (i.e., backed by the full faith and
credit of the United States Government) guarantor of mortgage-related securities
is GNMA. GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of Federal Housing Administration ("FHA")-insured
or U.S. Department of Veterans Affairs ("VA")-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of
the U.S. Government) guarantors include Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA and FHLMC
are each a government-sponsored corporation or corporate instrumentality of the
U.S. Government, respectively (government-sponsored entities or "GSEs"), which
were owned entirely by private stockholders until 2008 when they were placed in
conservatorship by the U.S. Government. After being placed in conservatorship,
the GSEs issued senior preferred stock and common stock to the U.S. Treasury in
an amount equal to 79.9% of each GSE in return for certain funding and liquidity
arrangements. The GSEs continue to operate as going concerns while in
conservatorship and each remains liable for all of its obligations associated
with its mortgage-backed securities. The U.S. Treasury provided additional
funding to the GSEs, but recently the GSEs have been paying dividends to the
U.S. Treasury in a cumulative amount almost equal to the payments made to the
GSEs by the U.S. Treasury since 2008. The future of the GSEs is unclear as
Congress is considering whether to adopt legislation that would severely
restrict or even terminate their operations. FNMA purchases residential
mortgages from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA and are now, in effect, backed by the full faith and credit of the U.S.
Government. Participation certificates issued by FHLMC, which represent
interests in mortgages from FHLMC's national portfolio, are guaranteed by FHLMC
as to the timely payment of interest and ultimate collection of principal and
are now, in effect, backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan associations, private mortgage
insurance companies, mortgage bankers and other secondary market issuers create
pass-through pools of conventional residential mortgage loans. Securities
representing interests in pools created by non-governmental private issuers
generally offer a higher rate of interest than securities representing interests
in pools created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded.
The structuring of the pass-through pool may also provide credit
enhancement. Examples of such credit support arising out of the structure of the
transaction include the issue of senior and subordinated securities (e.g., the
issuance of securities by a SPV in multiple classes or "tranches", with one or
more classes being senior to other subordinated classes as to payment of
principal and interest, with the result that defaults on the underlying mortgage
loans are borne first by the holders of the subordinated class); creation of
"reserve funds" (in which case cash or investments sometimes funded from a
portion of the payments on the underlying mortgage loans, are held in reserve
against future losses); and "overcollateralization" (in which case the scheduled
payments on, or the principal amount of, the underlying mortgage loans exceeds
that required to make payment of the securities and pay any servicing or other
fees). There can be no guarantee the credit enhancements, if any, will be
sufficient to prevent losses in the event of defaults on the underlying mortgage
loans.
In addition, mortgage-related securities that are issued by private
issuers are not subject to the underwriting requirements for the underlying
mortgages that are applicable to those mortgage-related securities that have a
government or government-sponsored entity guaranteed. As a result, the mortgage
loans underlying private mortgage-related securities may, and frequently do,
have less favorable collateral, credit risk or other underwriting
characteristics than government or government-sponsored mortgage-related
securities and have wider variances in a number of terms, including interest
rate, term, size, purposes and borrower characteristics. Privately issued pools
more frequently include second mortgages, high loan-to-value mortgages and
manufactured housing loans. The coupon rates and maturities of the underlying
mortgage loans in a private-label mortgage-related pool may vary to a greater
extent than those included in a government guaranteed pool, and the pool may
include subprime mortgage loans. Subprime loans refer to loans made to borrowers
with weakened credit histories or with a lower capacity to make timely payments
on their loans. For these reasons, the loans underlying these securities have
had in many cases higher default rates than those loans that meet government
underwriting requirements.
A Portfolio may invest in other forms of mortgage-related securities
including CMOs, which are debt obligations of the issuer secured by a pool of
mortgage loans pledged as collateral that is legally required to be paid by the
issuer, regardless of whether payments are actually made on the underlying
mortgages. CMOs are the predominant type of a "pay-through" mortgage-related
security. In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of a CMO, often referred to as a "tranche", is issued at a
specific coupon rate and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may cause one or more
tranches of the CMO to be retired substantially earlier than the stated
maturities or final distribution dates of the collateral. Although payment of
the principal of, and interest on, the underlying collateral securing privately
issued CMOs may be guaranteed by GNMA, FNMA or FHLMC, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
GNMA, FNMA, FHLMC, any other governmental agency or any other person or entity.
A Portfolio may invest in SMRS, which are mortgage-related
securities that are usually structured with separate classes of securities
collateralized by a pool of mortgages or a pool of mortgage backed bonds or
pass-through securities, with each class receiving different proportions of the
principal and interest payments from the underlying assets. A common type of
SMRS has one class of interest-only securities (IOs) receiving all of the
interest payments from the underlying assets and one class of principal-only
securities (POs) receiving all of the principal payments from the underlying
assets. IOs and POs are extremely sensitive to interest rate changes and are
more volatile than mortgage-related securities that are not stripped.
A Portfolio will only invest in SMRS that are issued by the U.S.
Government, its agencies or instrumentalities and supported by the full faith
and credit of the U.S. Although SMRS are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
the complexity of these instruments and the smaller number of investors in the
sector can lead to illiquid markets in the sector.
A Portfolio may also invest in commercial mortgage-backed
securities, which are securities that represent an interest in, or are secured
by, mortgage loans secured by multifamily or commercial properties, such as
industrial and warehouse properties, office buildings, retail space and shopping
malls, and cooperative apartments, hotels and motels, nursing homes, hospitals
and senior living centers. Commercial mortgage-backed securities have been
issued in public and private transactions by a variety of public and private
issuers using a variety of structures, some of which were developed in the
residential mortgage context, including multi-class structures featuring senior
and subordinated classes. Commercial mortgage-backed securities may pay fixed or
floating-rates of interest. The commercial mortgage loans that underlie
commercial mortgage-related securities have certain distinct risk
characteristics. Commercial mortgage loans generally lack standardized terms,
which may complicate their structure, tend to have shorter maturities than
residential mortgage loans and may not be fully amortizing. Commercial
properties themselves tend to be unique and are more difficult to value than
single-family residential properties.
Certain Risks. The value of mortgage-related securities is affected
by a number of factors. Unlike traditional debt securities, which have fixed
maturity dates, mortgage-related securities may be paid earlier than expected as
a result of prepayments of underlying mortgages. Such prepayments generally
occur during periods of falling mortgage interest rates. If property owners make
unscheduled prepayments of their mortgage loans, these prepayments will result
in the early payment of the applicable mortgage-related securities. In that
event, the Portfolio may be unable to invest the proceeds from the early payment
of the mortgage-related securities in investments that provide as high a yield
as the mortgage-related securities. Early payments associated with
mortgage-related securities cause these securities to experience significantly
greater price and yield volatility than is experienced by traditional
fixed-income securities. The level of general interest rates, general economic
conditions and other social and demographic factors affect the occurrence of
mortgage prepayments. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective life of
mortgage-related securities, subjecting them to greater risk of decline in
market value in response to rising interest rates. If the life of a
mortgage-related security is inaccurately predicted, the Portfolio may not be
able to realize the rate of return it expected.
As with other fixed-income securities, there is also the risk of
nonpayment of mortgage-related securities, particularly for those securities
that are backed by mortgage pools that contain subprime loans. Market factors
adversely affecting mortgage loan repayments include a general economic
downturn, high unemployment, a general slowdown in the real estate market, a
drop in the market prices of real estate, or higher mortgage payments required
to be made by holders of adjustable rate mortgages due to scheduled increases or
increases due to higher interest rates.
Subordinated mortgage-related securities may have additional risks.
The subordinated mortgage-related security may serve as credit support for the
senior securities purchased by other investors. In addition, the payments of
principal and interest on these subordinated securities generally will be made
only after payments are made to the holders of securities senior to the
subordinated securities. Therefore, if there are defaults on the underlying
mortgage loans, the holders of subordinated mortgage-related securities will be
less likely to receive payments of principal and interest and will be more
likely to suffer a loss.
Commercial mortgage-related securities, like all fixed-income
securities, generally decline in value as interest rates rise. Moreover,
although generally the value of fixed-income securities increases during periods
of falling interest rates, this inverse relationship is not as marked in the
case of single-family residential mortgage-related securities, due to the
increased likelihood of prepayments during periods of falling interest rates,
and may not be as marked in the case of commercial mortgage-related securities.
The process used to rate commercial mortgage-related securities may focus on,
among other factors, the structure of the security, the quality and adequacy of
collateral and insurance, and the creditworthiness of the originators, servicing
companies and providers of credit support.
Although the market for mortgage-related securities is becoming
increasingly liquid, those issued by certain private organizations may not be
readily marketable and there may be a limited market for these securities,
especially when there is a perceived weakness in the mortgage and real estate
market sectors. In particular, the secondary markets for CMOs, IOs and POs may
be more volatile and less liquid than those for other mortgage-related
securities, thereby potentially limiting the Portfolio's ability to buy or sell
those securities at any particular time. Without an active trading market,
mortgage-related securities held in the Portfolio's portfolio may be
particularly difficult to value because of the complexities involved in the
value of the underlying mortgages. In addition, the rating agencies may have
difficulties in rating commercial mortgage-related securities through different
economic cycles and in monitoring such ratings on a longer-term basis.
As with fixed-income securities generally, the value of
mortgage-related securities can also be adversely affected by increases in
general interest rates relative to the yield provided by such securities. Such
an adverse effect is especially possible with fixed-rate mortgage securities. If
the yield available on other investments rises above the yield of the fixed-rate
mortgage securities as a result of general increases in interest rate levels,
the value of the mortgage-related securities will decline.
Derivatives
A Portfolio may, but is not required to, use derivatives for hedging
or other risk management purposes or as part of its investment practices.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices.
There are four principal types of derivatives - options, futures,
forwards and swaps. These principal types of derivative instruments, as well as
the methods in which they may be used by a Portfolio, are described below.
Derivatives include listed and cleared transactions, where the Portfolio's
derivative trade counterparty is an exchange or clearinghouse, and non-cleared
bilateral "over-the-counter" ("OTC") transactions, where the Portfolio's
derivative trade counterparty is a financial institution. Exchange-traded or
cleared derivatives transactions tend to be more liquid and subject to less
counterparty credit risk than those that are privately negotiated. A Portfolio
may use derivatives to earn income and enhance returns, to hedge or to adjust
the risk profile of a portfolio and either to replace more traditional direct
investments or to obtain exposure to otherwise inaccessible markets.
Forward Contracts. A forward contract, which may be standardized and
exchange-traded or customized and privately negotiated, is an agreement for one
party to buy, and the other party to sell, a specific quantity of an underlying
security, commodity or other asset for an agreed-upon price at a future date. A
forward contract generally is settled by physical delivery of the security,
commodity or other asset underlying the forward contract to an agreed upon
location at a future date (rather than settled by cash) or will be rolled
forward into a new forward contract. Non-deliverable forwards ("NDFs") specify a
cash payment upon maturity.
Futures Contracts and Options on Futures Contracts. A futures
contract is an agreement that obligates the buyer to buy and the seller to sell
a specified quantity of an underlying asset (or settle for cash the value of a
contract based on an underlying asset, rate or index) at a specific price on the
contract maturity date. Options on futures contracts are options that call for
the delivery of futures contracts upon exercise. Futures contracts are
standardized, exchange-traded instruments and are fungible (i.e., considered to
be perfect substitutes for each other). This fungibility allows futures
contracts to be readily offset or canceled through the acquisition of equal but
opposite positions, which is the primary method in which futures contracts are
liquidated. A cash-settled futures contract does not require physical delivery
of the underlying asset, but instead is settled for cash equal to the difference
between the values of the contract on the date it is entered into and its
maturity date.
Options. An option, which may be standardized and exchange-traded,
or customized and privately negotiated, is an agreement that, for a premium
payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy (a "call") or sell (a "put") the underlying asset (or settle
for cash an amount based on an underlying asset, rate or index) at a specified
price (the exercise price) during a period of time or on a specified date.
Likewise, when an option is exercised the writer of the option is obligated to
sell (in the case of a call option) or to purchase (in the case of a put option)
the underlying asset (or settle for cash an amount based on an underlying asset,
rate or index).
Swaps. A swap is an agreement that obligates two parties to exchange
a series of cash flows at specified intervals (payment dates) based upon or
calculated by reference to changes in specified prices or rates (e.g., interest
rates in the case of interest rate swaps, currency exchange rates in the case of
currency swaps) for a specified amount of an underlying asset (the "notional"
principal amount). Most swaps are entered into on a net basis (i.e., the two
payment streams are netted out, with a Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. Generally, the notional
principal amount is used solely to calculate the payment streams but is not
exchanged. Certain standardized swaps, including certain interest rate swaps and
credit default swaps, are (or soon will be) subject to mandatory central
clearing. Cleared swaps are transacted through futures commission merchants
("FCMs") that are members of central clearinghouses with the clearinghouse
serving as central counterparty, similar to transactions in futures contracts.
Portfolios post initial and variation margin to support their obligations under
cleared swaps by making payments to their clearing member FCMs. Central clearing
is expected to reduce counterparty credit risks and increase liquidity, but
central clearing does not make swap transactions risk free. Centralized clearing
will be required for additional categories of swaps on a phased-in basis based
on Commodity Futures Trading Commission ("CFTC") approval of contracts for
central clearing. Bilateral swap agreements are two-party contracts entered into
primarily by institutional investors and are not cleared through a third party.
Risks of Derivatives and Other Regulatory Issues. Investment
techniques employing such derivatives involve risks different from, and, in
certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives.
o Market Risk. This is the general risk attendant to all
investments that the value of a particular investment will
change in a way detrimental to a Portfolio's interest.
o Management Risk. Derivative products are highly specialized
instruments that require investment techniques and risk
analyses different from those associated with stocks and
bonds. The use of a derivative requires an understanding not
only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of
the derivative under all possible market conditions. In
particular, the use and complexity of derivatives require the
maintenance of adequate controls to monitor the transactions
entered into, the ability to assess the risk that a derivative
adds to a Portfolio's investment portfolio, and the ability to
forecast price, interest rate or currency exchange rate
movements correctly.
o Credit Risk. This is the risk that a loss may be sustained by
a Portfolio as a result of the failure of another party to a
derivative (usually referred to as a "counterparty") to comply
with the terms of the derivative contract. The credit risk for
derivatives traded on an exchange or through a clearinghouse
is generally less than for uncleared OTC derivatives, since
the exchange or clearinghouse, which is the issuer or
counterparty to each derivative, provides a guarantee of
performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the
clearinghouse in order to reduce overall credit risk. For
uncleared OTC derivatives, there is no similar clearing agency
guarantee. Therefore, the Portfolio considers the
creditworthiness of each counterparty to an uncleared OTC
derivative in evaluating potential credit risk.
o Counterparty Risk. The value of an OTC derivative will depend
on the ability and willingness of a Portfolio's counterparty
to perform its obligations under the transaction. If the
counterparty defaults, a Portfolio will have contractual
remedies but may choose not to enforce them to avoid the cost
and unpredictability of legal proceedings. In addition, if a
counterparty fails to meet its contractual obligations, a
Portfolio could miss investment opportunities or otherwise be
required to retain investments it would prefer to sell,
resulting in losses for the Portfolio. Participants in OTC
derivatives markets generally are not subject to the same
level of credit evaluation and regulatory oversight as are
exchanges or clearinghouses. As a result, OTC derivatives
generally expose a Portfolio to greater counterparty risk than
derivatives traded on an exchange or through a clearinghouse.
New regulations affecting derivatives transactions now, or
will soon, require certain standardized derivatives, including
many types of swaps, to be subject to mandatory central
clearing. Under these new requirements, a central clearing
organization will be substituted as the counterparty to each
side of the derivatives transaction. Each party to derivatives
transactions will be required to maintain its positions with a
clearing organization through one or more clearing brokers.
Central clearing is expected to reduce, but not eliminate,
counterparty risk. A Portfolio will be subject to the risk
that its clearing member or clearing organization will itself
be unable to perform its obligations.
o Liquidity Risk. Liquidity risk exists when a particular
instrument is difficult to purchase or sell. If a derivative
transaction is particularly large or if the relevant market is
illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction
or liquidate a position at an advantageous price.
o Leverage Risk. Since many derivatives have a leverage
component, adverse changes in the value or level of the
underlying asset, rate or index can result in a loss
substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss
generally is related to a notional principal amount, even if
the parties have not made any initial investment. Certain
derivatives have the potential for unlimited loss, regardless
of the size of the initial investment.
o Regulatory Risk. The U.S. Government is in the process of
adopting and implementing additional regulations governing
derivatives markets, including clearing as discussed above,
margin, reporting and registration requirements. While the
full extent and cost of these regulations is currently
unclear, these regulations could, among other things, restrict
a Portfolio's ability to engage in derivatives transactions
and/or increase the cost of such derivatives transactions
(through increased margin or capital requirements). In
addition, Congress, various exchanges and regulatory and
self-regulatory authorities have undertaken reviews of options
and futures trading in light of market volatility. Among the
actions that have been taken or proposed to be taken are new
limits and reporting requirements for speculative positions
new or more stringent daily price fluctuation limits for
futures and options transactions, and increased margin
requirements for various types of futures transactions. These
regulations and actions may adversely affect the instruments
in which a Portfolio invests and its ability to execute its
investment strategy.
o Other Risks. Other risks in using derivatives include the risk
of mispricing or improper valuation of derivatives and the
inability of derivatives to correlate perfectly with
underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in
increased cash payment requirements to counterparties or a
loss of value to a Portfolio. Derivatives do not always
perfectly or even highly correlate or track the value of the
assets, rates or indices they are designed to closely track.
Consequently, a Portfolio's use of derivatives may not always
be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio's investment
objective.
Other. A Portfolio may purchase and sell derivative instruments only
to the extent that such activities are consistent with the requirements of the
Commodity Exchange Act ("CEA") and the rules adopted by the Commodity Futures
Trading Commission ("CFTC") thereunder. Under CFTC rules, a registered
investment company that conducts more than a minimal amount of trading in
futures, commodity options, swaps and other commodity interests is a commodity
pool and its adviser must register as a commodity pool operator ("CPO"). Under
such rules, registered investment companies are subject to additional disclosure
and reporting requirements. The Adviser and the Portfolios have claimed an
exclusion from the definition of CPO under CFTC Rule 4.5 under the CEA with
respect to the Portfolios and are not currently subject to these registration
and reporting requirements under the CEA.
Use of Options, Futures, Forwards and Swaps by the Portfolios
-- Options on Securities and Municipal and U.S. Government
Securities. In an effort, among other things, to increase current income and to
reduce fluctuations in NAV, the Portfolios may write covered put and call
options and purchase put and call options on securities, including municipal
securities and U.S. Government securities. The Portfolios may also enter into
options on the yield "spread" or yield differential between two securities. In
addition, the Portfolios may write covered straddles. There are no specific
limitations on the writing and purchasing of options by the 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. 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.
A Portfolio may purchase call options to hedge against an increase
in the price of securities that the Portfolio anticipates purchasing in the
future. If such increase occurs, the call option will permit the Portfolio to
purchase the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Portfolio upon exercise of the
option, and, unless the price of the underlying security rises sufficiently, the
option may expire worthless to the Portfolio and the Portfolio will suffer a
loss on the transaction to the extent of the premium paid.
A Portfolio may purchase put options to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put options will
permit the Portfolio to sell the securities at the exercise price or to close
out the options at a profit. By using put options in this way, the Portfolio
will reduce any profit it might otherwise have realized on the underlying
security by the amount of the premium paid for the put option and by transaction
costs.
A Portfolio may write a put or call option in return for a premium,
which is retained by the Portfolio whether or not the option is exercised. 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. A Portfolio may write covered options or uncovered options. 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 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
is equal to or less than the exercise price of the call written. A put option
written by a Portfolio is "covered" if the Portfolio holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. Uncovered options or "naked options" are riskier than covered options.
For example, if a Portfolio wrote a naked call option and the price of the
underlying security increased, the Portfolio would have to purchase the
underlying security for delivery to the call buyer and sustain a loss, which
could be substantial, equal to the difference between the option price and the
market price of a security.
In contrast to other types of options, options on the yield "spread"
or yield differential between two securities are based on the difference between
the yields of designated securities. A Portfolio may also, as an example, write
combinations of put and call options on the same security, known as "straddles,"
with the same exercise and expiration date. By writing a straddle, the Portfolio
undertakes a simultaneous obligation to sell and purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises above the exercise price, the call will likely be exercised
and the Portfolio will be required to sell the underlying security at or below
market price. This loss may be offset, however, in whole or in part, by the
premiums received on the writing of the two options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of the security remains stable and neither the call nor the put is
exercised. In those instances where one of the options is exercised, the loss on
the purchase or sale of the underlying security may exceed the amount of the
premiums received.
The Portfolios may 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.
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.
A Portfolio 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. By writing a call option, the Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price above its then current market value,
resulting in a capital loss unless the security subsequently appreciates in
value. Where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium. The Portfolio may purchase put options to hedge
against a decline in the value of portfolio securities. If such decline occurs,
the put options will permit the Portfolio to sell the securities at the exercise
price or to close out the options at a profit. By using put options in this way,
the Portfolio will reduce any profit it might otherwise have realized on the
underlying security by the amount of the premium paid for the put option and by
transaction costs.
A Portfolio 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 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.
-- Options on Securities Indices and Municipal and U.S. Government
Securities Indices. An option on a securities index is similar to an option on a
security except that, rather than taking or making delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option.
A Portfolio may write (sell) call and put options and purchase call
and put options on securities indices. If a Portfolio purchases put options on
securities indices to hedge its investments against a decline in the value of
portfolio securities, it will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Portfolio's security holdings.
A Portfolio may also write put or call options on securities indices
to, among other things, earn income. If the value of the chosen index declines
below the exercise price of the put option, the Portfolio has the risk of loss
of the amount of the difference between the exercise price and the closing level
of the chosen index, which it would be required to pay to the buyer of the put
option and which may not be offset by the premium it received upon sale of the
put option. Similarly, if the value of the index is higher than the exercise
price of the call option, the Portfolio has the risk of loss of the amount of
the difference between the exercise price and the closing level of the chosen
index, which may not be offset by the premium it received upon sale of the call
option. If the decline or increase in the value securities index is
significantly below or above the exercise price of the written option, the
Portfolio could experience a substantial loss.
The purchase of call options on securities indices may be used by a
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid if the value of the index does
not rise. The purchase of call options on stock indexes when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing call options on
securities the Portfolio owns.
-- Futures Contracts and Options on Futures Contracts. Futures
contracts that a Portfolio may buy and sell may include futures contracts on
fixed-income or other securities, and contracts based on interest rates or
financial indices, including any index of U.S. Government securities. A
Portfolio may, for example, purchase or sell futures contracts and options
thereon to hedge against changes in interest rates or securities (through index
futures or options).
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Portfolio's current or intended investments in fixed-income securities. For
example, if a Portfolio owned long-term bonds and interest rates were expected
to increase, that Portfolio might sell interest rate futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
that Portfolio's portfolio. However, since the futures market is more liquid
than the cash market, the use of interest rate futures contracts as a hedging
technique allows a Portfolio to hedge its interest rate risk without having to
sell its portfolio securities. If interest rates were to increase, the value of
the debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the NAV of that Portfolio from
declining as much as it otherwise would have. On the other hand, if interest
rates were expected to decline, interest rate futures contracts could be
purchased to hedge in anticipation of subsequent purchases of long-term bonds at
higher prices. Because the fluctuations in the value of the interest rate
futures contracts should be similar to those of long-term bonds, a Portfolio
could protect itself against the effects of the anticipated rise in the value of
long-term bonds without actually buying them until the necessary cash becomes
available or the market has stabilized. At that time, the interest rate futures
contracts could be liquidated and that Portfolio's cash reserves could then be
used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used
for hedging or risk management purposes to attempt to protect a Portfolio's
current or intended investments from broad fluctuations in stock or bond prices.
For example, a Portfolio may sell stock or bond index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Portfolio's portfolio securities that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may be
offset, in whole or in part, by gains on the futures position. When a Portfolio
is not fully invested in the securities market and anticipates a significant
market advance, it may purchase stock or bond index futures contracts in order
to gain rapid market exposure that may, in whole or in part, offset increases in
the cost of securities that the Portfolio intends to purchase. As such purchases
are made, the corresponding positions in stock or bond index futures contracts
will be closed out.
Options on futures contracts are options that call for the delivery
of futures contracts upon exercise. Options on futures contracts written or
purchased by a Portfolio will be traded on U.S. exchanges and will be used only
for hedging purposes.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in a Portfolio's
portfolio. If the futures price at expiration of the option is below the
exercise price, a Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Portfolio's portfolio holdings. The writing of a put option on a futures
contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the futures
contract. If the futures price at expiration of the put option is higher than
the exercise price, a Portfolio will retain the full amount of the option
premium, which provides a partial hedge against any increase in the price of
securities which the Portfolio intends to purchase. If a put or call option a
Portfolio has written is exercised, the 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 options on futures positions, a Portfolio's losses from
exercised options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
A Portfolio may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest rates, a
Portfolio could, in lieu of selling futures contracts, purchase put options
thereon. In the event that such decrease were to occur, it may be offset, in
whole or in part, by a profit on the option. If the anticipated market decline
were not to occur, the Portfolios would suffer a loss equal to the price of the
put. Where it is projected that the value of securities to be acquired by a
Portfolio will increase prior to acquisition due to a market advance or changes
in interest, a Portfolio could purchase call options on futures contracts,
rather than purchasing the underlying futures contracts. If the market advances,
the increased cost of securities to be purchased may be offset by a profit on
the call. However, if the market declines, the Portfolio will suffer a loss
equal to the price of the call, but the securities which the Portfolio intends
to purchase may be less expensive.
-- Credit Default Swap Agreements. The "buyer" in a credit default
swap contract is obligated to pay the "seller" a periodic stream of payments
over the term of the contract in return for a contingent payment upon the
occurrence of a credit event with respect to an underlying reference obligation.
Generally, a credit event means bankruptcy, failure to pay, obligation
acceleration or restructuring. A Portfolio may be either the buyer or the seller
in the transaction. As a seller, a Portfolio receives a fixed rate of income
throughout the term of the contract, which typically is between one month and
ten years, provided that no credit event occurs. If a credit event occurs, the
Portfolio typically must pay the contingent payment to the buyer. The contingent
payment will be either (i) the "par value" (full amount) of the reference
obligation in which case the Portfolio will receive the reference obligation in
return, or (ii) an amount equal to the difference between the par value and the
current market value of the obligation. The value of the reference obligation
received by the Portfolio as a seller if a credit event occurs, coupled with the
periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the Portfolio. If the
reference obligation received by a Portfolio is a defaulted security, physical
delivery of the security will cause a Portfolio to hold a defaulted security. If
a Portfolio is a buyer and no credit event occurs, the Portfolio may lose the
periodic stream of payments over the term of the contract. However, if a credit
event occurs, the buyer typically receives full notional value for a reference
obligation that may have little or no value.
Credit default swaps may involve greater risks than if a Portfolio
had invested in the reference obligation directly. Credit default swaps are
subject to general market risk, liquidity risk and credit risk.
-- Swaps: Interest Rate Transactions. A Portfolio may enter into
interest rate swaps, swaptions, and cap or floor transactions, which may include
preserving a return or spread on a particular investment or portion of its
portfolio or protecting against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. Unless there is a counterparty
default, the risk of loss to a Portfolio from interest rate transactions is
limited to the net amount of interest payments that the Portfolio is
contractually obligated to make. If the counterparty to an interest rate
transaction defaults, the Portfolio's risk of loss consists of the net amount of
interest rate payments that the Portfolio is contractually obligated to receive.
Interest rate swaps involve the exchange by a Portfolio with another
party of payments calculated by reference to specified interest rates (e.g., an
exchange of floating-rate payments for fixed rate payments) computed based on a
contractually-based principal (or "notional") amount.
An option on a swap agreement, also called a "swaption," is an
option that gives the buyer the right, but not the obligation, to enter into a
swap on a future date in exchange for paying a market-based "premium". A
receiver swaption gives the owner the right to receive the total return of a
specified asset, reference rate, or index. A payer swaption gives the owner the
right to pay the total return of a specified asset, reference rate, or index.
Swaptions also include options that allow an existing swap to be terminated or
extended by one of the counterparties.
Interest rate caps and floors are similar to options in that the
purchase of an interest rate cap or floor entitles the purchaser, to the extent
that a specified index exceeds (in the case of a cap) or falls below (in the
case of a floor) a predetermined interest rate, to receive payments of interest
on a notional amount from the party selling the interest rate cap or floor. Caps
and floors are less liquid than swaps. These transactions do not involve the
delivery of securities or other underlying assets or principal.
Caps and floors are less liquid than swaps. These transactions do
not involve the delivery of securities or other underlying assets or principal.
A Portfolio will enter into bilateral swap agreements, including interest rate
swap, swaption, cap or floor transactions only with counterparties who have
credit ratings of at least A- (or the equivalent) from any one nationally
recognized statistical rating organization ("NRSRO") or counterparties with
guarantors with debt securities having such a rating.
-- Inflation (CPI) Swaps. Inflation swap agreements are contracts in
which one party agrees to pay the cumulative percentage increase in a price
index (the Consumer Price Index with respect to CPI swaps) over the term of the
swap (with some lag on the inflation index), and the other pays a compounded
fixed rate. Inflation swap agreements may be used to protect the NAV of a
Portfolio against an unexpected change in the rate of inflation measured by an
inflation index since the value of these agreements is expected to increase if
unexpected inflation increases. A Portfolio will enter into inflation swaps on a
net basis. The net amount of the excess, if any, of the Portfolio's obligations
over its entitlements with respect to each inflation swap will be accrued on a
daily basis, and an amount of cash or liquid instruments having an aggregate NAV
at least equal to the accrued excess will be segregated by the Portfolio. The
values of inflation swap agreements are expected to change in response to
changes in real interest rates. Real interest rates are tied to the relationship
between nominal interest rates and the rate of inflation. If nominal interest
rates increase at a faster rate than inflation, real interest rates may rise,
leading to a decrease in value of an inflation swap agreement. Additionally,
payments received by a Portfolio from inflation swap agreements will result in
taxable income, either as ordinary income or capital gains, rather than
tax-exempt income, which will increase the amount of taxable distributions
received by shareholders.
- Total Return Swaps. The Portfolios may enter into total return
swaps in order to take a "long" or "short" position with respect to an
underlying referenced asset. The Portfolios are subject to market price
volatility of the underlying referenced asset. A total return swap involves
commitments to pay interest in exchange for a market linked return based on a
notional amount. To the extent that the total return of the security group of
securities or index underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Portfolios will receive a payment from or
make a payment to the counterparty. Total return swaps could result in losses if
the underlying asset or reference does not perform as anticipated.
Forward Commitments and When-Issued and Delayed Delivery Securities
The Portfolios may use forward commitments. Forward commitments for
the purchase or sale of securities may include purchases on a "when-issued"
basis or purchases or sales on a "delayed delivery" basis. In some cases, a
forward commitment may be conditioned upon the occurrence of a subsequent event,
such as approval and consummation of a merger, corporate reorganization or debt
restructuring (i.e., a "when, as and if issued" trade). When forward commitment
transactions are negotiated, the price is fixed at the time the commitment is
made and the Portfolio assumes the rights and risks of ownership of the security
but the Fund does not pay for the securities until they are received. If the
Portfolio is fully or almost fully invested when forward commitment purchases
are outstanding, such purchases may result in a form of leverage. Leveraging the
portfolio in this manner may increase the Portfolio's volatility of returns.
When-issued securities and forward commitments may be sold prior to
the settlement date. If the Portfolio chooses to dispose of the right to acquire
a when-issued security prior to its acquisition or dispose of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
Any significant commitment of Portfolio assets to the purchase of securities on
a "when, as and if issued" basis may increase the volatility of the Portfolio's
NAV.
Forward commitments include "to be announced" ("TBA")
mortgage-backed securities, which are contracts for the purchase or sale of
mortgage-backed securities to be delivered at a future agreed-upon date, whereby
the specific mortgage pool numbers or the number of pools that will be delivered
to fulfill the trade obligation or terms of the contract are unknown at the time
of the trade. Subsequent to the time of the trade, a mortgage pool or pools
guaranteed by GNMA, FNMA, or FHLMC (including fixed rate or variable rate
mortgages) are allocated to the TBA mortgage-backed securities transactions.
At the time the Portfolio intends to enter into a forward
commitment, it will record the transaction and thereafter reflect the value of
the security purchased or, if a sale, the proceeds to be received, in
determining its NAV. Any unrealized appreciation or depreciation reflected in
such valuation of a "when, as and if issued" security would be canceled in the
event that the required conditions did not occur and the trade was canceled.
Purchases of securities on a forward commitment or when-issued basis
may involve more risk than other types of purchases. For example, by committing
to purchase securities in the future, the Portfolio subjects itself to a risk of
loss on such commitments as well as on its portfolio securities. Also, the
Portfolio may have to sell assets which have been set aside in order to meet
redemptions. In addition, if the Portfolio determines it is advisable as a
matter of investment strategy to sell the forward commitment or "when-issued" or
"delayed delivery" securities before delivery, the Portfolio may incur a gain or
loss because of market fluctuations since the time the commitment to purchase
such securities was made. Any such gain or loss would be treated as a capital
gain or loss for tax purposes. When the time comes to pay for the securities to
be purchased under a forward commitment or on a "when-issued" or "delayed
delivery" basis, the Portfolio will meet its obligations from the then-available
cash flow or the sale of securities, or, although it would not normally expect
to do so, from the sale of the forward commitment or "when-issued" or "delayed
delivery" securities themselves (which may have a value greater or less than the
Portfolio's payment obligation). No interest or dividends accrue to the
purchaser prior to the settlement date for securities purchased or sold under a
forward commitment. In addition, in the event the other party to the transaction
files for bankruptcy, becomes insolvent, or defaults on its obligation, the
Portfolio may be adversely affected.
General
The successful use of the foregoing investment practices, all of
which are highly specialized investment activities, draws upon the Adviser's
special skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate movements correctly.
Should interest rates move in an unexpected manner, the Portfolios may not
achieve the anticipated benefits of futures contracts, options, interest rate
transactions or forward commitment contracts, or may realize losses and thus be
in a worse position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are no
daily price fluctuation limits with respect to forward contracts, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. In addition, the correlation between movements in the price of such
instruments and movements in the price of the securities hedged or used for
cover will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its position in futures
contracts, options, interest rate transactions and forward commitment contracts
will depend on the availability of liquid markets in such instruments. Markets
for all these vehicles with respect to municipal securities are 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.
Effects of Borrowing and Use of Leverage
A Portfolio, including, in particular, the High Income Portfolio,
may use borrowings for investment purposes subject to the limits imposed by the
1940 Act.
Borrowings by a Portfolio result in leveraging of the Portfolio's
shares of common stock. The proceeds of such borrowings will be invested in
accordance with the Portfolio's investment objective and policies. The Adviser
anticipates that the difference between the interest expense paid by the
Portfolio on borrowings and the rates received by the Portfolio from its
investment portfolio will provide the Portfolio's shareholders with a
potentially higher yield. The Portfolios may also use leverage for investment
purposes by entering into transactions such as forward contracts and Tender
Option Bond ("TOBs") transactions. This means that the Portfolio uses the cash
proceeds made available during the term of these transactions to make
investments in other fixed-income securities.
Utilization of leverage, which is usually considered speculative,
however, involves certain risks to the Portfolio's shareholders. These include a
higher volatility of the NAV of the Portfolio's shares. So long as the Portfolio
is able to realize a net return on its investment portfolio that is higher than
the interest expense paid on borrowings or the carrying costs of leveraged
transactions, the effect of leverage will be to cause the Portfolio's
shareholders to realize higher current net return than if the Portfolio were not
leveraged. However, to the extent that the interest expense on borrowings or the
carrying costs of leveraged transactions approaches the net return on the
Portfolio's investment portfolio, the benefit of leverage to the Portfolio's
shareholders will be reduced, and if the interest expense on borrowings or the
carrying costs of leveraged transactions were to exceed the net return to
shareholders, the Portfolio's use of leverage would result in a lower rate of
return than if the Portfolio were not leveraged. Similarly, the effect of
leverage in a declining market would be a greater decrease in NAV per share than
if the Portfolio were not leveraged. In an extreme case, if the Portfolio's
current investment income were not sufficient to meet the interest expense on
borrowings, it could be necessary for the Portfolio to liquidate certain of its
investments in adverse circumstances, potentially significantly reducing its
NAV. During periods of rising short-term interest rates, the interest paid on
floaters in TOB transactions would increase, which may adversely affect the
Portfolio's net returns. If rising interest rates coincide with a period of
rising long-term rates, the value of long-term municipal bonds purchased with
the proceeds of leverage would decline, adversely affecting the Portfolio's NAV.
In certain circumstances, adverse changes in interest rates or other events
could cause a TOB Trust to terminate or collapse, potentially requiring a
Portfolio to liquidate longer-term municipal securities at unfavorable prices to
meet the Trust's outstanding obligations.
Certain transactions, such as derivative transactions, forward
commitments, reverse repurchase agreements and short sales, involve leverage and
may expose a Portfolio to potential losses that, in some cases, may exceed the
amount originally invested by the Portfolio. When a Portfolio engages in such
transactions, it will, in accordance with guidance provided by the SEC or its
staff in, among other things, regulations, interpretive releases and no-action
letters, deposit in a segregated account certain liquid assets with a value at
least equal to the Portfolio's exposure, on a marked-to-market or other relevant
basis, to the transaction. Transactions for which assets have been segregated
will not be considered "senior securities" for purposes of the Portfolios'
restriction concerning senior securities. The segregation of assets is intended
to enable a Portfolio to have assets available to satisfy its obligations with
respect to these transactions, but will not limit the Portfolio's exposure to
loss.
Illiquid Securities
A Portfolio will not invest in illiquid securities if immediately
after such investment more than 15% or such other amount permitted by guidance
regarding the 1940 Act of the Portfolio's net assets would be invested in such
securities. For this purpose, illiquid securities include, among others: (a)
direct placements or other securities that are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers), (b) options
purchased by the Portfolio over-the-counter options and the cover for options
written by the Portfolio over-the-counter, and (c) repurchase agreements not
terminable within seven days. Securities that have legal or contractual
restrictions on resale but have a readily available market are not deemed
illiquid for purposes of this limitation.
Mutual funds do not typically hold a significant amount of
restricted securities (securities that are subject to restrictions on resale to
the general public) or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund may also have to take certain steps
or wait a certain amount of time in order to remove the transfer restrictions
for such restricted securities in order to dispose of them, resulting in
additional expense and delay.
Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act for resales of certain securities to qualified institutional buyers. An
insufficient number of qualified institutional buyers interested in purchasing
certain restricted securities held by a Portfolio, however, could affect
adversely the marketability of such portfolio securities and the Portfolio might
be unable to dispose of such securities promptly or at reasonable prices.
The Adviser, acting under the oversight of the Boards, will monitor
the liquidity of restricted securities in each Portfolio's portfolio that are
eligible for resale pursuant to Rule 144A. In reaching liquidity decisions, the
Adviser will consider, among others, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers issuing quotations
to purchase or sell the security; (3) the number of other potential purchasers
of the security; (4) the number of dealers undertaking to make a market in the
security; (5) the nature of the security (including its unregistered nature) and
the nature of the marketplace for the security (e.g., the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer); and (6) any applicable SEC interpretation or position with respect to
such type of securities.
Investment in Exchange-Traded Funds and Other Investment Companies
Each of the Portfolios may invest in shares of ETFs, subject to the
restrictions and limitations of the 1940 Act, or any applicable rules, exemptive
orders or regulatory guidance. ETFs are pooled investment vehicles, which may be
managed or unmanaged, that generally seek to track the performance of a specific
index. ETFs will not track their underlying indices precisely since the ETFs
have expenses and may need to hold a portion of their assets in cash, unlike the
underlying indices, and the ETFs may not invest in all of the securities in the
underlying indices in the same proportion as the indices for varying reasons. A
Portfolio will incur transaction costs when buying and selling ETF shares, and
indirectly bear the expenses of the ETFs. In addition, the market value of an
ETF's shares, which are based on supply and demand in the market for the ETF's
shares, may differ from their NAV. Accordingly, there may be times when an ETF's
shares trade at a discount to its NAV.
A Portfolio may also invest in investment companies other than ETFs,
as permitted by the 1940 Act or the rules and regulations thereunder. As with
ETF investments, if the Portfolio acquires shares in other investment companies,
shareholders would bear, indirectly, the expenses of such investment companies
(which may include management and advisory fees), which are in addition to the
Portfolio's expenses. The Portfolios intend to invest uninvested cash balances
in an affiliated money market fund as permitted by Rule 12d1-1 under the 1940
Act.
Loans of Portfolio Securities
A Portfolio may seek to increase income by lending portfolio
securities to brokers, dealers and financial institutions ("borrowers") to the
extent permitted under the 1940 Act or the rules or regulations thereunder (as
such statute, rules, or regulations may be amended from time to time) or by
guidance regarding, interpretations of, or exemptive orders under, the 1940 Act.
Under the securities lending program, all securities loans will be secured
continually by cash collateral. A principal risk in lending portfolio securities
is that the borrower will fail to return the loaned securities upon termination
of the loan, and that the collateral will not be sufficient to replace the
loaned securities upon the borrower's default. In determining whether to lend
securities to a particular borrower, the Adviser (subject to the oversight of
the Boards) will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. The loans would be made only to firms deemed
by the Adviser to be creditworthy, and when, in the judgment of the Adviser, the
consideration that can be earned currently from securities loans of this type
justifies the attendant risk. The Fund will be compensated for the loan from a
portion of the net return from the interest earned on the cash collateral after
a rebate paid to the borrower (which may be a negative amount - i.e., the
borrower may pay a fee to the Fund in connection with the loan) and payments for
fees paid to the securities lending agent and for certain other administrative
expenses.
A Portfolio will have the right to call a loan and obtain the
securities loaned on notice to the borrower within the normal and customary
settlement time for the securities. While securities are on loan, the borrower
is obligated to pay a Portfolio amounts equal to any income or other
distribution from the securities.
A Portfolio may invest any cash collateral in a money market fund
that complies with Rule 2a-7, has been approved by the Boards and is expected to
be advised by the Adviser. Any such investment of cash collateral will be
subject to the money market fund's investment risk. A Portfolio may pay
reasonable finders', administrative, and custodial fees in connection with a
loan.
A Portfolio will not have the right to vote any securities having
voting rights during the existence of the loan. A Portfolio will have the right
to regain record ownership of loaned securities or equivalent securities in
order to exercise voting or ownership rights. When a Portfolio lends its
securities, its investment performance will continue to reflect the value of
securities on loan.
Preferred Stock
Each Portfolio may invest in preferred stock. Preferred stock is an
equity security that has features of debt because it generally entitles the
holder to periodic payments at a fixed rate of return. Preferred stock is
subordinated to any debt the issuer has outstanding but has liquidation
preference over common stock. Accordingly, preferred stock dividends are not
paid until all debt obligations are first met. Preferred stock may be subject to
more fluctuations in market value, due to changes in market participants'
perceptions of the issuer's ability to continue to pay dividends, than debt of
the same issuer.
Repurchase Agreements and Buy/Sell Back Transactions
A Portfolio may seek additional income by investing in repurchase
agreements pertaining only to U.S. Government securities. A repurchase agreement
is an agreement by which a Portfolio purchases a security and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date, normally one day or a week later. The purchase and
repurchase obligations are transacted under one document. The resale price is
greater than the purchase price, reflecting an agreed-upon "interest rate",
which is effective for the period of time the buyer's money is invested in the
security, and which is related to the current market rate of the purchased
security rather than its coupon rate. During the term of the repurchase
agreement, the Portfolio monitors on a daily basis the market value of the
securities subject to the agreement and, if the market value of the securities
falls below the resale amount provided under the repurchase agreement, the
seller under the repurchase agreement is required to provide additional
securities or cash equal to the amount by which the market value of the
securities falls below the resale amount. Because a repurchase agreement permits
a Portfolio to invest temporarily available cash on a fully-collateralized
basis, repurchase agreements permit the Portfolio to earn a return on
temporarily available cash while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. Repurchase agreements may exhibit the
characteristics of loans by a Portfolio.
The obligation of the seller under the repurchase agreement is not
guaranteed, and there is a risk that the seller may fail to repurchase the
underlying security, whether because of the seller's bankruptcy or otherwise. In
such event, a Portfolio would attempt to exercise its rights with respect to the
underlying security, including possible sale of the securities. The Portfolio
may incur various expenses in connection with the exercise of its rights and may
be subject to various delays and risks of loss, including (a) possible declines
in the value of the underlying securities, (b) possible reduction in levels of
income and (c) lack of access to the securities (if they are held through a
third-party custodian) and possible inability to enforce the Portfolios' rights.
The Boards have established procedures, which are periodically reviewed by the
Board, pursuant to which the Adviser monitors the creditworthiness of the
dealers with which the Portfolios enter into repurchase agreement transactions.
A Portfolio may enter into buy/sell back transactions, which are
similar to repurchase agreements. In this type of transaction, a Portfolio
enters a trade to buy securities at one price and simultaneously enters a trade
to sell the same securities at another price on a specified date. Similar to a
repurchase agreement, the repurchase price is higher than the sale price and
reflects current interest rates. Unlike, a repurchase agreement, however, the
buy/sell back transaction, though done simultaneously, is two separate legal
agreements. A buy/sell back transaction also differs from a repurchase agreement
in that the seller is not required to provide margin payments if the value of
the securities falls below the repurchase price because the transaction is two
separate transactions. The Portfolio has the risk of changes in the value of the
purchased security during the term of the buy/sell back agreement although these
agreements typically provide for the repricing of the original transaction at a
new market price if the value of the security changes by a specific amount.
Short Sales
A Portfolio may make short sales of securities or maintain a short
position. A short sale is effected by selling a security that the Portfolio does
not own, or, if the Portfolio does own such security, it is not to be delivered
upon consummation of sale. A short sale is against the box to the extent that
the Portfolio contemporaneously owns or has the right to obtain securities
identical to those sold. A short sale of a security involves the risk that,
instead of declining, the price of the security sold short will rise. If the
price of the securities sold short increases between the time of a short sale
and the time the Portfolio replaces the borrowed security, the Portfolio will
incur a loss; conversely, if the price declines, the Portfolio will realize a
gain. The potential for the price of a fixed-income security sold short to rise
is a function of both the remaining maturity of the obligation, its
creditworthiness and its yield. Unlike short sales of equities or other
instruments, the potential for the price of a fixed-income security to rise may
be limited due to the fact that the security will be no more than par at
maturity. However, the short sale of other instruments or securities generally,
including fixed-income securities convertible into equities or other
instruments, a fixed-income security trading at a deep discount from par or
which pays a coupon that is high in relative or absolute terms, or which is
denominated in a currency other than the U.S. Dollar, involves the possibility
of a theoretically unlimited loss since there is a theoretically unlimited
potential for the market price of the security sold short to increase.
Structured Products
A Portfolio may invest in structured products. Structured products,
including indexed or structured securities, combine the elements of futures
contracts or options with those of debt, preferred equity or a depositary
instrument. Generally, the principal amount, amount payable upon maturity or
redemption, or interest rate of a structured product is tied (either positively
or negatively) to prices, changes in prices, or differences between prices, of
underlying assets, such as securities, currencies, intangibles, goods, articles
or commodities or by reference to an unrelated benchmark related to an objective
index, economic factor or other measure, such as interest rates, currency
exchange rates, commodity indices, and securities indices. The interest rate or
(unlike most fixed-income securities) the principal amount payable at maturity
of a structured product may be increased or decreased depending on changes in
the value of the underlying asset or benchmark.
Structured products may take a variety of forms. Most commonly, they
are in the form of debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, but may also be issued as
preferred stock with dividend rates determined by reference to the value of a
currency or convertible securities with the conversion terms related to a
particular commodity.
Investing in structured products may be more efficient and less
expensive for a Portfolio than investing in the underlying assets or benchmarks
and the related derivative. These investments can be used as a means of pursuing
a variety of investment goals, including currency hedging, duration management
and increased total return. In addition, structured products may be a
tax-advantaged investment in that they generate income that may be distributed
to shareholders as income rather than short-term capital gains that may
otherwise result from a derivatives transaction.
Structured products, however, have more risk than traditional types
of debt or other securities. These products may not bear interest or pay
dividends. The value of a structured product or its interest rate may be a
multiple of a benchmark and, as a result, may be leveraged and move (up or down)
more steeply and rapidly than the benchmark. Under certain conditions, the
redemption value of a structured product could be zero. Structured products are
potentially more volatile and carry greater market risks than traditional debt
instruments. The prices of the structured instrument and the benchmark or
underlying asset may not move in the same direction or at the same time.
Structured products may be less liquid and more difficult to price than less
complex securities or instruments or more traditional debt securities. The risk
of these investments can be substantial with the possibility that the entire
principal amount is at risk. The purchase of structured products also exposes a
Portfolio to the credit risk of the issuer of the structured product.
Structured Notes and Indexed Securities: A Portfolio may invest in a
particular type of structured instrument sometimes referred to as a "structured
note". The terms of these notes may be structured by the issuer and the
purchaser of the note. Structured notes are derivative debt instruments, the
interest rate or principal of which is determined by an unrelated indicator (for
example, a currency, security, commodity or index thereof). Indexed securities
may include structured notes as well as securities other than debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
The terms of structured notes and indexed securities may provide that in certain
circumstances no principal is due at maturity, which may result in a total loss
of invested capital. Structured notes and indexed securities may be positively
or negatively indexed, so that appreciation of the unrelated indicator may
produce an increase or a decrease in the interest rate or the value of the
structured note or indexed security at maturity may be calculated as a specified
multiple of the change in the value of the unrelated indicator. Therefore, the
value of such notes and securities may be very volatile. Structured notes and
indexed securities may entail a greater degree of market risk than other types
of debt securities because the investor bears the risk of the unrelated
indicator. Structured notes or indexed securities also may be more volatile,
less liquid, and more difficult to accurately price than less complex securities
and instruments or more traditional debt securities.
Credit-Linked Securities: Credit-linked securities are issued by a
limited purpose trust or other vehicle that, in turn, invests in a basket of
derivative instruments, such as credit default swaps, interest rate swaps and
other securities, in order to provide exposure to certain high-yield or other
fixed-income markets. For example, a Portfolio may invest in credit-linked
securities as a cash management tool in order to gain exposure to certain
high-yield markets and/or to remain fully invested when more traditional
income-producing securities are not available. Like an investment in a bond,
investments in credit-linked securities represent the right to receive periodic
income payments (in the form of distributions) and payment of principal at the
end of the term of the security. However, these payments are conditioned on the
trust's receipt of payments from, and the trust's potential obligations to, the
counterparties to the derivative instruments and other securities in which the
trust invests. For instance, the trust may sell one or more credit default
swaps, under which the trust would receive a stream of payments over the term of
the swap agreements provided that no event of default has occurred with respect
to the referenced debt obligation upon which the swap is based. If a default
occurs, the stream of payments may stop and the trust would be obligated to pay
the counterparty the par value (or other agreed-upon value) of the referenced
debt obligation. This, in turn, would reduce the amount of income and principal
that a Portfolio would receive as an investor in the trust. A Portfolio's
investments in these instruments are indirectly subject to the risks associated
with derivative instruments, including, among others, credit risk, default or
similar event risk, counterparty risk, interest rate risk, leverage risk and
management risk. These securities are generally structured as Rule 144A
securities so that they may be freely traded among institutional buyers.
However, changes in the market for credit-linked securities or the availability
of willing buyers may result in the securities becoming illiquid.
Tender Option Bond ("TOB") Transactions
A Portfolio may enter into TOB transactions ("TOBs") in which the
Portfolio sells a municipal security to a broker, which, in turn deposits the
bond into a special purpose vehicle, which is generally organized as a trust,
sponsored by the broker (the "Trust"). The Portfolio receives cash and a
residual interest security (sometimes referred to as "inverse floaters") issued
by the Trust in return. The Trust simultaneously issues securities, which pay an
interest rate that is reset each week based on an index of high-grade short-term
demand notes. These securities, sometimes referred to as "floaters", are bought
by third parties, including tax-exempt money market funds, and can be tendered
by these holders to a liquidity provider at par, unless certain events occur.
Under certain circumstances, the Trust may be terminated or collapsed, either by
the Portfolio or upon the occurrence of certain events, such as a downgrade in
the credit quality of the underlying bond or in the event holders of the
floaters tender their securities to the liquidity provider. The Portfolio
continues to earn all the interest from the transferred bond less the amount of
interest paid on the floaters and the expenses of the SPV, which include
payments to the trustee and the liquidity provider and organizational costs. The
Portfolio uses the cash received from the transaction for investment purposes,
which involves leverage risk.
U.S. Government Securities
U.S. Government securities may be backed by the full faith and
credit of the United States, supported only by the right of the issuer to borrow
from the U.S. Treasury or backed only by the credit of the issuing agency
itself. These securities include: (i) the following U.S. Treasury securities,
which are backed by the full faith and credit of the United States and differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturities of one year or less with no interest paid and hence issued at
a discount and repaid at full face value upon maturity), U.S. Treasury notes
(maturities of one to ten years with interest payable every six months) and U.S.
Treasury bonds (generally maturities of greater than ten years with interest
payable every six months); (ii) obligations issued or guaranteed by U.S.
Government agencies and instrumentalities that are supported by the full faith
and credit of the U.S. Government, such as securities issued by the GNMA, the
FHA, the VA, the Department of Housing and Urban Development, the Export-Import
Bank, the General Services Administration and the Small Business Administration;
and (iii) obligations issued or guaranteed by U.S. government agencies and
instrumentalities that are not supported by the full faith and credit of the
U.S. Government or a right to borrow from the U.S. Treasury, such as securities
issued by the FNMA and the FHLMC (as discussed under "Asset-Backed Securities,
Mortgage-Related Securities and Structured Securities"), and governmental CMOs.
The securities of these entities are now in effect backed by the full faith and
credit of the U.S. Government. The maturities of the U.S. Government securities
listed in paragraphs (i) and (ii) above usually range from three months to 30
years. Such securities, except GNMA certificates, normally provide for periodic
payments of interest in fixed amount with principal payments at maturity or
specified call dates.
U.S. Government securities also include zero-coupon securities and
principal-only securities and certain stripped mortgage-related securities.
Zero-coupon securities are described in more detail in "Zero-Coupon Securities"
below, and stripped mortgage-related securities and principal-only securities
are described in more detail in "Asset-Backed Securities, Mortgage-Related
Securities and Structured Securities" above. In addition, other U.S. Government
agencies and instrumentalities have issued stripped securities that are similar
to SMRS.
Inflation-protected securities, or IPS, such as Treasury
Inflation-Protected Securities, or TIPS, are fixed income securities whose
principal value is periodically adjusted according to the rate of inflation. If
the index measuring inflation falls, the principal value of these securities
will be adjusted downward, and consequently the interest payable on these
securities (calculated with respect to a smaller principal amount) will be
reduced. Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-protected
securities. For bonds that do not provide a similar guarantee, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
Inflation-protected securities tend to react to changes in real
interest rates. In general, the price of an inflation-protected debt security
can fall when real interest rates rise, and can rise when real interest rates
fall. Interest payments on inflation-protected debt securities can be
unpredictable and will vary as the principal and/or interest is adjusted for
inflation.
TIPS, which are issued by the U.S Treasury, use the Consumer Price
Index for Urban Consumers, or the CPI, as the inflation measure. The principal
of a TIPS increases with inflation and decreases with deflation, as measured by
the CPI. When a TIPS matures, the holder is paid the adjusted principal or
original principal, whichever is greater. TIPS pay interest twice a year, at a
fixed rate, which is determined by auction at the time the TIPS are issued. The
rate is applied to the adjusted principal; so, like the principal, interest
payments rise with inflation and fall with deflation. TIPS are issued in terms
of 5, 10, and 20 years.
Guarantees of securities by the U.S. Government or its agencies or
instrumentalities guarantee only the payment of principal and interest on the
securities, and do not guarantee the securities' yield or value or the yield or
value of the shares of the Portfolio that holds the securities.
U.S. Government securities are considered among the safest of
fixed-income investments. As a result, however, their yields are generally lower
than the yields available from other fixed-income securities.
Variable, Floating and Inverse Floating Rate Municipal or Other Fixed-Income
Securities
These securities have interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market interest
rate. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of these securities, they are still subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. Because the interest rate is reset only periodically, changes
in the interest rate on these securities may lag behind changes in prevailing
market interest rates. Also, some of these securities (or the underlying
mortgages) are subject to caps or floors that limit the maximum change in the
interest rate during a specified period or over the life of the security.
When-Issued Securities and Forward Commitments
A 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.
At the time the 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 NAV. 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.
If a Portfolio is fully or almost fully invested with "when-issued"
or "forward commitment" transactions, the transactions may result in a form of
leveraging. Leveraging the Portfolio in this manner may increase the volatility
of the Portfolio's NAV.
Zero-Coupon Municipal or Other Securities
A zero-coupon security pays no interest to its holder during its
life. An investor acquires a zero-coupon security at a discounted price from the
face value of the security, which is generally based upon its present value, and
which, depending upon the time remaining until maturity, may be significantly
less than its face value (sometimes referred to as a "deep discount" price).
Upon maturity of the zero-coupon security, the investor receives the face value
of the security.
A Portfolio may invest in zero-coupon Treasury securities, which
consist of Treasury bills or the principal components of U.S. Treasury bonds or
notes. The Portfolio may also invest in zero-coupon securities issued by U.S.
Government agencies or instrumentalities that are supported by the full faith
and credit of the United States, which consist of the principal components of
securities of U.S. Government agencies or instrumentalities.
Currently, the only U.S. Treasury security issued without coupons is
the Treasury bill. The zero-coupon securities purchased by the Portfolio may
consist of principal components held in STRIPS form issued through the U.S.
Treasury's STRIPS program, which permits the beneficial ownership of the
component to be recorded directly in the Treasury book-entry system. In
addition, in the last few years a number of banks and brokerage firms have
separated ("stripped") the principal portions ("corpus") from the coupon
portions of the U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account).
Because zero-coupon securities trade at a discount from their face
or par value but pay no periodic interest, they are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest.
Current federal tax law requires that a holder (such as a Portfolio)
of a zero-coupon security accrue a portion of the discount at which the security
was purchased as income each year even though the holder receives no interest
payment in cash on the security during the year (generally referred to as
"original issue discount" or "OID"). As a result, in order to make the
distributions necessary for the 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, obtained by liquidation of portfolio securities or
borrowings if necessary, greater than the total amount of cash that the
Portfolio has actually received as interest during the year. The Portfolios
believe, however, that it is highly unlikely that it would be necessary to
liquidate portfolio securities or borrow money in order to make such required
distributions or to meet their investment objectives.
Future Developments
A Portfolio may 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.
Special Risk Considerations
The ratings of fixed-income securities by Moody's, S&P and Fitch are
a generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of differences in credit risk of securities within each rating category. See
Appendix A for a description of such ratings.
Many fixed-income securities, including certain municipal securities
in which a Portfolio may invest, contain call or buy-back features that permit
the issuer of the security to call or repurchase it. Such securities may present
risks based on payment expectations. If an issuer exercises such a "call option"
and redeems the security, the Portfolio may have to replace the called security
with a lower yielding security, resulting in a decreased rate of return for the
Portfolio.
Non-rated municipal or other fixed-income 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.
A Portfolio may invest in lower-rated securities and the High Income
Portfolio invests principally in lower-rated securities (commonly referred to as
"junk bonds"), which may include securities having the lowest rating for
non-subordinated debt securities (i.e., rated C by Moody's or CCC or lower by
S&P and Fitch) and unrated securities of equivalent investment quality. Debt
securities with such a rating are considered by the rating organizations to be
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. These securities are considered to have extremely poor prospects
of ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal.
Lower-rated securities generally are 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, although the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
The market for lower-rated securities may be thinner and less active than that
for higher-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 Adviser may experience
difficulty in valuing such securities and, in turn, a 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. Transaction costs
with respect to lower-rated securities may be higher, and in some cases
information may be less available, than is the case with investment grade
securities.
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 NAV of the Portfolio.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies
The following fundamental investment policies 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 of the Portfolio
represented at a meeting at which more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the outstanding shares of
the Portfolio, whichever is less.
As a matter of fundamental policy, a Portfolio may not:
(1) concentrate investments in an industry, as concentration may
be defined under the 1940 Act or the rules and regulations
thereunder (as such statute, rules or regulations may be
amended from time to time) or by guidance regarding,
interpretations of, or exemptive orders under, the 1940 Act or
the rules or regulations thereunder published by appropriate
regulatory authorities;
(2) issue any senior security (as that term is defined in the 1940
Act) or borrow money, except to the extent permitted by the
1940 Act or the rules and regulations thereunder (as such
statute, rules or regulations may be amended from time to
time) or by guidance regarding, or interpretations of, or
exemptive orders under, the 1940 Act or the rules or
regulations thereunder published by appropriate regulatory
authorities;
(3) make loans except through (i) the purchase of debt obligations
in accordance with its investment objectives and policies;
(ii) the lending of portfolio securities; (iii) the use of
repurchase agreements; or (iv) the making of loans to
affiliated funds as permitted under the 1940 Act, the rules
and regulations thereunder (as such statutes, rules or
regulations may be amended from time to time), or by guidance
regarding, and interpretations of, or exemptive orders under,
the 1940 Act;
(4) act as an underwriter of securities, except that a Portfolio
may acquire restricted securities under circumstances in
which, if such securities were sold, the Portfolio might be
deemed to be an underwriter for purposes of the Securities
Act; or
(5) purchase or sell real estate except that it may dispose of
real estate acquired as a result of the ownership of
securities or other instruments. This restriction does not
prohibit a Portfolio from investing in securities or other
instruments backed by real estate or in securities of
companies engaged in the real estate business.
As a fundamental policy, Arizona, Massachusetts, New Jersey, New
York and Ohio Portfolios may not purchase or sell commodities regulated by the
Commodity Futures Trading Commission under the CEA or commodities contracts
except for futures contracts and options on futures contracts.
As a fundamental policy, National, High Income, California,
Michigan, Minnesota, Pennsylvania and Virginia Portfolios may purchase or sell
commodities or options thereon to the extent permitted by applicable law.
As a fundamental policy, each Portfolio is diversified (as that term
is defined in the 1940 Act). This means that at least 75% of a Portfolio's
assets consists of: (i) cash or cash items; (ii) government securities; (iii)
securities of other investment companies; and (iv) securities of any one issuer
that represent no more than 10% of the outstanding voting securities of the
issuer of the securities and not more than 5% of the total assets of a
Portfolio.
Non-Fundamental Investment Policy
The following is a description of an operating policy that the
Portfolios have adopted but that is not fundamental and subject to change
without shareholder approval.
The Portfolios may not purchase securities on margin, except (i) as
otherwise provided under rules adopted by the SEC under the 1940 Act or by
guidance regarding the 1940 Act, or interpretations thereof, and (ii) that the
Portfolios may obtain such short-term credits as are necessary for the clearance
of portfolio transactions, and the Portfolios may make margin payments in
connection with futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments.
MANAGEMENT OF THE FUNDS
Adviser
The Adviser, a Delaware limited partnership with principal offices
at 1345 Avenue of the Americas, New York, New York 10105, has been retained
under investment advisory agreements (the "Advisory Agreements") to provide
investment advice and, in general, to conduct the management and investment
program of the Funds under the supervision of the Funds' Boards (see "Management
of the Funds" in the Prospectus). The Adviser is an investment adviser
registered under the Investment Advisers Act of 1940, as amended.
The Adviser is a leading global investment management firm
supervising client accounts with assets as of September 30, 2013, totaling
approximately $445 billion. The Adviser provides management services for many of
the largest U.S. public and private employee benefit plans, endowments,
foundations, public employee retirement funds, banks, insurance companies and
high net worth individuals worldwide.
As of September 30, 2013, the ownership structure of the Adviser,
expressed as a percentage of general and limited partnership interests, was as
follows:
AXA and its subsidiaries 64.0%
AllianceBernstein Holding, L.P. 34.5
Unaffiliated holders 1.5
------------
100.0%
============
|
AXA is a societe anonyme organized under the laws of France and the
holding company for an international group of insurance and related financial
services companies, through certain of its subsidiaries ("AXA and its
subsidiaries"). AllianceBernstein Holding L.P., ("Holding") is a Delaware
limited partnership, the units of which ("Holding Units"), are traded publicly
on the Exchange under the ticker symbol "AB". As of September 30, 2013, AXA
owned approximately 1.6% of the issued and outstanding assignments of beneficial
ownership of the Holding Units.
AllianceBernstein Corporation (an indirect wholly-owned subsidiary
of AXA) is the general partner of both Holding and the Adviser.
AllianceBernstein Corporation owns 100,000 general partnership units in Holding
and a 1% general partnership interest in the Adviser. Including both the general
partnership and limited partnership interests in Holding and the Adviser, AXA
and its subsidiaries had an approximate 64.6% economic interest in the Adviser
as of September 30, 2013.
Advisory Agreements and Expenses
Under the Advisory Agreements, the Adviser furnishes advice and
recommendations with respect to the portfolios of securities and investments and
provides persons satisfactory to the Boards to act as officers and employees of
the Portfolios. Such officers and employees, as well as certain directors or
trustees of the Portfolios, may be employees of the Adviser or its affiliates.
The Adviser is, under the Advisory Agreements, responsible for
certain expenses incurred by the Portfolios 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 Funds 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 SEC and
with state regulatory authorities).
The Funds have, under the Advisory Agreements, assumed the
obligation for payment of all of their other expenses. As to the obtaining of
services other than those specifically provided to the Portfolios by the
Adviser, each Portfolio may employ its own personnel. For such services, it may
also utilize personnel employed by the Adviser or its affiliates. In such event,
the services will be provided to the Portfolios at cost and the payments
therefore must be specifically approved by each Portfolio's Board. The
Portfolios paid to the Adviser a total of $45,388, $44,079, $43,443 and $45,366
in respect of such services during the fiscal year of the Fund ended October 31,
2013 for the National, California, High Income and New York Portfolios,
respectively, and a total of $46,822, $46,056, $47,179, $46,275, $46,463,
$47,028, $70,589 and $46,985 in respect of such services during the fiscal year
of the Fund II ended September 30, 2013 for the Arizona, Massachusetts,
Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia Portfolios,
respectively.
The Advisory Agreements continue in effect with respect to each
Portfolio provided that such continuance is approved at least annually by a
majority vote of the holders of the outstanding voting securities of such
Portfolio or by a majority vote of the Fund's Directors or Trustees (the
"Directors"), and, in either case, by a majority of the Directors who are not
parties to the Advisory Agreements or interested persons of any such party as
defined by the 1940 Act. Most recently, the Boards approved the continuance of
the Advisory Agreements for each Portfolio for another annual term at their
meetings held on November 5-7, 2013.
Any material amendment to the Advisory Agreements must be approved
by a vote of the outstanding securities of the relevant Portfolios and by the
vote of a majority of the Directors who are not interested persons of the
Portfolio or the Adviser.
The Advisory Agreements are 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 Directors on 60 days' written
notice, or by the Adviser on 60 days' written notice, and will automatically
terminate in the event of its assignment. The Advisory Agreements provide 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.
Effective September 7, 2004, under the terms of the Advisory
Agreements, the Portfolios, except the High Income Portfolio, pay the Adviser
.45 of 1% of the first $2.5 billion, .40 of 1% of the next $2.5 billion and .35
of 1% of the excess over $5 billion of each Portfolio's average daily net
assets. Effective December 17, 2009, the High Income Portfolio pays the Adviser
a contractual advisory fee of .50 of 1.00% of the first $2.5 billon, .45 of
1.00% of the excess over $2.5 billon up to $5 billion and .40 of 1.00% of the
excess over $5 billion of the Portfolio's average daily net assets. Such fees
are accrued daily and paid monthly.
The Adviser has contractually agreed for the period from the
effective date of the Portfolio's Prospectus to the effective date of the
subsequent Prospectus incorporating the Portfolio's annual financial statements
(the "Period") to waive its fee and bear certain expenses so that total
operational expenses, excluding interest expense, do not exceed the amounts
noted for the Portfolios listed in the table below. These fee waiver and/or
expense reimbursement agreements automatically extend each year unless the
Adviser provides notice 60 days prior to the end of the Period.
Portfolio Share Class Expense Cap
--------- ----------- -----------
National Portfolio Class A 0.80%
Class B 1.50%
Class C 1.50%
Advisor Class 0.50%
California Portfolio Class A 0.80%
Class B 1.50%
Class C 1.50%
Advisor Class 0.50%
New York Portfolio Class A 0.80%
Class B 1.50%
Class C 1.50%
Advisor Class 0.50%
Arizona Portfolio Class A 0.78%
Class B 1.48%
Class C 1.48%
Massachusetts Portfolio Class A 0.82%
Class B 1.52%
Class C 1.52%
Michigan Portfolio Class A 0.90%
Class B 1.60%
Class C 1.60%
Minnesota Portfolio Class A 0.90%
Class B 1.60%
Class C 1.60%
New Jersey Portfolio Class A 0.87%
Class B 1.57%
Class C 1.57%
Ohio Portfolio Class A 0.85%
Class B 1.55%
Class C 1.55%
Pennsylvania Portfolio Class A 0.90%
Class B 1.60%
Class C 1.60%
Virginia Portfolio Class A 0.80%
Class B 1.50%
Class C 1.50%
High Income Portfolio Class A 0.80%
Class C 1.50%
Advisor Class 1.50%
|
For the three most recent fiscal years of the Portfolios, the
Adviser's advisory fees for each Portfolio were as follows:
Amounts waived
or Reimbursed under
Fee Waiver and/or Expense
Portfolio Advisory Fees Reimbursement Agreement
--------- ------------- -----------------------
National
2013 $4,969,075 $686,403
2012 4,436,262 1,010,697
2011 3,902,370 1,039,593
High Income
2013 $6,795,042 $1,165,235
2012 4,446,659 $819,490
2011 2,293,656 635,742
New York
2013 $3,079,269 $376,624
2012 2,950,562 623,409
2011 2,680,820 721,844
California
2013 $2,926,874 $340,448
2012 3,006,543 586,798
2011 2,981,311 661,662
Arizona
2013 $771,761 $248,835
2012 775,700 278,827
2011 803,098 307,606
Massachusetts
2013 $1,377,687 $187,162
2012 1,304,587 175,351
2011 1,202,320 196,478
Michigan
2013 $424,385 $109,710
2012 446,583 41,343
2011 448,365 76,958
Minnesota
2013 $477,490 $124,739
2012 498,371 124,242
2011 514,127 144,485
New Jersey
2013 $724,660 $123,839
2012 703,419 137,654
2011 710,652 152,544
Ohio
2013 $739,082 $174,581
2012 712,317 175,924
2011 710,865 176,601
Pennsylvania
2013 $580,841 $117,372
2012 595,901 53,557
2011 583,709 73,408
Virginia
2013 $1,329,722 $327,068
2012 1,252,456 467,827
2011 1,102,338 464,802
|
Certain other clients of the Adviser may have investment objectives
and policies similar to those of the Portfolios. The Adviser may, from time to
time, make recommendations which result in the purchase or sale of the
particular security by its other clients simultaneously with a purchase or sale
thereof by one or more Portfolios. 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.
It is the policy of the Adviser to allocate advisory recommendations and the
placing of orders in a manner that is deemed equitable by the Adviser to the
accounts involved, including the Portfolios. When two or more of the Adviser's
clients (including a Portfolio) are purchasing or selling the same security on a
given day through the same broker or 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: AllianceBernstein Blended
Style Series, Inc., AllianceBernstein Bond Fund, Inc., AllianceBernstein Cap
Fund, Inc., AllianceBernstein Corporate Shares, AllianceBernstein Discovery
Growth Fund, Inc., AllianceBernstein Core Opportunities Fund, Inc.,
AllianceBernstein Equity Income Fund, Inc., AllianceBernstein Exchange Reserves,
AllianceBernstein Fixed-Income Shares, Inc., AllianceBernstein Global Bond Fund,
Inc., AllianceBernstein Global Real Estate Investment Fund, Inc.,
AllianceBernstein Global Risk Allocation Fund, Inc., AllianceBernstein Global
Thematic Growth Fund, Inc., AllianceBernstein Growth and Income Fund, Inc.,
AllianceBernstein High Income Fund, Inc., AllianceBernstein Institutional Funds,
Inc., AllianceBernstein International Growth Fund, Inc., AllianceBernstein Large
Cap Growth Fund, Inc., AllianceBernstein Trust, AllianceBernstein Unconstrained
Bond Fund, Inc., AllianceBernstein Variable Products Series Fund, Inc., The
AllianceBernstein Pooling Portfolios, The AllianceBernstein Portfolios, Sanford
C. Bernstein Fund, Inc., and Sanford C. Bernstein Fund II, Inc., all open-end
investment companies; and to AllianceBernstein Global High Income Fund, Inc.,
AllianceBernstein Income Fund, Inc., AllianceBernstein Multi-Manager Alternative
Fund, AllianceBernstein California Municipal Income Fund, Inc.,
AllianceBernstein National Municipal Income Fund, and Alliance New York
Municipal Income Fund, Inc., all registered closed-end investment companies. The
registered investment companies for which the Adviser serves as investment
adviser are referred to collectively below as the "AllianceBernstein Fund
Complex", while all of these investment companies, except the Sanford C.
Bernstein Fund, Inc. and AllianceBernstein Multi-Manager Alternative Fund, are
referred to collectively below as the "AllianceBernstein Funds".
Board of Directors Information
Certain information concerning the Directors is set forth below.
OTHER
PORTFOLIOS PUBLIC
IN COMPANY
PRINCIPAL ALLIANCE- DIRECTORSHIPS
OCCUPATION(S) BERNSTEIN HELD BY
DURING PAST FUND COMPLEX DIRECTOR
NAME, ADDRESS,* FIVE YEARS OVERSEEN IN THE PAST
AGE (YEAR AND ELECTED**) OR LONGER BY DIRECTOR FIVE YEARS
------------------------ -------------- ------------- -------------
INDEPENDENT DIRECTORS
Chairman of the Board
Marshall C. Turner, Jr., # ^ Private Investor 100 Xilinx, Inc.
72 since prior to (programmable
(2005) 2009. Former CEO logic semi
of Dupont conductors)
Photomasks, Inc. and SunEdison
(components of Inc. (semi-
semi0conductor conductor
manufacturing), substrates,
2003-2006, and solar materials
interim CEO and solar power
1999-2000. plants) since
Interim CEO of prior to 2009
MEMC Electronic
Materials, Inc.
(semi-conductor
and solar cell
substrates) from
November 2008
until March 2009.
He has extensive
operating and
early-stage
investment
experience,
including prior
service as a
general partner of
three institutional
venture capital
partnerships,
and serves on the
boards of three
education and
science- related
non-profit
organizations. He
has served as a
director of one
AllianceBernstein
fund since 1992,
and director or
trustee of
multiple
AllianceBernstein
funds since
2005. He is
Chairman of the
AllianceBernstein
Funds since
January 2014.
John H. Dobkin, # Independent 100 None
71 Consultant
(1998) since prior to
2009. Formerly,
President of
Save Venice, Inc.
(preservation
organization)
from 2001-2002;
Senior Advisor
from June 1999-
June 2000 and
President of
Historic Hudson
Valley (historic
preservation)
from December
1989-May 1999.
Previously,
Director of the
National Academy
of Design. He has
served as a
director or
trustee of
various
AllianceBernstein
Funds since 1992.
Michael J. Downey, # Private Investor 100 Asia Pacific
70 since prior to Fund, Inc.
(2005) 2009. Formerly since prior to
managing partner 2009, Prospect
of Lexington Acquisition
Capital, LLC Corp. (financial
(investment services) from
advisory firm) 2007 until 2009
from December 1997 and The Merger
until December Fund since prior
2003. From 1987 to 2009 until
until 1993, 2013
Chairman and CEO
of Prudential
Mutual Fund
Management,
director of the
Prudential
mutual funds,
and member of
the Executive
Committee of
Prudential
Securities Inc.
He has served
as a director
or trustee of the
AllianceBernstein
Funds since 2005
and is a director
and chairman of
one other
registered
investment company.
William H. Foulk, Jr., #, ## Investment 100 None
81 Adviser and an
(1998) Independent
Consultant
since prior to
2009. Previously,
he was Senior
Manager of
Barrett
Associates,
Inc., a
registered
investment
adviser. He
was formerly
Deputy
Comptroller and
Chief Investment
Officer of the
State of New
York and, prior
thereto, Chief
Investment
Officer of the
New York Bank
for Savings. He
has served as a
director or
trustee of
various
AllianceBernstein
Funds since
1983 and has
been Chairman of
the Independent
Directors
Committee of the
AllianceBernstein
Funds since 2003.
He served as
Chairman of such
funds from 2003
through December
2013.
D. James Guzy, # Chairman of the 100 PLX Technology
77 Board of PLX (semi-
(2005) Technology conductors)
(semi-conductors) since prior to
and of SRC 2009 and Cirrus
Computers Inc., Logic
with which he Corporation
has been (semi-
associated conductors)
since prior to since prior to
2009. He was a 2009 and until
director of July 2011
Intel Corporation
(semi-conductors)
from 1969 until
2008, and served
as Chairman of
the Finance
Committee of such
company for
several years
until May 2008.
He has served as
a director or
trustee of one
or more of the
AllianceBernstein
Funds since 1982.
Nancy P. Jacklin, # Professorial 100 None
65 Lecturer at the
(2006) Johns Hopkins
School of Advanced
International
Studies since
2008. Formerly,
U.S. Executive
Director of the
International
Monetary Fund
(December
2002-May 2006);
Partner,
Clifford Chance
(1992-2002);
Sector Counsel,
International
Banking and
Finance, and
Associate
General Counsel,
Citicorp
(1985-1992);
Assistant
General Counsel
(International),
Federal Reserve
Board of
Governors
(1982-1985);
and Attorney
Advisor, U.S.
Department of
the Treasury
(1973-1982).
Member of the
Bar of the
District of
Columbia and of
New York; and
member of the
Council on
Foreign
Relations. She
has served as a
director or
trustee of the
AllianceBernstein
Funds since
2006.
Greenbacker
Renewable Energy
Company LLC
(renewable
energy and
energy
efficiency
projects) from
August 2013 to
January 2014
Garry L. Moody, # Independent 100 Greenbacker
61 Consultant. Renewable Energy
(2008) Formerly, Partner, Company LLC
Deloitte & Touche (renewable
LLP (1995-2008) energy and
where he held a energy
number of senior efficiency
positions, projects) from
including Vice August 2013 to
Chairman, and January 2014
U.S. and Global
Investment
Management
Practice Managing
Partner;
President,
Fidelity
Accounting and
Custody Services
Company
(1993-1995);
and Partner,
Ernst & Young
LLP (1975-1993),
where he served
as the National
Director of
Mutual Fund Tax
Services and
Managing
Partner of its
Chicago Office
Tax department.
He is a member
of both the
Governing
Council of the
Independent
Directors
Council (IDC),
an organization
of independent
directors of
mutual funds,
and the Trustee
Advisory Board
of BoardIQ, a
biweekly
publication
focused on
issues and news
affecting
directors of
mutual funds.
He has served
as a director
or trustee, and
as Chairman of
the Audit
Committee, of the
AllianceBernstein
Funds since
2008.
Earl D. Weiner, # Of Counsel, and 100 None
74 Partner prior to
(2007) January 2007, of
the law firm
Sullivan &
Cromwell LLP
and member of ABA
Federal Regulation
of Securities
Committee Task
Force to draft
editions of the
Fund Director's
Guidebook. He
has served as
director or
trustee of the
AllianceBernstein
Funds since 2007
and is Chairman
of the Governance
and Nominating
Committees of the
Funds.
INTERESTED DIRECTOR
Robert M. Keith, + Senior Vice 100 None
1345 Avenue of the Americas President of
New York, NY 10105 the Adviser++
53 and head of
(2010) AllianceBernstein
Investments,
Inc. ("ABI")++
since July
2008; Director
of ABI and
President of the
AllianceBernstein
Mutual Funds.
Previously, he
served as
Executive Managing
Director of ABI
from December
2006 to June
2008. Prior to
joining ABI in
2006, Executive
Managing Director
of Bernstein
Global Wealth
Management, and
prior thereto,
Senior Managing
Director and
Global Head of
Client Service
and Sales of
the Adviser's
institutional
investment
management
business since
2004. Prior
thereto, he was
Managing Director
and Head of North
American Client
Service and Sales
in the Adviser's
institutional
investment
management
business, with
which he had
been associated
since prior to
2004.
--------
|
* The address for each of the Fund's Directors is c/o AllianceBernstein
L.P., Attention: Philip L. Kirstein, 1345 Avenue of the Americas, New
York, NY 10105.
** There is no stated term of office for the Funds' Directors.
# Member of the Audit Committee, the Governance and Nominating Committee and
the Independent Directors Committee.
## Member of the Fair Value Pricing Committee.
+ Mr. Keith is an "interested person", as defined in Section 2(a)(19) of the
1940 Act, of the Funds due to his various positions, including his
position as a Senior Vice President of the Adviser.
++ The Adviser and ABI are affiliates of the Funds.
^ Mr. Turner became Chairman of the Board on January 1, 2014.
The business and affairs of the Funds are overseen by the Boards.
Directors who are not "interested persons" of the Funds as defined in the 1940
Act, are referred to as "Independent Directors", and Directors who are
"interested persons" of the Funds are referred to as "Interested Directors".
Certain information concerning the Funds' governance structure and each Director
is set forth below.
Experience, Skills, Attributes and Qualifications of the Funds'
Directors. The Governance and Nominating Committee of each Fund's Board, which
is composed of Independent Directors, reviews the experience, qualifications,
attributes and skills of potential candidates for nomination or election by the
Board, and conducts a similar review in connection with the proposed nomination
of current Directors for re-election by shareholders at any annual or special
meeting of shareholders. In evaluating a candidate for nomination or election as
a Director, the Governance and Nominating Committee takes into account the
contribution that the candidate would be expected to make to the diverse mix of
experience, qualifications, attributes and skills that the Governance and
Nominating Committee believes contributes to good governance for the Fund.
Additional information concerning the Governance and Nominating Committee's
consideration of nominees appears in the description of the Committee below.
Each Board believes that, collectively, the Directors have balanced
and diverse experience, qualifications, attributes and skills, which allow the
Board to operate effectively in governing the Fund and protecting the interests
of shareholders. Each Board has concluded that, based on each Director's
experience, qualifications, attributes or skills on an individual basis and in
combination with those of the other Directors, each Director is qualified and
should continue to serve as such.
In determining that a particular Director was and continues to be
qualified to serve as a Director, each Board has considered a variety of
criteria, none of which, in isolation, was controlling. In addition, each Board
has taken into account the actual service and commitment of each Director during
his or her tenure (including the Director's commitment and participation in
Board and committee meetings, as well as his or her current and prior leadership
of standing and ad hoc committees) in concluding that each should continue to
serve. Additional information about the specific experience, skills, attributes
and qualifications of each Director, which in each case led to the Board's
conclusion that the Director should serve (or continue to serve) as Director of
the Fund, is provided in the table above and in the next paragraph.
Among other attributes and qualifications common to all Directors
are their ability to review critically, evaluate, question and discuss
information provided to them (including information requested by the Directors),
to interact effectively with the Adviser, other service providers, counsel and
the Fund's independent registered public accounting firm, and to exercise
effective business judgment in the performance of their duties as Directors. In
addition to his or her service as a Director of the Funds and other
AllianceBernstein Funds as noted in the table above: Mr. Dobkin has experience
as an executive of a number of organizations and served as Chairman of the Audit
Committee of many of the AllianceBernstein Funds from 2001 to 2008; Mr. Downey
has experience in the investment advisory business including as Chairman and
Chief Executive Officer of a large fund complex and as director of a number of
non-AllianceBernstein funds and as Chairman of a non-AllianceBernstein
closed-end fund; Mr. Foulk has experience in the investment advisory and
securities businesses, including as Deputy Comptroller and Chief Investment
Officer of the State of New York (where his responsibilities included bond
issuances, cash management and oversight of the New York Common Retirement
Fund), has served as Chairman of the Independent Directors Committee since 2003,
served as Chairman of the AllianceBernstein Funds from 2003 through December
2013 and is active in a number of mutual fund related organizations and
committees; Mr. Guzy has experience as a corporate director including as
Chairman of a public company and Chairman of the Finance Committee of a large
public technology company; Ms. Jacklin has experience as a financial services
regulator including as U.S. Executive Director of the International Monetary
Fund, which is responsible for ensuring the stability of the international
monetary system, and as a financial services lawyer in private practice; Mr.
Keith has experience as an executive of the Adviser, with responsibility to,
among other things, the AllianceBernstein Funds; Mr. Moody has experience as a
certified public accountant including experience as Vice Chairman and U.S. and
Global Investment Management Practice Partner for a major accounting firm, is a
member of both the governing council of an organization of independent directors
of mutual funds, and the Trustee Advisory Board of BoardIQ, a biweekly
publication focused on issues and news affecting directors of mutual funds, has
served as a director of Greenbacker Renewable Energy Company LLC and has served
as a director or trustee and Chairman of the Audit Committee of the
AllianceBernstein Funds since 2008; Mr. Turner has experience as a director
(including Chairman and Chief Executive officer of a number of companies) and as
a venture capital investor including prior service as general partner of three
institutional venture capital partnerships, and has served as Chairman of the
AllianceBernstein Funds since January 2014; and Mr. Weiner has experience as a
securities lawyer whose practice includes registered investment companies and as
Chairman, director or trustee of a number of boards, and has served as Chairman
of the Governance and Nominating Committee of the AllianceBernstein Funds since
2007. The disclosure herein of a director's experience, qualifications,
attributes and skills does not impose on such director any duties, obligations,
or liability that are greater than the duties, obligations and liability imposed
on such director as a member of the Board and any committee thereof in the
absence of such experience, qualifications, attributes and skills.
Board Structure and Oversight Function. The Boards are responsible
for oversight of the Funds. Each Fund has engaged the Adviser to manage the Fund
on a day-to-day basis. The Boards are responsible for overseeing the Adviser and
the Funds' other service providers in the operations of the Funds in accordance
with the Funds' investment objective and policies and otherwise in accordance
with its prospectus, the requirements of the 1940 Act and other applicable
Federal, state and other securities and other laws, and each Fund's charter and
bylaws. The Boards meet in-person at regularly scheduled meetings eight times
throughout the year. In addition, the Directors may meet in-person or by
telephone at special meetings or on an informal basis at other times. The
Independent Directors also regularly meet without the presence of any
representatives of management. As described below, each Board has established
four standing committees - the Audit, Governance and Nominating, Independent
Directors, and Fair Value Pricing Committees - and may establish ad hoc
committees or working groups from time to time, to assist the Board in
fulfilling its oversight responsibilities. Each committee is composed
exclusively of Independent Directors. The responsibilities of each committee,
including its oversight responsibilities, are described further below. The
Independent Directors have also engaged independent legal counsel, and may from
time to time engage consultants and other advisors, to assist them in performing
their oversight responsibilities.
An Independent Director serves as Chairman of each Board. The
Chairman's duties include setting the agenda for each Board meeting in
consultation with management, presiding at each Board meeting, meeting with
management between Board meetings, and facilitating communication and
coordination between the Independent Directors and management. The Directors
have determined that the Board's leadership by an Independent Director and its
committees composed exclusively of Independent Directors is appropriate because
they believe it sets the proper tone to the relationships between the Fund, on
the one hand, and the Adviser and other service providers, on the other, and
facilitates the exercise of the Board's independent judgment in evaluating and
managing the relationships. In addition, each Fund is required to have an
Independent Director as Chairman pursuant to certain 2003 regulatory settlements
involving the Adviser.
Risk Oversight. Each Fund is subject to a number of risks, including
investment, compliance and operational risks. Day-to-day risk management with
respect to the Funds resides with the Adviser or other service providers
(depending on the nature of the risk), subject to supervision by the Adviser.
Each Board has charged the Adviser and its affiliates with (i) identifying
events or circumstances, the occurrence of which could have demonstrable and
material adverse effects on the Fund; (ii) to the extent appropriate, reasonable
or practicable, implementing processes and controls reasonably designed to
lessen the possibility that such events or circumstances occur or to mitigate
the effects of such events or circumstances if they do occur; and (iii) creating
and maintaining a system designed to evaluate continuously, and to revise as
appropriate, the processes and controls described in (i) and (ii) above.
Risk oversight forms part of the Boards' general oversight of the
Funds' investment program and operations and is addressed as part of various
regular Board and committee activities. Each Fund's investment management and
business affairs are carried out by or through the Adviser and other service
providers. Each of these persons has an independent interest in risk management
but the policies and the methods by which one or more risk management functions
are carried out may differ from the Fund's and each other's in the setting of
priorities, the resources available or the effectiveness of relevant controls.
Oversight of risk management is provided by the Board and the Audit Committee.
The Directors regularly receive reports from, among others, management
(including the Global Heads of Investment Risk and Trading Risk of the Adviser),
the Fund's Senior Officer (who is also the Fund's independent compliance
officer), its independent registered public accounting firm, and counsel, and
internal auditors for the Adviser, as appropriate, regarding risks faced by the
Fund and the Adviser's risk management programs.
Not all risks that may affect the Funds can be identified, nor can
controls be developed to eliminate or mitigate their occurrence or effects. It
may not be practical or cost-effective to eliminate or mitigate certain risks,
the processes and controls employed to address certain risks may be limited in
their effectiveness, and some risks are simply beyond the reasonable control of
the Funds or the Adviser, its affiliates or other service providers. Moreover,
it is necessary to bear certain risks (such as investment-related risks) to
achieve the Funds' goals. As a result of the foregoing and other factors the
Funds' ability to manage risk is subject to substantial limitations.
Board Committees. Each Fund's Board has four standing committees of
the Board -- an Audit Committee, a Governance and Nominating Committee, a Fair
Value Pricing Committee and an Independent Directors Committee. The members of
the Audit, Governance and Nominating, Fair Value Pricing and Independent
Directors Committees are identified above.
The function of the Audit Committee is to assist the Boards in their
oversight of the Funds' financial reporting process. The Audit Committee met
three times each during the Funds' most recently completed fiscal years.
The function of the Governance and Nominating Committee includes the
nomination of persons to fill any vacancies or newly created positions on the
Boards. The Governance and Nominating Committee met three times each during the
Funds' most recently completed fiscal year.
Each Fund's Board has adopted a charter for its Governance and
Nominating Committee. Pursuant to the charter, the Committee assists each Board
in carrying out its responsibilities with respect to governance of a Fund and
identifies, evaluates, selects and nominates candidates for the Board. The
Committee may also set standards or qualifications for Directors and reviews at
least annually the performance of each Director, taking into account factors
such as attendance at meetings, adherence to Board policies, preparation for and
participation at meetings, commitment and contribution to overall work of the
Board and its committees, and whether there are health or other reasons that
might affect the Director's ability to perform his or her duties. The Committee
may consider candidates as Directors submitted by a Fund's current Board
members, officers, the Adviser, shareholders and other appropriate sources.
Pursuant to the charter, the Governance and Nominating Committee
will consider candidates for nomination as a director submitted by a shareholder
or group of shareholders who have beneficially owned at least 5% of a
Portfolio's common stock or shares of beneficial interest for at least two years
prior to the time of submission and who timely provide specified information
about the candidates and the nominating shareholder or group. To be timely for
consideration by the Governance and Nominating Committee, the submission,
including all required information, must be submitted in writing to the
attention of the Secretary at the principal executive offices of the Funds not
less than 120 days before the date of the proxy statement for the previous
year's annual meeting of shareholders. If the Funds did not hold an annual
meeting of shareholders in the previous year, the submission must be delivered
or mailed and received within a reasonable amount of time before the Funds begin
to print and mail their proxy materials. Public notice of such upcoming annual
meeting of shareholders may be given in a shareholder report or other mailing to
shareholders or by other means deemed by the Governance and Nominating Committee
or the Board to be reasonably calculated to inform shareholders.
Shareholders submitting a candidate for consideration by the
Governance and Nominating Committee must provide the following information to
the Governance and Nominating Committee: (i) a statement in writing setting
forth (A) the name, date of birth, business address and residence address of the
candidate; (B) any position or business relationship of the candidate, currently
or within the preceding five years, with the shareholder or an associated person
of the shareholder as defined below; (C) the class or series and number of all
shares of a Portfolio owned of record or beneficially by the candidate; (D) any
other information regarding the candidate that is required to be disclosed about
a nominee in a proxy statement or other filing required to be made in connection
with the solicitation of proxies for election of Directors pursuant to Section
20 of the 1940 Act and the rules and regulations promulgated thereunder; (E)
whether the shareholder believes that the candidate is or will be an "interested
person" of the Funds (as defined in the 1940 Act) and, if believed not to be an
"interested person," information regarding the candidate that will be sufficient
for the Funds to make such determination; and (F) information as to the
candidate's knowledge of the investment company industry, experience as a
director or senior officer of public companies, directorships on the boards of
other registered investment companies and educational background; (ii) the
written and signed consent of the candidate to be named as a nominee and to
serve as a Director if elected; (iii) the written and signed agreement of the
candidate to complete a directors' and officers' questionnaire if elected; (iv)
the shareholder's consent to be named as such by the Funds; (v) the class or
series and number of all shares of a Portfolio of the Funds owned beneficially
and of record by the shareholder and any associated person of the shareholder
and the dates on which such shares were acquired, specifying the number of
shares owned beneficially but not of record by each, and stating the names of
each as they appear on the Funds' record books and the names of any nominee
holders for each; and (vi) a description of all arrangements or understandings
between the shareholder, the candidate and/or any other person or persons
(including their names) pursuant to which the recommendation is being made by
the shareholder. "Associated Person of the shareholder" means any person who is
required to be identified under clause (vi) of this paragraph and any other
person controlling, controlled by or under common control with, directly or
indirectly, (a) the shareholder or (b) the associated person of the shareholder.
The Governance and Nominating Committee may require the shareholder
to furnish such other information as it may reasonably require or deem necessary
to verify any information furnished pursuant to the nominating procedures
described above or to determine the qualifications and eligibility of the
candidate proposed by the shareholder to serve on the Board. If the shareholder
fails to provide such other information in writing within seven days of receipt
of written request from the Governance and Nominating Committee, the
recommendation of such candidate as a nominee will be deemed not properly
submitted for consideration, and will not be considered, by the Committee.
The Governance and Nominating Committee will consider only one
candidate submitted by such a shareholder or group for nomination for election
at an annual meeting of shareholders. The Governance and Nominating Committee
will not consider self-nominated candidates. The Governance and Nominating
Committee will consider and evaluate candidates submitted by shareholders on the
basis of the same criteria as those used to consider and evaluate candidates
submitted from other sources. These criteria include the candidate's relevant
knowledge, experience, and expertise, the candidate's ability to carry out his
or her duties in the best interests of the Funds and the candidate's ability to
qualify as an Independent Director or Trustee. When assessing a candidate for
nomination, the Committee considers whether the individual's background, skills,
and experience will complement the background, skills, and experience of other
nominees and will contribute to the diversity of the Board.
The function of the Fair Value Pricing Committee is to consider, in
advance if possible, any fair valuation decision of the Adviser's Valuation
Committee relating to a security held by the Funds made under unique or highly
unusual circumstances not previously addressed by the Valuation Committee that
would result in a change in the Funds' NAV by more than $0.01 per share. The
Fair Value Pricing Committee did not meet during either of the Funds' most
recently completed fiscal years.
The function of the Independent Directors Committee is to consider
and take action on matters that the Board or Committee believes should be
addressed in executive session of the Independent Directors, such as review and
approval of the Advisory and Distribution Services Agreements. The Independent
Directors Committee met eight times during each Fund's most recently completed
fiscal year.
The dollar range of each Portfolio's securities owned by each
Director and the aggregate dollar range of securities in the AllianceBernstein
Fund Complex owned by each Director are set forth below.
Dollar Range of Equity Securities in the Portfolios
As of December 31, 2013
------------------------
NATIONAL HIGH INCOME NEW YORK CALIFORNIA
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
John H. Dobkin None None None None
Michael J. Downey None None None None
William H. Foulk, Jr. None None None None
D. James Guzy None None None None
Nancy P. Jacklin $50,001-$100,000 None None None
Robert M. Keith None None None None
Garry L. Moody None None None None
Marshall C. Turner, Jr. None None None None
Earl D. Weiner None $10,001-$50,000 None None
ARIZONA MASSACHUSETTS MICHIGAN MINNESOTA
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
John H. Dobkin None None None None
Michael J. Downey None None None None
William H. Foulk, Jr. None None None None
D. James Guzy None None None None
Nancy P. Jacklin None None None None
Robert M. Keith None None None None
Garry L. Moody None None None None
Marshall C. Turner, Jr. None None None None
Earl D. Weiner None None None None
NEW JERSEY OHIO PENNSYLVANIA VIRGINIA
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
John H. Dobkin None None None None
Michael J. Downey None None None None
William H. Foulk, Jr. None None None None
D. James Guzy None None None None
Nancy P. Jacklin None None None None
Robert M. Keith None None None None
Garry L. Moody None None None None
Marshall C. Turner, Jr. None None None None
Earl D. Weiner None None None None
|
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN THE
ALLIANCEBERNSTEIN FUND
COMPLEX AS OF DECEMBER 31, 2013
John H. Dobkin Over $100,000
Michael J. Downey Over $100,000
William H. Foulk, Jr. Over $100,000
D. James Guzy Over $100,000
Nancy P. Jacklin Over $100,000
Robert M. Keith None
Garry L. Moody Over $100,000
Marshall C. Turner, Jr. Over $100,000
Earl D. Weiner Over $100,000
|
Officer Information
Certain information concerning each Fund's officers is set forth
below.
NAME, ADDRESS* POSITION(S) PRINCIPAL OCCUPATION
AND AGE HELD WITH FUND DURING PAST 5 YEARS
--------------- --------------- -------------------------
Robert M. Keith, President and See biography above.
53 Chief Executive
Officer
Philip L. Kirstein, Senior Vice Senior Vice President
68 Independent President and and
Compliance Independent Compliance
Officer Officer of the Funds in the
AllianceBernstein Fund
Complex, with which he
has been associated
since October 2004.
Prior thereto, he was Of
Counsel to Kirkpatrick &
Lockhart, LLP from
October 2003 to October
2004, and General
Counsel of Merrill Lynch
Investment Managers,
L.P. since prior to
March 2003.
Douglas J. Peebles, Senior Vice Senior Vice President of
48 President the Adviser,**
with which he has been
associated since prior
to 2009.
Robert B. (Guy) Davidson III, Senior Vice Senior Vice President of
52 President the Adviser,** with
which he has been
associated since prior
to 2009.
Michael G. Brooks, Vice President Senior Vice President of
65 the Adviser,** with
which he has been
associated since prior
to 2009.
Fred S. Cohen, Vice President Senior Vice President of
55 the Adviser,** with
which he has been
associated since prior
to 2009.
Wayne D. Godlin, Vice President Senior Vice President of
52 the Adviser,** with
which he has been
associated since
December 2009. Prior
thereto, he was an
investment manager and a
Managing Director of Van
Kampen Asset Management
with which he had been
associated since prior
to 2009.
Terrance T. Hults, Vice President Senior Vice President of
47 the Adviser,** with
which he has been
associated since prior
to 2009.
Emilie D. Wrapp, Secretary Senior Vice President,
58 Assistant General
Counsel and Assistant
Secretary of ABI,** with
which she has been
associated since prior
to 2009.
Joseph J. Mantineo, Treasurer and Senior Vice President of
54 Chief Financial ABIS,** with which he
Officer has been associated
since prior to 2009.
Vincent S. Noto Chief Compliance Chief Compliance Officer
49 Officer of the AllianceBernstein
Funds, and Vice
President of ABIS,** with
which he has been
associated since prior
to 2009.
Phyllis J. Clarke, Controller Vice President of the
53 ABIS,** with which she
has been associated
since prior to 2009.
--------
|
* The address for each of the Funds' officers is 1345 Avenue of the
Americas, New York, NY 10105.
** The Adviser, ABI and ABIS are affiliates of the Funds.
The Funds do not pay any fees to, or reimburse expenses of, their
Directors who are considered "interested persons" of a Portfolio. The aggregate
compensation paid to each of the Directors by the Portfolios during their fiscal
years ended October 31, 2013 and September 30, 2013, the aggregate compensation
paid to each of the Directors during calendar year 2013 by the AllianceBernstein
Fund Complex and the total number of registered investment companies (and
separate investment portfolios within those companies) in the AllianceBernstein
Fund Complex with respect to which each of the Directors serves as a director or
trustee, are set forth below. Neither the registered investment company nor any
other fund in the AllianceBernstein Fund Complex provides compensation in the
form of pension or retirement benefits to any of its Directors or trustees. Each
of the Directors is a director or trustee of one or more other registered
investment companies in the AllianceBernstein Fund Complex.
Aggregate Aggregate
Name of Director Compensation Compensation
of the Fund From the Fund I from the Fund II
----------- ---------------- -----------------
John H. Dobkin $ 6,488 $ 6,492
Michael J. Downey $ 6,488 $ 6,492
William H. Foulk, Jr. $ 12,112 $ 12,120
D. James Guzy $ 6,488 $ 6,492
Nancy P. Jacklin $ 6,488 $ 6,492
Robert M. Keith $ 0 $ 0
Garry L. Moody $ 7,320 $ 7,322
Marshall C. Turner, Jr. $ 6,488 $ 6,492
Earl D. Weiner $ 6,936 $ 6,944
Total
Total Number of
Number of Investment
Investment Portfolios
Companies in within the
the Alliance- Alliance-
Total Bernstein Bernstein
Compensation Fund Complex, Fund Complex,
from the Including the Including the
Alliance- Fund, as to Fund, as to
Bernstein which the which the
Fund Complex, Director is Director is
Name of Director Including a Director a Director
or Fund the Funds or Trustee or Trustee
---------------- ------------ ------------ --------------
John H. Dobkin $262,000 31 100
Michael J. Downey $262,000 31 100
William H. Foulk, Jr. $487,000 31 100
D. James Guzy $262,000 31 100
Nancy P. Jacklin $262,000 31 100
Robert M. Keith $ 0 31 100
Garry L. Moody $297,000 31 100
Marshall C. Turner, Jr. $262,000 31 100
Earl D. Weiner $280,000 31 100
|
As of January 10, 2014, the Directors and officers of each of the
Funds, as a group owned less than 1% of the shares of each Fund.
Additional Information About the Portfolios' Portfolio Managers
The management of, and investment decisions for, the Portfolios'
portfolios are made by the Municipal Bond Investment Team. The investment
professionals(1) with the most significant responsibility for the day-to-day
management of the Portfolios' portfolios are: Michael G. Brooks, Fred S. Cohen
(except for High Income Portfolio), R. B. (Guy) Davidson III, Wayne Godlin and
Terrance T. Hults. For additional information about the portfolio management of
each Portfolio, see "Management of the Funds - Portfolio Managers" in the Funds'
Prospectus.
(1) Investment professionals at the Adviser include portfolio managers and
research analysts. Investment professionals are part of investment groups
(or teams) that service individual fund portfolios. The number of
investment professionals assigned to a particular fund will vary from fund
to fund.
The dollar ranges(2) of the Portfolios' equity securities owned
directly or beneficially by the Portfolios' portfolio managers as of October 31,
2013 for the High Income Municipal Portfolio and the New York Portfolio are set
forth below. The Portfolios' portfolio managers did not directly or beneficially
own equity securities in any of the other Portfolios as of October 31, 2013 and
September 30, 2013, as applicable.
(2) The ranges presented include any vested shares awarded under the Adviser's
Partners Compensation Plan (the "Plan").
HIGH INCOME MUNICIPAL PORTFOLIO
Michael G. Brooks None
Fred S. Cohen None
Robert B. (Guy) Davidson, III None
Wayne D. Godlin None
Terrance T. Hults $10,001-$50,000
NEW YORK PORTFOLIO
-------------------
Michael G. Brooks None
Fred S. Cohen None
Robert B. (Guy) Davidson, III None
Wayne D. Godlin None
Terrance T. Hults $10,001-$50,000
|
As of September 30, 2013 and October 31, 2013, employees of the
Adviser had approximately $93,898,403 and $96,058,819, respectively, invested in
shares of all AllianceBernstein Mutual Funds (excluding AllianceBernstein money
market funds) through their interests in certain deferred compensation plans,
including the Partners Compensation Plan, including both vested and unvested
amounts.
The following tables provide information regarding registered
investment companies (other than the Portfolios), other pooled investment
vehicles and other accounts over which the Portfolios' portfolio managers also
have day-to-day management responsibilities. The tables provide the numbers of
such accounts, the total assets in such accounts and the number of accounts and
total assets whose fees are based on performance. The information is provided as
of October 31, 2013 with regard to the National, High Income, California and New
York Portfolios, and as of September 30, 2013 with regard to the Arizona,
Massachusetts, Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Virginia
Portfolios.
- National Portfolio
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $16,414,000,000 None None
Fred S. Cohen 32 $16,414,000,000 None None
Robert B. (Guy) Davidson III 32 $16,414,000,000 None None
Wayne D. Godlin 32 $16,414,000,000 None None
Terrance T. Hults 32 $16,414,000,000 None None
|
- High Income Municipal Portfolio
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $16,177,000,000 None None
Robert B. (Guy) Davidson III 32 $16,177,000,000 None None
Wayne D. Godlin 32 $16,177,000,000 None None
Terrance T. Hults 32 $16,177,000,000 None None
- California Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $16,788,000,000 None None
Fred S. Cohen 32 $16,788,000,000 None None
Robert B. (Guy) Davidson III 32 $16,788,000,000 None None
Wayne D. Godlin 32 $16,788,000,000 None None
Terrance T. Hults 32 $16,788,000,000 None None
- New York Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $16,809,000,000 None None
Fred S. Cohen 32 $16,809,000,000 None None
Robert B. (Guy) Davidson III 32 $16,809,000,000 None None
Wayne D. Godlin 32 $16,809,000,000 None None
Terrance T. Hults 32 $16,809,000,000 None None
|
- High Income Municipal Portfolio
OTHER POOLED INVESTMENT VEHICLES
Total
Number Assets
Total Total of Other of Other
Number Assets Pooled Pooled
of Other of Other Investment Investment
Pooled Pooled Vehicles Vehicles
Investment Investment Managed with Managed with
Vehicles Vehicles Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 5 $345,000,000 None None
Robert B. (Guy) Davidson III 5 $345,000,000 None None
Wayne D. Godlin 5 $345,000,000 None None
Terrance T. Hults 5 $345,000,000 None None
|
- High Income Municipal Portfolio
OTHER ACCOUNTS(3)
Number
Total Total of Other Total Assets
Number Assets Accounts of Other
of Other of Other Managed with Accounts with
Accounts Accounts Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 1,624 $11,645,000,000 2 $338,000,000
Robert B. (Guy) Davidson III 1,624 $11,645,000,000 2 $338,000,000
Wayne D. Godlin 1,624 $11,645,000,000 2 $338,000,000
Terrance T. Hults 1,624 $11,645,000,000 2 $338,000,000
--------
|
(3) Each investment vehicle or account represented in the chart, for which the
investment professionals have portfolio management responsibility, is
based upon one of nine model portfolios. Each vehicle or account differs
from its respective model portfolio only to a limited extent based on
specific client requirements relating to the client's tax considerations,
cash flows due to the frequency and amount of investments, and/or
client-imposed investment restrictions regarding particular types of
industries.
- California, New York and National Portfolios
OTHER POOLED INVESTMENT VEHICLES
Total
Number Assets
Total Total of Other of Other
Number Assets Pooled Pooled
of Other of Other Investment Investment
Pooled Pooled Vehicles Vehicles
Investment Investment Managed with Managed with
Vehicles Vehicles Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 5 $345,000,000 None None
Fred S. Cohen 5 $345,000,000 None None
Robert B. (Guy) Davidson III 5 $345,000,000 None None
Wayne D. Godlin 5 $345,000,000 None None
Terrance T. Hults 5 $345,000,000 None None
|
- California, New York and National Portfolios
OTHER ACCOUNTS(4)
Number
Total Total of Other Total Assets
Number Assets Accounts of Other
of Other of Other Managed with Accounts with
Accounts Accounts Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 1,624 $11,645,000,000 2 $338,000,000
Fred S. Cohen 1,624 $11,645,000,000 2 $338,000,000
Robert B. (Guy) Davidson III 1,624 $11,645,000,000 2 $338,000,000
Wayne D. Godlin 1,624 $11,645,000,000 2 $338,000,000
Terrance T. Hults 1,624 $11,645,000,000 2 $338,000,000
--------
|
(4) Each investment vehicle or account represented in the chart, for which the
investment professionals have portfolio management responsibility, is
based upon one of nine model portfolios. Each vehicle or account differs
from its respective model portfolio only to a limited extent based on
specific client requirements relating to the client's tax considerations,
cash flows due to the frequency and amount of investments, and/or
client-imposed investment restrictions regarding particular types of
industries.
- Arizona Portfolio
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,253,000,000 None None
Fred S. Cohen 32 $17,253,000,000 None None
Robert B. (Guy) Davidson III 32 $17,253,000,000 None None
Wayne D. Godlin 32 $17,253,000,000 None None
Terrance T. Hults 32 $17,253,000,000 None None
- Massachusetts Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,133,000,000 None None
Fred S. Cohen 32 $17,133,000,000 None None
Robert B. (Guy) Davidson III 32 $17,133,000,000 None None
Wayne D. Godlin 32 $17,133,000,000 None None
Terrance T. Hults 32 $17,133,000,000 None None
- Michigan Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,330,000,000 None None
Fred S. Cohen 32 $17,330,000,000 None None
Robert B. (Guy) Davidson III 32 $17,330,000,000 None None
Wayne D. Godlin 32 $17,330,000,000 None None
Terrance T. Hults 32 $17,330,000,000 None None
- Minnesota Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,310,000,000 None None
Fred S. Cohen 32 $17,310,000,000 None None
Robert B. (Guy) Davidson III 32 $17,310,000,000 None None
Wayne D. Godlin 32 $17,310,000,000 None None
Terrance T. Hults 32 $17,310,000,000 None None
- New Jersey Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,255,000,000 None None
Fred S. Cohen 32 $17,255,000,000 None None
Robert B. (Guy) Davidson III 32 $17,255,000,000 None None
Wayne D. Godlin 32 $17,255,000,000 None None
Terrance T. Hults 32 $17,255,000,000 None None
- Ohio Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,259,000,000 None None
Fred S. Cohen 32 $17,259,000,000 None None
Robert B. (Guy) Davidson III 32 $17,259,000,000 None None
Wayne D. Godlin 32 $17,259,000,000 None None
Terrance T. Hults 32 $17,259,000,000 None None
- Pennsylvania Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,289,000,000 None None
Fred S. Cohen 32 $17,289,000,000 None None
Robert B. (Guy) Davidson III 32 $17,289,000,000 None None
Wayne D. Godlin 32 $17,289,000,000 None None
Terrance T. Hults 32 $17,289,000,000 None None
- Virginia Portfolio
|
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Total
Number of Assets of
Total Total Registered Registered
Number of Assets of Investment Investment
Registered Registered Companies Companies
Investment Investment Managed with Managed with
Companies Companies Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- -------- -------- ----------- -----------
Michael Brooks 32 $17,155,000,000 None None
Fred S. Cohen 32 $17,155,000,000 None None
Robert B. (Guy) Davidson III 32 $17,155,000,000 None None
Wayne D. Godlin 32 $17,155,000,000 None None
Terrance T. Hults 32 $17,155,000,000 None None
|
- All Portfolios of Fund II
OTHER POOLED INVESTMENT VEHICLES
Total
Number Assets
Total Total of Other of Other
Number Assets Pooled Pooled
of Other of Other Investment Investment
Pooled Pooled Vehicles Vehicles
Investment Investment Managed with Managed with
Vehicles Vehicles Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 5 $317,000,000 None None
Fred S. Cohen 5 $317,000,000 None None
Robert B. (Guy) Davidson III 5 $317,000,000 None None
Wayne D. Godlin 5 $317,000,000 None None
Terrance T. Hults 5 $317,000,000 None None
- All Portfolios of Fund II
|
OTHER ACCOUNTS(5)
Number
Total Total of Other Total Assets
Number Assets Accounts of Other
of Other of Other Managed with Accounts with
Accounts Accounts Performance- Performance-
Portfolio Manager Managed Managed based Fees based Fees
----------------- ------- ------- ---------- ----------
Michael Brooks 1,629 $11,731,000,000 3 $336,000,000
Fred S. Cohen 1,629 $11,731,000,000 3 $336,000,000
Robert B. (Guy) Davidson III 1,629 $11,731,000,000 3 $336,000,000
Wayne D. Godlin 1,629 $11,731,000,000 3 $336,000,000
Terrance T. Hults 1,629 $11,731,000,000 3 $336,000,000
--------
|
(5) Each investment vehicle or account represented in the chart, for which the
investment professionals have portfolio management responsibility, is
based upon one of nine model portfolios. Each vehicle or account differs
from its respective model portfolio only to a limited extent based on
specific client requirements relating to the client's tax considerations,
cash flows due to the frequency and amount of investments, and/or
client-imposed investment restrictions regarding particular types of
industries.
Investment Professional Conflict of Interest Disclosure
As an investment adviser and fiduciary, the Adviser owes its clients
and shareholders an undivided duty of loyalty. We recognize that conflicts of
interest are inherent in our business and accordingly have developed policies
and procedures (including oversight monitoring) reasonably designed to detect,
manage and mitigate the effects of actual or potential conflicts of interest in
the area of employee personal trading, managing multiple accounts for multiple
clients, including AllianceBernstein Mutual Funds, and allocating investment
opportunities. Investment professionals, including portfolio managers and
research analysts, are subject to the above-mentioned policies and oversight
monitoring to ensure that all clients are treated equitably. We place the
interests of our clients first and expect all of our employees to meet their
fiduciary duties.
Employee Personal Trading. The Adviser has adopted a Code of
Business Conduct and Ethics that is designed to detect and prevent conflicts of
interest when investment professionals and other personnel of the Adviser own,
buy or sell securities which may be owned by, or bought or sold for, clients.
Personal securities transactions by an employee may raise a potential conflict
of interest when an employee owns or trades in a security that is owned or
considered for purchase or sale by a client, or recommended for purchase or sale
by an employee to a client. Subject to the reporting requirements and other
limitations of its Code of Business Conduct and Ethics, the Adviser permits its
employees to engage in personal securities transactions, and also allows them to
acquire investments in certain Funds managed by the Adviser. The Adviser's Code
of Business Conduct and Ethics requires disclosure of all personal accounts and
maintenance of brokerage accounts with designated broker-dealers approved by the
Adviser. The Code of Business Conduct and Ethics also requires preclearance of
all securities transactions (except transactions in U.S. Treasuries and open-end
mutual funds) and imposes a 90-day holding period for securities purchased by
employees to discourage short-term trading.
Managing Multiple Accounts for Multiple Clients. The Adviser has
compliance policies and oversight monitoring in place to address conflicts of
interest relating to the management of multiple accounts for multiple clients.
Conflicts of interest may arise when an investment professional has
responsibilities for the investments of more than one account because the
investment professional may be unable to devote equal time and attention to each
account. The investment professional or investment professional teams for each
client may have responsibilities for managing all or a portion of the
investments of multiple accounts with a common investment strategy, including
other registered investment companies, unregistered investment vehicles, such as
hedge funds, pension plans, separate accounts, collective trusts and charitable
foundations. Among other things, the Adviser's policies and procedures provide
for the prompt dissemination to investment professionals of initial or changed
investment recommendations by analysts so that investment professionals are
better able to develop investment strategies for all accounts they manage. In
addition, investment decisions by investment professionals are reviewed for the
purpose of maintaining uniformity among similar accounts and ensuring that
accounts are treated equitably. Investment professional compensation reflects a
broad contribution in multiple dimensions to long-term investment success for
our clients and is generally not tied specifically to the performance of any
particular client's account, nor is it generally tied to the level or change in
level of assets under management.
Allocating Investment Opportunities. The investment professionals at
the Adviser routinely are required to select and allocate investment
opportunities among accounts. The Adviser has adopted policies and procedures
intended to address conflicts of interest relating to the allocation of
investment opportunities. These policies and procedures are designed to ensure
that information relevant to investment decisions is disseminated promptly
within its portfolio management teams and investment opportunities are allocated
equitably among different clients. The policies and procedures require, among
other things, objective allocation for limited investment opportunities (e.g.,
on a rotational basis), and documentation and review of justifications for any
decisions to make investments only for select accounts or in a manner
disproportionate to the size of the account. Portfolio holdings, position sizes,
and industry and sector exposures tend to be similar across similar accounts,
which minimizes the potential for conflicts of interest relating to the
allocation of investment opportunities. Nevertheless, access to portfolio funds
or other investment opportunities may be allocated differently among accounts
due to the particular characteristics of an account, such as size of the
account, cash position, tax status, risk tolerance and investment restrictions
or for other reasons.
The Adviser's procedures are also designed to address potential
conflicts of interest that may arise when the Adviser has a particular financial
incentive, such as a performance-based management fee, relating to an account.
An investment professional may perceive that he or she has an incentive to
devote more time to developing and analyzing investment strategies and
opportunities or allocating securities preferentially to accounts for which the
Adviser could share in investment gains.
Portfolio Manager Compensation
The Adviser's compensation program for portfolio managers is
designed to align with clients' interests, emphasizing each portfolio manager's
ability to generate long-term investment success for the Adviser's clients,
including the Portfolios. The Adviser also strives to ensure that compensation
is competitive and effective in attracting and retaining the highest caliber
employees.
Portfolio managers receive a base salary, incentive compensation and
contributions to AllianceBernstein's 401(k) plan. Part of the annual incentive
compensation is generally paid in the form of a cash bonus, and part through an
award under the firm's Incentive Compensation Award Plan (ICAP). The ICAP awards
vest over a four-year period. Deferred awards are paid in the form of restricted
grants of the firm's Master Limited Partnership Units, and award recipients have
the ability to receive a portion of their awards in deferred cash. The amount of
contributions to the 401(k) plan is determined at the sole discretion of the
Adviser. On an annual basis, the Adviser endeavors to combine all of the
foregoing elements into a total compensation package that considers industry
compensation trends and is designed to retain its best talent.
The incentive portion of total compensation is determined by
quantitative and qualitative factors. Quantitative factors, which are weighted
more heavily, are driven by investment performance. Qualitative factors are
driven by contributions to the investment process and client success.
The quantitative component includes measures of absolute, relative
and risk-adjusted investment performance. Relative and risk-adjusted returns are
determined based on the benchmark in the Portfolios' Prospectus and versus peers
over one-, three- and five-year calendar periods, with more weight given to
longer-time periods. Peer groups are chosen by Chief Investment Officers, who
consult with the product management team to identify products most similar to
our investment style and most relevant within the asset class. Portfolio
managers of the Portfolios do not receive any direct compensation based upon the
investment returns of any individual client account, and compensation is not
tied directly to the level or change in level of assets under management.
Among the qualitative components considered, the most important
include thought leadership, collaboration with other investment colleagues,
contributions to risk-adjusted returns of other portfolios in the firm, efforts
in mentoring and building a strong talent pool and being a good corporate
citizen. Other factors can play a role in determining portfolio managers'
compensation, such as the complexity of investment strategies managed, volume of
assets managed and experience.
The Adviser emphasizes four behavioral competencies--relentlessness,
ingenuity, team orientation and accountability--that support its mission to be
the most trusted advisor to its clients. Assessments of investment professionals
are formalized in a year-end review process that includes 360-degree feedback
from other professionals from across the investment teams and the Adviser.
EXPENSES OF THE FUNDS
Distribution Services Agreements
Each Fund has entered into a Distribution Services Agreement
("Agreement") with ABI, the Funds' principal underwriter, to permit ABI to
distribute the Portfolios' shares and to permit the Portfolio to pay
distribution services fees to defray expenses associated with the distribution
of the Portfolios' Class A, Class B and Class C shares in accordance with a
plan of distribution that is included in the Agreement and that has been duly
adopted and approved in accordance with Rule 12b-1 adopted by the SEC under the
1940 Act (each a "Rule 12b-1 Plan").
In approving the Rule 12b-1 Plan, the Directors determined that
there was a reasonable likelihood that the Rule 12b-1 Plan would benefit the
Funds and its shareholders. The distribution services fee of a particular class
will not be used to subsidize the provision of distribution services with
respect to any other class.
The Adviser may from time to time, and from its own funds or such
other resources as may be permitted by rules of the SEC, make payments for
distribution services to ABI; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
The Rule 12b-1 Plan continues in effect with respect to each class
of a Portfolio so long as such continuance is specifically approved at least
annually by the Directors and by a majority of the Directors who are not parties
to the Agreements or "interested persons," as defined in the 1940 Act, of any
such party (other than as Directors or Trustees of the Funds) and who have no
direct or indirect financial interest in the operation of the Rule 12b-1 Plan or
any agreement related thereto ("Qualified Directors"). Most recently,
continuance of the Agreements was approved for an additional annual term by a
vote, cast in person, of the Directors, including a majority of Qualified
Directors at their meetings held on November 5-7, 2013.
All material amendments to the Rule 12b-1 Plan will become effective
only upon approval as provided in the preceding paragraph, and the 12b-1 Plan
may not be amended in order to increase materially the costs that the Portfolios
may bear pursuant to the Agreement without the approval of a majority of the
holders of the outstanding voting shares of a Portfolio or the class or classes
of the Portfolio affected. The Agreement may be terminated (a) by the Portfolio
without penalty at any time by a majority vote of the holders of the Portfolio's
outstanding voting securities, voting separately by class, or by a majority vote
of the Qualified Directors or (b) by ABI. To terminate the Rule 12b-1 Plan or
Agreement, any party must give the other parties 60 days' written notice except
that a Portfolio may terminate the Rule 12b-1 Plan without giving prior notice
to ABI. The Agreement will terminate automatically in the event of its
assignment. The Rule 12b-1 Plan is of a type known as a "reimbursement plan",
which means that it reimburses the distributor for the actual costs of services
rendered.
In the event that the Rule 12b-1 Plan is terminated by either party
or not continued with respect to the Class A, Class B or Class C shares, (i) no
distribution services fees (other than current amounts accrued but not yet paid)
would be owed by the Portfolio to ABI with respect to that class and (ii) the
Portfolio would not be obligated to pay ABI for any amounts expended under the
Agreement not previously recovered by ABI from distribution services fees in
respect of shares of such class or through deferred sales charges.
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 ABI 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 ("CDSCs") and distribution services fees on the Class B and Class C
shares are the same as those of the initial sales charge and distribution
services fee with respect to the Class A shares in that the sales charge and
distribution services fee provide for the financing of the distribution of the
relevant class of the Portfolio's shares.
With respect to Class A shares of the Funds, distribution expenses
accrued by ABI in one fiscal year may not be paid from distribution services
fees received from the Funds in subsequent fiscal years. ABI's compensation with
respect to Class B and Class C shares under the Rule 12b-1 Plan is directly tied
to the expenses incurred by ABI. Actual distribution expenses for Class B and
Class C shares for any given year, however, will probably exceed the
distribution services fee payable under each Rule 12b-1 Plan with respect to the
class involved and, in the case of Class B and Class C shares, payments received
from CDSCs. The excess will be carried forward by ABI 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 each Rule 12b-1 Plan is in
effect.
Pursuant to the Plan, each class of each Portfolio pays ABI a Rule
12b-1 distribution services fee which may not exceed an annual rate of 0.30% of
a Portfolio's aggregate average daily net assets attributable to the Class A
shares and 1.00% of a Portfolio's aggregate average daily net assets
attributable to the Class B shares and Class C shares to compensate ABI for
distribution expenses. The Plan provides that a portion of the distribution
services fee in an amount not to exceed 0.25% of the aggregate daily net assets
of a Portfolio attributable to each of the Class A, Class B and Class C shares
constitutes a service fee that ABI will use for personal services and/or the
maintenance of shareholder accounts.
During the fiscal year ended October 31, 2013, for the National,
High Income, New York and California Portfolios, and during the fiscal year
ended September 30, 2013, for the Arizona, Massachusetts, Michigan, Minnesota,
New Jersey, Ohio, Pennsylvania and Virginia Portfolios with respect to Class A
shares, the distribution services fees for expenditures payable to ABI were as
follows:
Percentage Per Annum
Distribution Services of the Aggregate
Fees for Expenditures Average Daily Net Assets
Portfolio Payable to ABI Attributable to Class A Shares
--------- ---------------------- ------------------------------
National $2,222,387 0.30%
High Income $1,969,256 0.30%
New York $1,660,318 0.30%
California $1,528,241 0.30%
Arizona $ 406,205 0.30%
Massachusetts $ 695,733 0.30%
Michigan $ 200,230 0.30%
Minnesota $ 251,794 0.30%
New Jersey $ 368,505 0.30%
Ohio $ 358,503 0.30%
Pennsylvania $ 300,972 0.30%
Virginia $ 668,751 0.30%
|
Expenses incurred by each Portfolio and costs allocated to each
Portfolio in connection with activities primarily intended to result in the sale
of Class A shares were as follows:
Category National High Income New York California Arizona Massachusetts Michigan
of Expense Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------- --------- --------- --------- --------- --------- --------- ---------
Advertising/
Marketing $ 7,740 $ 6,895 $ 5,786 $ 5,343 $ 1,521 $ 2,591 $ 757
Printing and Mailing
of Prospectuses and
Semi-Annual and
Annual Reports to
Other Than Current
Shareholders $ 466 $ 391 $ 360 $ 308 $ 201 $ 340 $ 110
Compensation to
Underwriters $ 309,558 $ 273,407 $ 231,893 $ 213,134 $ 56,576 $ 96,944 $ 27,923
Compensation to
Dealers $2,524,910 $3,059,499 $1,885,637 $1,655,569 $430,314 $ 800,313 $ 212,004
Compensation to Sales
Personnel $ 139,459 $ 304,827 $ 136,495 $ 43,335 $ 13,475 $ 40,851 $ 9,423
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 322,126 $ 284,922 $ 240,868 $ 221,523 $ 59,280 $ 101,565 $ 29,225
Totals $3,304,259 $3,929,941 $2,501,039 $2,139,212 $561,367 $1,042,604 $ 279,442
|
Minnesota New Jersey Ohio Pennsylvania Virginia
Category of Expense Portfolio Portfolio Portfolio Portfolio Portfolio
------------------- --------- --------- --------- --------- ---------
Advertising/ Marketing $ 937 $ 1,362 $ 1,340 $ 1,124 $ 2,504
Printing and Mailing
of Prospectuses and
Semi-Annual and Annual
Reports to Other Than
Current Shareholders $ 123 $ 174 $ 174 $ 150 $ 337
Compensation to
Underwriters $ 35,044 $ 51,314 $ 49,883 $ 41,903 $ 93,272
Compensation to
Dealers $290,699 $409,675 $406,481 $303,327 $706,662
Compensation to Sales
Personnel $ 12,772 $ 19,855 $ 18,640 $ 13,008 $ 31,487
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 36,742 $ 53,799 $ 52,299 $ 43,937 $ 97,631
Totals $376,317 $536,179 $528,817 $403,449 $931,893
|
Expenses incurred by each Portfolio and costs allocated to each
Portfolio in connection with activities primarily intended to result in the sale
of Class B shares were as follows for the periods indicated:
Percentage Per Annum
Distribution Services of the Aggregate
Fees for Expenditures Average Daily Net Assets
Portfolio Payable to ABI Attributable to Class B Shares
--------- ---------------------- ------------------------------
National $ 43,703 1.00%
New York $ 78,753 1.00%
California $ 14,152 1.00%
Arizona $ 15,370 1.00%
Massachusetts $ 18,032 1.00%
Michigan $ 7,288 1.00%
Minnesota $ 1,797 1.00%
New Jersey $ 15,192 1.00%
Ohio $ 13,303 1.00%
Pennsylvania $ 13,676 1.00%
Virginia $ 17,918 1.00%
|
During the fiscal year ended October 31, 2013, for the National, New
York and California Portfolios, and during the fiscal year ended September 30,
2013, for the Arizona, Massachusetts, Michigan, Minnesota, New Jersey, Ohio,
Pennsylvania and Virginia Portfolios, expenses incurred by each Portfolio and
costs allocated to each Portfolio in connection with activities primarily
intended to result in the sale of Class B shares were as follows:
National New York California Arizona Massachusetts
Category of Expense Portfolio Portfolio Portfolio Portfolio Portfolio
------------------- ---------- ---------- ---------- ---------- ----------
Advertising/ Marketing $ 47 $ 85 $ 15 $ 18 $ 21
Printing and Mailing
of Prospectuses and
Semi-Annual and Annual
Reports to Other Than
Current Shareholders $ 4 $ 5 $ 2 $ 4 $ 3
Compensation to
Underwriters $ 1,848 $ 3,336 $ 597 $ 650 $ 759
Compensation to
Dealers $16,072 $32,330 $4,434 $ 4,062 $5,614
Compensation to Sales
Personnel $ 148 $ 306 $ 12 $ 10 $ 7
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 1,914 $ 3,447 $ 617 $ 671 $ 791
Totals $20,033 $39,509 $5,677 $ 5,415 $7,195
|
Michigan Minnesota New Jersey Ohio Pennsylvania Virginia
Category of Expense Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------- --------- --------- --------- --------- --------- ---------
Advertising/ Marketing $ 9 $ 0 $ 18 $ 16 $ 16 $ 20
Printing and Mailing
of Prospectuses and
Semi-Annual and Annual
Reports to Other Than
Current Shareholders $ 1 $ 0 $ 4 $ 4 $ 3 $ 3
Compensation to
Underwriters $ 310 $ 76 $ 642 $ 561 $ 576 $ 747
Compensation to
Dealers $2,500 $553 $4,959 $4,191 $4,508 $5,626
Compensation to Sales
Personnel $ 14 $ 0 $ 15 $ 7 $ 15 $ 18
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 320 $ 76 $ 668 $ 584 $ 601 $ 785
Totals $3,154 $705 $6,306 $5,363 $5,719 $7,199
|
Expenses incurred by each Portfolio and costs allocated to each
Portfolio in connection with activities primarily intended to result in the sale
of Class C shares were as follows for the periods indicated:
Percentage Per Annum
Distribution Services of the Aggregate
Fees for Expenditures Average Daily Net Assets
Portfolio Payable to ABI Attributable to Class C Shares
--------- ---------------------- ------------------------------
National $1,672,834 1.00%
High Income $2,347,815 1.00%
New York $1,006,294 1.00%
California $1,013,868 1.00%
Arizona $ 345,638 1.00%
Massachusetts $ 724,386 1.00%
Michigan $ 268,357 1.00%
Minnesota $ 219,980 1.00%
New Jersey $ 366,814 1.00%
Ohio $ 434,089 1.00%
Pennsylvania $ 273,840 1.00%
Virginia $ 707,850 1.00%
|
During the fiscal year ended October 31, 2013, for the National,
High Income, New York and California Portfolios, and during the fiscal year
ended September 30, 2013, for the Arizona, Massachusetts, Michigan, Minnesota,
New Jersey, Ohio, Pennsylvania and Virginia Portfolios, expenses incurred by
each Portfolio and costs allocated to each Portfolio in connection with
activities primarily intended to result in the sale of Class C shares were as
follows:
Category National High Income New York California Arizona Massachusetts
of Expense Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------- --------- --------- --------- --------- --------- --------------
Advertising/ Marketing $ 1,755 $ 2,444 $ 1,062 $ 1,068 $ 385 $ 807
Printing and Mailing
of Prospectuses and
Semi-Annual and Annual
Reports to Other Than
Current Shareholders $ 107 $ 136 $ 68 $ 64 $ 51 $ 103
Compensation to
Underwriters $ 70,012 $ 97,790 $ 42,182 $ 42,536 $ 14,426 $ 30,224
Compensation to
Dealers $1,584,178 $2,125,913 $ 925,030 $1,034,160 $334,774 $ 721,511
Compensation to Sales
Personnel $ 20,278 $ 77,194 $ 17,654 $ 5,488 $ 4,365 $ 12,091
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 72,775 $ 101,883 $ 43,812 $ 44,137 $ 15,131 $ 31,712
Totals $1,749,105 $2,405,360 $1,029,808 $1,127,453 $369,132 $ 796,448
|
Michigan Minnesota New Jersey Ohio Pennsylvania Virginia
Category of Expense Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------- --------- --------- --------- --------- --------- ---------
Advertising/ Marketing $ 303 $ 244 $ 410 $ 484 $ 308 $ 796
Printing and Mailing
of Prospectuses and
Semi-Annual and Annual
Reports to Other Than
Current Shareholders $ 40 $ 33 $ 54 $ 64 $ 40 $ 108
Compensation to
Underwriters $ 11,210 $ 9,180 $ 15,309 $ 18,145 $ 11,444 $ 29,595
Compensation to
Dealers $310,126 $213,537 $373,873 $421,697 $285,734 $693,053
Compensation to Sales
Personnel $ 2,703 $ 3,203 $ 4,876 $ 4,037 $ 2,700 $ 7,112
Interest, Carrying or
Other Financing
Charges $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (Includes
Personnel Costs of
Those Home Office
Employees Involved in
the Distribution
Effort and the
Travel-related
Expenses Incurred by
the Marketing
Personnel Conducting
Seminars) $ 11,751 $ 9,632 $ 16,066 $ 19,014 $ 11,992 $ 30,997
Totals $336,133 $235,829 $410,588 $463,441 $312,218 $761,661
|
During the fiscal year ended October 31, 2013, for the National,
High Income, New York and California Portfolios, and during the fiscal year
ended September 30, 2013, for the Arizona, Massachusetts, Michigan, Minnesota,
New Jersey, Ohio, Pennsylvania and Virginia Portfolios, unreimbursed
distribution expenses incurred and carried over for reimbursement in future
years in respect of the Class B and Class C shares of each Portfolio were as
follows:
National High Income New York California Arizona Massachusetts
Class Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----- --------- --------- --------- --------- --------- ---------
Class B $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(% of the net assets of 0% 0% 0% 0% 0% 0%
Class B)
Class C $76,271 $57,545 $23,514 $ 113,585 $23,496 $ 72,063
(% of the net assets of
Class C) .05% .03% .03% .13% .08% .11%
|
Michigan Minnesota New Jersey Ohio Pennsylvania Virginia
Class Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----- --------- --------- --------- --------- --------- ---------
Class B $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(% of the net assets of 0% 0% 0% 0% 0% 0%
Class B)
Class C $67,777 $15,850 $43,773 $29,351 $38,377 $53,813
(% of the net assets of
Class C) .31% .08% .13% .08% .16% .09%
|
Transfer Agency Agreements
ABIS, an indirect wholly-owned subsidiary of the Adviser, located
principally at 8000 IH 10 W, 4th Floor, San Antonio, Texas 78230, receives a
transfer agency fee per account holder of the Class A shares, Class B shares,
Class C shares and Advisor Class shares (as applicable) of each Portfolio of
the Funds. The transfer agency fee with respect to the Class B shares and Class
C shares is higher than the transfer agency fee with respect to the Class A
shares and Advisor Class shares. For the fiscal year ended October 31, 2013 and
September 30, 2013, the Fund and the Fund II paid ABIS $508,593 and $224,112,
respectively, under the transfer agency agreements.
ABIS acts as the transfer agent for the Portfolios. ABIS registers
the transfer, issuance and redemption of Portfolio shares and disburses
dividends and other distributions to Portfolio shareholders.
Many Portfolio shares are owned by selected dealers or selected
agents, as defined below, financial intermediaries or other financial
representatives ("financial intermediaries") for the benefit of their customers.
Retirement plans may also hold Portfolio shares in the name of the plan, rather
than the participant. In those cases, the Portfolios often do not maintain an
account for you. Thus, some or all of the transfer agency functions for these
accounts are performed by the financial intermediaries and plan recordkeepers.
The Portfolios, ABI and/or the Adviser pay to these financial intermediaries,
including those that sell shares of the AllianceBernstein Mutual Funds, fees for
sub-accounting or shareholder servicing in amounts ranging up to $19 per
customer fund account per annum. Retirement plans may also hold Portfolio shares
in the name of the plan, rather than the participant. Plan recordkeepers, who
may have affiliated financial intermediaries who sell shares of the Portfolios,
may be paid for each plan participant fund account in amounts up to $19 per
account per annum and/or up to 0.25% per annum of the average daily assets held
through the intermediary. To the extent any of these payments for recordkeeping
services, transfer agency services or retirement plan accounts are made by the
Portfolios, they are included in your Prospectus in the Portfolio expense tables
under "Fees and Expenses of the Portfolios." In addition, financial
intermediaries may be affiliates of entities that receive compensation from the
Adviser or ABI for maintaining retirement plan "platforms" that facilitate
trading by affiliated and non-affiliated financial intermediaries and
recordkeeping for retirement plans.
Because financial intermediaries and plan recordkeepers may be paid
varying amounts per class for sub-accounting or shareholder servicing, the
service requirements of which may also vary by class, this may create an
additional incentive for financial intermediaries and their financial advisors
to favor one fund complex over another or one class of shares over another.
PURCHASE OF SHARES
The following information supplements that set forth in the
Portfolios' Prospectus under the heading "Investing in the Portfolios".
Effective January 31, 2009, sales of Class B shares of the
Portfolios to new investors were suspended. Class B shares are only issued (i)
upon the exchange of Class B shares from another AllianceBernstein Fund; (ii)
for purposes of dividend reinvestment, (iii) through the Portfolio's Automatic
Investment Program for accounts that established the Program prior to January
31, 2009, and (iv) for purchase of additional Class B shares by Class B
shareholders as of January 31, 2009. The ability to establish a new Automatic
Investment Program for accounts containing Class B shares was suspended as of
January 31, 2009.
General
Shares of each Portfolio are offered on a continuous basis at a
price equal to their NAV plus an initial sales charge at the time of purchase
("Class A shares"), with a CDSC ("Class B shares"), without any initial sales
charge and, as long as the shares are held one year or more, without any CDSC
("Class C shares"), or to investors eligible to purchase Advisor Class shares,
without any initial sales charge or CDSC ("Advisor Class shares"), in each case
as described below. All of the classes of shares of each Portfolio, except the
Advisor Class shares, are subject to Rule 12b-1 asset-based sales charges.
Shares of each Portfolio that are offered subject to a sales charge are offered
through (i) investment dealers that are members of Financial Industry Regulatory
Authority and have entered into selected dealer agreements with ABI ("selected
dealers"), (ii) depository institutions and other financial intermediaries, or
their affiliates, that have entered into selected agent agreements with ABI
("selected agents"), and (iii) ABI. Only the Fund's Portfolios offer Advisor
Class shares and the High Income Portfolio does not offer Class B shares.
Investors may purchase shares of a Portfolio either through
financial intermediaries or directly through ABI. A transaction, service,
administrative or other similar fee may be charged by your financial
intermediary with respect to the purchase, sale or exchange of shares made
through the financial intermediary. Such financial intermediary 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 Funds, including
requirements as to classes of shares available through that financial
intermediary and the minimum initial and subsequent investment amounts. The
Funds are not responsible for, and has no control over, the decision of any
financial intermediary to impose such differing requirements. Sales personnel of
financial intermediaries distributing the Funds' shares may receive differing
compensation for selling different classes of shares.
In order to open your account, each Fund or your financial
intermediary is required to obtain certain information from you for
identification purposes. This information may include name, date of birth,
permanent residential address and social security/taxpayer identification
number. It will not be possible to establish your account without this
information. If a Fund or your financial intermediary is unable to verify the
information provided, your account may be closed and other appropriate action
may be taken as permitted by law.
Frequent Purchases and Sales of Portfolio Shares
The Funds' Boards have adopted policies and procedures designed to
detect and deter frequent purchases and redemptions of Portfolio shares or
excessive or short-term trading that may disadvantage long-term Portfolio
shareholders. These policies are described below. There is no guarantee that the
Portfolios will be able to detect excessive or short-term trading or to identify
shareholders engaged in such practices, particularly with respect to
transactions in omnibus accounts. Shareholders should be aware that application
of these policies may have adverse consequences, as described below, and avoid
frequent trading in Portfolio shares through purchases, sales and exchanges of
shares. The Portfolio reserves the right to restrict, reject or cancel, without
any prior notice, any purchase or exchange order for any reason, including any
purchase or exchange order accepted by any shareholder's financial intermediary.
Risks Associated With Excessive Or Short-Term Trading Generally.
While the Portfolios will try to prevent market timing by utilizing the
procedures described below, these procedures may not be successful in
identifying or stopping excessive or short-term trading in all circumstances. By
realizing profits through short-term trading, shareholders that engage in rapid
purchases and sales or exchanges of a Portfolio's shares dilute the value of
shares held by long-term shareholders. Volatility resulting from excessive
purchases and sales or exchanges of Portfolio shares, especially involving large
dollar amounts, may disrupt efficient portfolio management and cause a Portfolio
to sell shares at inopportune times to raise cash to accommodate redemptions
relating to short-term trading. In particular, a Portfolio may have difficulty
implementing its long-term investment strategies if it is forced to maintain a
higher level of its assets in cash to accommodate significant short-term trading
activity. In addition, a Portfolio may incur increased administrative and other
expenses due to excessive or short-term trading, including increased brokerage
costs and realization of taxable capital gains.
Although the Portfolios do not invest in securities of foreign
issuers, such investments may be particularly susceptible to short-term trading
strategies. This is because foreign securities are typically traded on markets
that close well before the time a Portfolio calculates its NAV, ordinarily at
4:00 p.m., Eastern time, which gives rise to the possibility that developments
may have occurred in the interim that would affect the value of these
securities. The time zone differences among international stock markets can
allow a shareholder engaging in a short-term trading strategy to exploit
differences in Portfolio share prices that are based on closing prices of
securities of foreign issuers established some time before the Portfolio
calculates its own share price (referred to as "time zone arbitrage"). The
Portfolios have procedures, referred to as fair value pricing, designed to
adjust closing market prices of securities of foreign issuers to reflect what is
believed to be the fair value of those securities at the time a Portfolio
calculates its NAV. While there is no assurance, the Portfolios expect that the
use of fair value pricing, in addition to the short-term trading policies
discussed below, will significantly reduce a shareholder's ability to engage in
time zone arbitrage to the detriment of other Portfolio shareholders.
The Portfolio may invest in securities that are, among other things,
thinly traded, traded infrequently or relatively illiquid, and there is the risk
that the current market price for the securities may not accurately reflect
current market values. A shareholder may seek to engage in short-term trading to
take advantage of these pricing differences (referred to as "price arbitrage").
All Portfolios may be adversely affected by price arbitrage.
Policy Regarding Short-Term Trading. Purchases and exchanges of
shares of the Portfolio should be made for investment purposes only. The
Portfolios seek to prevent patterns of excessive purchases and sales or
exchanges of Portfolio shares. The Portfolios seek to prevent such practices to
the extent they are detected by the procedures described below, subject to the
Portfolios' ability to monitor purchase, sale and exchange activity. The
Portfolios reserve the right to modify this policy, including any surveillance
or account blocking procedures established from time to time to effectuate this
policy, at any time without notice.
o Transaction Surveillance Procedures. The Portfolios, through
their agents, ABI and ABIS, maintain surveillance procedures
to detect excessive or short-term trading in Portfolio shares.
This surveillance process involves several factors, which
include scrutinizing transactions in Portfolio shares that
exceed certain monetary thresholds or numerical limits within
a specified period of time. Generally, more than two exchanges
of Portfolio shares during any 60-day period or purchases of
shares followed by a sale within 60 days will be identified by
these surveillance procedures. For purposes of these
transaction surveillance procedures, the Portfolios may
consider trading activity in multiple accounts under common
ownership, control or influence. Trading activity identified
by either, or a combination, of these factors, or as a result
of any other information available at the time, will be
evaluated to determine whether such activity might constitute
excessive or short-term trading. With respect to managed or
discretionary accounts for which the account owner gives
his/her broker, investment adviser or other third party
authority to buy and sell Portfolio shares, the Portfolios may
consider trades initiated by the account owner, such as trades
initiated in connection with bona fide cash management
purposes, separately in their analysis. These surveillance
procedures may be modified from time to time, as necessary or
appropriate to improve the detection of excessive or
short-term trading or to address specific circumstances.
o Account Blocking Procedures. If the Portfolios determine, in
their sole discretion, that a particular transaction or
pattern of transactions identified by the transaction
surveillance procedures described above is excessive or
short-term trading in nature, the Portfolios will take
remedial action that may include issuing a warning, revoking
certain account-related privileges (such as the ability to
place purchase, sale and exchange orders over the internet or
by phone) or prohibiting or "blocking" future purchase or
exchange activity. However, sales of Portfolio shares back to
a Portfolio or redemptions will continue to be permitted in
accordance with the terms of the Portfolio's current
Prospectus. As a result, unless the shareholder redeems his or
her shares, which may have consequences if the shares have
declined in value, a CDSC is applicable or adverse tax
consequences may result, the shareholder may be "locked" into
an unsuitable investment. A blocked account will generally
remain blocked for 90 days. Subsequent detections of excessive
or short-term trading may result in an indefinite account
block or an account block until the account holder or the
associated broker, dealer or other financial intermediary
provides evidence or assurance acceptable to the Portfolio
that the account holder did not or will not in the future
engage in excessive or short-term trading.
o Applications of Surveillance Procedures and Restrictions to
Omnibus Accounts. Omnibus account arrangements are common
forms of holding shares of the Portfolios, particularly among
certain brokers, dealers and other financial intermediaries,
including sponsors of retirement plans and variable insurance
products. The Portfolios apply their surveillance procedures
to these omnibus account arrangements. As required by SEC
rules, the Portfolios have entered into agreements with all of
their financial intermediaries that require the financial
intermediaries to provide the Portfolios, upon the request of
the Portfolios or their agents, with individual account level
information about their transactions. If the Portfolios detect
excessive trading through its monitoring of omnibus accounts,
including trading at the individual account level, the
financial intermediaries will also execute instructions from
the Portfolios to take actions to curtail the activity, which
may include applying blocks to accounts to prohibit future
purchases and exchanges of Portfolio shares. For certain
retirement plan accounts, the Portfolios may request that the
retirement plan or other intermediary revoke the relevant
participant's privilege to effect transactions in Portfolio
shares via the internet or telephone, in which case the
relevant participant must submit future transaction orders via
the U.S. Postal Service (i.e., regular mail).
Purchase of Shares
Each Portfolio reserves the right to suspend the sale of its shares
to the public in response to conditions in the securities markets or for other
reasons. If a Portfolio suspends the sale of its shares, shareholders will not
be able to acquire those shares, including through an exchange.
The public offering price of shares of each Portfolio is their NAV,
plus, in the case of Class A shares, a sales charge. On each Fund business day
on which a purchase or redemption order is received by the Funds and trading in
the types of securities in which the Portfolio invests might materially affect
the value of Portfolio shares, the NAV is computed as of the Portfolio Closing
Time, which is the close of regular trading on any day the Exchange is open
(ordinarily 4:00 p.m., Eastern time, but sometimes earlier in the case of
scheduled half-day trading or unscheduled suspensions of trading) 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 NAVs of the various classes of shares of each
Portfolio are expected to be substantially the same. However, the NAVs of the
Class B and Class C shares will generally be slightly lower than the NAVs of the
Class A and Advisor Class shares as a result of the differential daily expense
accruals of the higher distribution and, in some cases, transfer agency fees
applicable with respect to those classes of shares.
The Funds will accept unconditional orders for shares of each
Portfolio to be executed at the public offering price equal to their NAV next
determined (plus applicable Class A sales charges), as described below. Orders
received by ABIS prior to the Portfolio Closing Time are priced at the NAV
computed as of the Portfolio Closing Time (plus applicable Class A sales
charges). In the case of orders for purchase of shares placed through financial
intermediaries, the applicable public offering price will be the NAV as so
determined, but only if the financial intermediary receives the order prior to
the Portfolio Closing Time. The financial intermediary is responsible for
transmitting such orders by a prescribed time to the Funds or their transfer
agent. If the financial intermediary fails to do so, the investor will not
receive that day's NAV. If the financial intermediary receives the order after
the Portfolio Closing Time, the price received by the investor will be based on
the NAV determined as of the Portfolio Closing Time on the Exchange on the next
business day.
A Fund may, at its sole option, accept securities as payment for
shares of the Fund, including from affiliates in accordance with the Fund's
procedures, if the Adviser believes that the securities are appropriate
investments for the Fund. The securities are valued by the method described
under "Net Asset Value" below as of the date the Fund receives the securities
and corresponding documentation necessary to transfer the securities to the
Portfolio. This is a taxable transaction to the shareholder.
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 Mutual Fund Application or an
"Autobuy" application obtained by calling the "For Literature" telephone number
shown on the cover of this SAI. Except with respect to certain omnibus accounts,
telephone purchase orders with payment by electronic funds transfer 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"). Telephone purchase requests must be received before the Portfolio
Closing Time, on a Fund business day to receive that day's public offering
price. Telephone purchase requests received after the Portfolio Closing Time,
are automatically placed the following Fund business day, and the applicable
public offering price will be the public offering price determined as of the
Portfolio Closing Time on such following business day.
Full and fractional shares are credited to a shareholder's account
in the amount of his or her subscription. As a convenience, and to avoid
unnecessary expense to a Portfolio, the Portfolio will not issue stock
certificates representing shares of the Portfolio. Ownership of a Portfolio's
shares will be shown on the books of the Portfolio's transfer agent.
Each class of shares of a Portfolio represents an interest in the
same portfolio of investments of the Portfolio, have the same rights and are
identical in all respects, except that (i) Class A shares bear the expense of
CDSC and Class B and Class C shares bear the expense of the CDSC, (ii) Class B
shares and Class C shares each bear the expense of a higher distribution
services fee than that borne by 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 those borne by Class A and Advisor Class shares, (iv) Class B shares
are subject to a conversion feature, and will convert to Class A shares under
certain circumstances, and (v) 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 Class B shareholders because the Class B shares convert to Class A
shares under certain circumstances, and the Class A and Class B shareholders
will vote separately by class. Each class has different exchange privileges and
certain different shareholder service options available.
The Directors of the Funds have determined that currently no
conflict of interest exists between or among the classes of shares of each
Portfolio. On an ongoing basis, the Directors of the Funds, pursuant to their
fiduciary duties under the 1940 Act and state law, will seek to ensure that no
such conflict arises.
Alternative Purchase Arrangements
Class A, Class B and Class C Shares. Class A, Class B and Class C
shares have the following alternative purchase arrangements: Class A shares are
generally offered with an initial sales charge, Class B shares are generally
offered with a CDSC and Class C shares are sold to investors choosing the
asset-based sales charge alternative. Special purchase arrangements are
available for group retirement plans. "Group retirement plans" are defined as
401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and
money purchase pension plans, defined benefit plans, and non-qualified deferred
compensation plans where plan level or omnibus accounts are held on the books of
a Portfolio. See "Alternative Purchase Arrangements - Group Retirement Plans and
Tax-Deferred Accounts" below. These alternative purchase arrangements permit an
investor to choose the method of purchasing shares that is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares, and other circumstances. Investors should consider whether during the
anticipated life of their investment in a Portfolio, the accumulated
distribution services fee and CDSC on Class B shares prior to conversion, or the
accumulated distribution services fee and CDSC 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, ABI
will reject any order (except orders from certain group retirement plans) for
more than $100,000 for Class B shares (see "Alternative Purchase Arrangements -
Group Retirement Plans and Tax-Deferred Accounts"). Class C shares will normally
not be suitable for the investor who qualifies to purchase Class A shares at
NAV. For this reason, ABI will reject any order for more than $500,000 for Class
C shares.
Class A shares are subject to a lower distribution services fee and,
accordingly, pay correspondingly higher dividends per share than Class B shares
or Class C shares. However, because initial sales charges are deducted at the
time of purchase, most investors purchasing Class A shares would not have all
their funds invested initially and, therefore, would initially own fewer shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might consider
purchasing Class A shares because the accumulated continuing distribution
charges on Class B shares or Class C shares may exceed the initial sales charge
on Class A shares during the life of the investment. Again, however, such
investors must weigh this consideration against the fact that, because of such
initial sales charges, not all of 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
of their funds invested initially, although remaining subject to higher
continuing distribution charges and being subject to a CDSC for a three-year and
one-year period, respectively.
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 CDSC may find it more advantageous
to purchase Class C shares.
Compensation Paid to Principal Underwriter
During the Fund's fiscal years ended October 31, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the National Portfolio were $637,538, $1,504,387 and $1,153,802,
respectively. Of these amounts, ABI received the amounts of $0, $1,659 and
$3,215, respectively, for the National Portfolio, representing that portion of
the sales charges paid on shares of that Portfolio sold during the year which
was not re-allowed to selected dealers (and was, accordingly, retained by ABI).
During the Fund's fiscal years ended October 31, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the High Income Portfolio were $1,054,209, $3,114,571 and $2,562,294,
respectively. Of these amounts, ABI received amounts of $122, $0 and $7,263,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund's fiscal years ended October 31, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the New York Portfolio were $803,528, $1,454,296 and $840,255,
respectively. Of these amounts, ABI received the amounts of $0, $0 and $16,
respectively, for the New York Portfolio, representing that portion of the sales
charges paid on shares of that Portfolio sold during the year which was not
re-allowed to selected dealers (and was, accordingly, retained by ABI).
During the Fund's fiscal years ended October 31, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the California Portfolio were $224,444, $356,758 and $311,166,
respectively. Of these amounts, ABI received the amounts of $503, $109, and
$310, respectively, for the California Portfolio, representing that portion of
the sales charges paid on shares of that Portfolio sold during the year which
was not re-allowed to selected dealers (and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Minnesota Portfolio were $92,260, $99,485 and $100,686,
respectively. Of these amounts, ABI received the amounts of $145, $246 and $161,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the New Jersey Portfolio were $82,769, $115,799 and $110,190,
respectively. Of these amounts, ABI received the amounts of $0, $0 and $0,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Ohio Portfolio were $195,007, $132,670 and $114,761, respectively.
Of these amounts, ABI received the amounts of $89, $0 and $260, respectively,
representing that portion of the sales charges paid on shares of that Portfolio
sold during the year which was not re-allowed to selected dealers (and was,
accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Pennsylvania Portfolio were $73,504, $96,702 and $69,825,
respectively. Of these amounts, ABI received the amounts of $143, $0 and $78,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Michigan Portfolio were $83,769, $130,211 and $88,482,
respectively. Of these amounts, ABI received the amounts of $110, $0 and $0,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Massachusetts Portfolio were $140,761, $288,206 and $365,343,
respectively. Of these amounts, ABI received the amounts of $60, $520 and $138,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Virginia Portfolio were $205,557, $419,337 and $237,005,
respectively. Of these amounts, ABI received the amounts of $782, $377 and $588,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
During the Fund II's fiscal years ended September 30, 2011, 2012 and
2013, the aggregate amounts of underwriting commission payable with respect to
shares of the Arizona Portfolio were $129,574, $160,319 and $129,220,
respectively. Of these amounts, ABI received the amounts of $0, $0 and $110,
respectively, representing that portion of the sales charges paid on shares of
that Portfolio sold during the year which was not re-allowed to selected dealers
(and was, accordingly, retained by ABI).
The following table shows the CDSCs received by ABI from each share
class during the Portfolios' last three fiscal years or since inception.
Amounts ABI Amounts ABI Amounts ABI
Received In Received In Received In
Fiscal Year Ended CDSCs From CDSCs From CDSCs From
September 30 Portfolio Class A Shares Class B Shares Class C Shares
------------ ---------- --------------- --------------- ---------------
2013 National $ 109,591 $ 663 $ 9,553
2012 23,011 1,199 8,018
2011 45,242 4,930 21,815
2013 High Income $ 153,166 N/A $ 87,962
2012 18,873 N/A 23,228
2011 73,190 N/A 63,414
2013 California $ 2,646 $ 95 $ 7,777
2012 981 389 5,025
2011 13,557 4,245 3,560
2013 New York $ 62,284 $ 1,632 $ 30,401
2012 14,409 871 9,108
2011 60,193 5,347 23,006
2013 Minnesota $ 2,270 $ 0 $ 7,984
2012 0 0 2,157
2011 158 190 6,606
2013 New Jersey $ 63 $ 59 $ 2,473
2012 196 566 773
2011 1,000 1,728 4,855
2013 Ohio $ 0 $ 0 $ 4,420
2012 0 17 3,061
2011 7,819 2,234 3,805
2013 Pennsylvania $ 9,305 $ 54 $ 4,706
2012 0 0 438
2011 2,163 742 1,405
2013 Michigan $ 0 $ 22 $ 3,063
2012 0 279 2,394
2011 601 4,798 2,146
2013 Massachusetts $ 25,337 $ 1 $ 14,094
2012 0 130 8,047
2011 19,001 334 18,427
2013 Virginia $ 31,492 $ 138 $ 9,759
2012 0 278 2,902
2011 21,682 1,148 5,589
2013 Arizona $ 0 $ 538 $ 3,477
2012 5,250 924 1,659
2011 4,490 1,153 5,057
|
Class A Shares
The public offering price of Class A shares is the NAV plus a sales
charge, as set forth below.
Sales Charge
-------------
Discount or
Commission to
As % of Dealers or Agents
Amount of As % of Net the Public of up to % of
Purchase Amount Invested Offering Price Offering Price
-------- --------------- -------------- --------------
Up to $100,000 3.09% 3.00% 3.00%
$100,000 up to $250,000 2.04 2.00 2.00
$250,000 up to $500,000 1.01 1.00 1.00
$500,000 and above 0.00 0.00 0.00
|
All or a portion of the initial sales charge may be paid to your
financial representative. With respect to purchases of $500,000 or more, Class A
shares redeemed within one year of purchase may be subject to a CDSC of up to
1%. The CDSC on Class A shares will be waived on certain redemptions, as
described below under "Contingent Deferred Sales Charge". ABI's commission is
the sales charge shown in the Prospectus less any applicable discount or
commission "re-allowed" to selected dealers and agents. ABI will re-allow
discounts to selected dealers and agents in the amounts indicated in the table
above. In this regard, ABI may elect to re-allow the entire sales charge to
selected dealers and agents for all sales with respect to which orders are
placed with ABI. A selected dealer who receives re-allowance in excess of 90% of
such a sales charge may be deemed to be an "underwriter" under the Securities
Act.
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 "AllianceBernstein
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 AllianceBernstein Exchange Reserves
that were purchased for cash without the payment of an initial sales charge and
without being subject to a CDSC or (iii) upon the automatic conversion of Class
B shares as described below under "Class B Shares-Conversion Feature".
Commissions may be paid to selected dealers or agents who initiate
or are responsible for Class A share purchases by a single shareholder in excess
of $500,000 that are not subject to an initial sales charge at up to the
following rates: 1.00% on purchases up to $3,000,000; 0.75% on purchases over
$3,000,000 to $5,000,000; and 0.50% on purchases over $5,000,000. Commissions
are paid based on cumulative purchases by a shareholder over the life of an
account with no adjustments for redemptions, transfers or market declines.
In addition to the circumstances described above, certain types of
investors may be entitled to pay no initial sales charge in certain
circumstances described below.
Class A Shares - Sales at NAV. Each Portfolio may sell its Class A
shares at NAV (i.e., without any initial sales charge) to certain categories of
investors including:
(i) investment management clients of the Adviser or its
affiliates, including clients and prospective clients of the
Adviser's AllianceBernstein Institutional Investment
Management division;
(ii) officers, directors and present and full-time employees of
selected dealers or agents; or the spouse or domestic partner,
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;
(iii) the Adviser, ABI, ABIS and their affiliates; certain employee
benefit plans for employees of the Adviser, ABI, ABIS and
their affiliates;
(iv) persons participating in a fee-based program, sponsored and
maintained by a registered broker-dealer or other financial
intermediary and approved by ABI, under which such persons pay
an asset-based fee for service in the nature of investment
advisory or administrative services;
(v) certain retirement plan accounts as described under
"Alternative Purchase Arrangements-Group Retirement Plans and
Tax-Deferred Accounts"; and
(vi) current Class A shareholders of AllianceBernstein Mutual Funds
and investors who receive a "Fair Funds Distribution" (a
"Distribution") resulting from an SEC enforcement action
against the Adviser and current Class A shareholders of
AllianceBernstein Mutual Funds who receive a Distribution
resulting from any SEC enforcement action related to trading
in shares of AllianceBernstein Mutual Funds who, in each case,
purchase shares of an AllianceBernstein Mutual Fund from ABI
through deposit with ABI of the Distribution check.
Class B Shares
Effective January 31, 2009, sales of Class B shares of the
Portfolios to new investors were suspended. Class B shares will only be issued
(i) upon the exchange of Class B shares from another AllianceBernstein Fund,
(ii) for purposes of dividend reinvestment, (iii) through the Portfolios'
Automatic Investment Program for accounts that established the Program prior to
January 31, 2009, and (iv) for purchases of additional Class B shares by Class B
shareholders as of January 31, 2009. The ability to establish a new Automatic
Investment Program for accounts containing Class B shares was suspended as of
January 31, 2009.
Investors may purchase Class B shares at the public offering price
equal to the NAV 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 Funds will receive the full
amount of the investor's purchase payment.
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 NAVs 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 ABI to have been compensated for distribution
expenses incurred in the sale of the 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 shares, an equal pro-rata
portion of the Class B shares in the sub-account will also convert to Class A
shares.
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 NAV 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 CDSC so that the investor will receive as
proceeds upon redemption the entire NAV 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 sales charge or CDSC, 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 than Class A
shares, and will thus have a higher expense ratio and pay correspondingly lower
dividends than Class A shares.
Contingent Deferred Sales Charge
Class B shares which are redeemed within three years of purchase
will be subject to a CDSC at the rates set forth below charged as a percentage
of the dollar amount subject thereto. Class A share purchases of $500,000 or
more and Class C shares that in either case are redeemed within one year of
purchase will be subject to a CDSC of 1% as are Class A share purchases by
certain group retirement plans (see "Alternative Purchase Arrangements - Group
Retirement Plans" below). The charge will be assessed on an amount equal to the
lesser of the cost of the shares being redeemed or their NAV at the time of
redemption. Accordingly, no sales charge will be imposed on increases in NAV
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 NAV 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 NAV 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).
For Class B shares, the amount of the CDSC, 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 for the Portfolios
Year Since Purchase as a % of Dollar Amount Subject to Charge
------------------- -----------------------------------------
First 3.00%
Second 2.00%
Third 1.00%
Fourth None
|
In determining the CDSC applicable to a redemption of Class B and
Class C shares, it will be assumed that the redemption is, first, of any shares
that are not subject to a CDSC (for example, because the shares 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 CDSC and conversion
schedules will be the schedules that applied at the time of the purchase of
shares of the corresponding class of the AllianceBernstein Mutual Fund
originally purchased by the shareholder. If you redeem your shares and directly
invest the proceeds in units of CollegeBoundfund, the CDSC will apply to the
units of CollegeBoundfund. The CDSC period begins with the date of your original
purchase, not the date of exchange for other Class B shares or purchase of
CollegeBoundfund units.
Proceeds from the CDSC are paid to ABI and are used by the ABI to
defray the expenses of ABI related to providing distribution-related services to
a Portfolio in connection with the sale of Portfolio shares, such as the payment
of compensation to selected dealers and agents for selling Portfolio shares. The
combination of the CDSC and the distribution services fee enables a Portfolio to
sell shares without a sales charge being deducted at the time of purchase.
The CDSC is waived on redemptions of shares (i) following the death
or disability, as defined in the Code, 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 that has attained the age of 70-1/2, (iii) that had been
purchased by present or former Directors or Trustees of the Funds, 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, (iv) pursuant to, and in accordance
with, a systematic withdrawal plan (see "Sales Charge Reduction Programs for
Class A Shares--Systematic Withdrawal Plan" below), (v) to the extent that the
redemption is necessary to meet a plan participant's or beneficiary's request
for a distribution or loan from a group retirement plan or to accommodate a plan
participant's or beneficiary's direction to reallocate his or her plan account
among other investment alternatives available under a group retirement plan,
(vi) due to the complete termination of a trust upon the death of the trust
granter, beneficiary or trustee, but only if the trust termination is
specifically provided for in the trust document, or (vii) that had been
purchased with proceeds from a Distribution resulting from any SEC enforcement
action related to trading in shares of AllianceBernstein Mutual Funds through
deposit with ABI of the Distribution check. The CDSC is also waived for (i)
permitted exchanges of shares, (ii) holders of Class A shares who purchased
$500,000 or more of Class A shares where the participating broker or dealer
involved in the sale of such shares waived the commission it would normally
receive from ABI or (iii) Class C shares sold through programs offered by
financial intermediaries and approved by ABI where such programs offer only
shares which are not subject to a CDSC, where the financial intermediary
establishes a single omnibus account for a Portfolio or in the case of a group
retirement plan, a single account for each plan, and where no advance commission
is paid to any financial intermediary in connection with the purchase of such
shares.
Advisor Class Shares
Advisor Class shares of the New York, California and National
Portfolios 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 ABI, (ii) through
self-directed defined contribution employee benefit plans (e.g., 401(k) plans)
that purchase shares directly without the involvement of a financial
intermediary, (iii) officers and present or former Directors of the Funds or
other investment companies managed by the Adviser, officers, directors and
present or retired full-time employees and former employees (for subsequent
investments in accounts established during the course of their employment) of
the Adviser, ABI, ABIS and their affiliates, Relatives of any such person, or
any trust, individual retirement account or retirement plan for the benefit of
any such person or (iv) by the categories of investors described in clauses (i),
(iii) and (iv) under "Class A Shares -- Sales at NAV". 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 Portfolios in order to be approved by
ABI for investment in Advisor Class shares. A transaction fee may be charged by
your financial intermediary with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial intermediary. Advisor Class
shares do not incur any distribution services fees, and will thus have a lower
expense ratio and pay correspondingly higher dividends than Class A, Class B or
Class C shares.
Alternative Purchase Arrangements - Group Retirement Plans and Tax-Deferred
Accounts
Each Fund offers special distribution arrangements for group
retirement plans. However, plan sponsors, plan fiduciaries and other financial
intermediaries may establish requirements as to the purchase, sale or exchange
of shares of a Portfolio, including maximum and minimum initial investment
requirements that are different from those described in this SAI. Group
retirement plans also may not offer all classes of shares of a Portfolio. In
addition, the Class A, Class B and Class C CDSC may be waived for investments
made through certain group retirement plans. Therefore, plan sponsors or
fiduciaries may not adhere to these share class eligibility standards as set
forth in the Prospectus and this SAI. The Funds are not responsible for, and
have no control over, the decision of any plan sponsor or fiduciary to impose
such differing requirements.
Class A Shares. Class A shares are available at NAV to all
AllianceBernstein-sponsored group retirement plans, regardless of size, and to
the AllianceBernstein Link, AllianceBernstein Individual 401(k) and
AllianceBernstein SIMPLE IRA plans with at least $250,000 in plan assets or 100
or more employees. Effective June 30, 2005, for purposes of determining whether
a SIMPLE IRA plan has at least $250,000 in plan assets, all of the SIMPLE IRAs
of an employer's employees are aggregated. ABI measures the asset levels and
number of employees in these plans once monthly. Therefore, if a plan that is
not eligible at the beginning of a month for purchases of Class A shares at NAV
meets the asset level or number of employees required for such eligibility later
in that month, all purchases by the plan will be subject to a sales charge until
the monthly measurement of assets and employees. If the plan terminates a
Portfolio as an investment option within one year, then all plan purchases of
Class A shares will be subject to a 1%, 1-year CDSC on redemption.
Class A shares are also available at NAV to group retirement plans.
The 1%, 1-year CDSC also generally applies. However, the 1%, 1-year CDSC may be
waived if the financial intermediary agrees to waive all commissions or other
compensation paid in connection with the sale of such shares (typically up to a
1% advance payment for sales of Class A shares at NAV) other than the service
fee paid pursuant to the Class's Rule 12b-1 Plan.
Class B Shares. Class B shares may continue to be purchased by group
retirement plans that have already selected Class B shares as an investment
alternative under their plan prior to September 2, 2003.
Class C Shares. Class C shares are available to AllianceBernstein
Link, AllianceBernstein Individual 401(k) and AllianceBernstein SIMPLE IRA plans
with less than $250,000 in plan assets and less than 100 employees. Class C
shares are also available to group retirement plans with plan assets of less
than $1 million. If an AllianceBernstein Link, AllianceBernstein Individual
401(k) or AllianceBernstein SIMPLE IRA plan holding Class C shares becomes
eligible to purchase Class A shares at NAV, the plan sponsor or other
appropriate fiduciary of such plan may request ABI in writing to liquidate the
Class C shares and purchase Class A shares with the liquidation proceeds. Any
such liquidation and repurchase may not occur before the expiration of the
1-year period that begins on the date of the plan's last purchase of Class C
shares.
Choosing a Class of Shares for Group Retirement Plans. As noted,
plan sponsors, plan fiduciaries and other financial intermediaries may establish
requirements as to the purchase, sale or exchange of shares of a Portfolio,
including maximum and minimum initial investment requirements that are different
from those described in this SAI. Plan fiduciaries should consider how these
requirements differ from a Portfolio's share class eligibility criteria before
determining whether to invest. For example, each Portfolio makes its Class A
shares available at NAV to group retirement plans. In addition, under certain
circumstances described above, the 1%, 1-year CDSC may be waived. As described
above, while Class B shares are generally not available to group retirement
plans, Class B shares are available for continuing contributions from plans that
have already selected Class B shares as an investment option under their plans
prior to September 2, 2003. Plan fiduciaries should weigh the fact that Class B
shares will convert to Class A shares after a period of time against the fact
that Class A shares have lower expenses, and therefore may have higher returns,
than Class B shares, before determining which class to make available to its
plan participants.
Sales Charge Reduction Programs for Class A Shares
The AllianceBernstein Mutual Funds offer shareholders various
programs through which shareholders may obtain reduced sales charges or
reductions in CDSC through participation in such programs. In order for
shareholders to take advantage of the reductions available through the combined
purchase privilege, rights of accumulation and letters of intent, a Portfolio
must be notified by the shareholder or his or her financial intermediary that
they qualify for such a reduction. If the Portfolio is not notified that a
shareholder is eligible for these reductions, the Portfolio will be unable to
ensure that the reduction is applied to the shareholder's account.
Combined Purchase Privilege. Shareholders may qualify for the sales
charge reductions by combining purchases of shares of a Portfolio (and/or any
other AllianceBernstein Mutual Fund) into a single "purchase". By combining such
purchases, shareholders may be able to take advantage of the quantity discounts
described under "Alternative Purchase Arrangements - Class A Shares". A
"purchase" means a single purchase or concurrent purchases of shares of a
Portfolio or any other AllianceBernstein Mutual Fund, including
AllianceBernstein Institutional Funds, by (i) an individual, his or her spouse
or domestic partner or the individual's children under the age of 21 years
purchasing shares for his, her or their own account(s), including certain
CollegeBoundfund accounts; (ii) a trustee or other fiduciary purchasing shares
for a single trust, estate or single fiduciary account with one or more
beneficiaries involved; or (iii) 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 that has not been in existence for at least six months or that 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.
Currently, the AllianceBernstein Mutual Funds include:
AllianceBernstein Blended Style Series, Inc.
-AllianceBernstein 2000 Retirement Strategy
-AllianceBernstein 2005 Retirement Strategy
-AllianceBernstein 2010 Retirement Strategy
-AllianceBernstein 2015 Retirement Strategy
-AllianceBernstein 2020 Retirement Strategy
-AllianceBernstein 2025 Retirement Strategy
-AllianceBernstein 2030 Retirement Strategy
-AllianceBernstein 2035 Retirement Strategy
-AllianceBernstein 2040 Retirement Strategy
-AllianceBernstein 2045 Retirement Strategy
-AllianceBernstein 2050 Retirement Strategy
-AllianceBernstein 2055 Retirement Strategy
AllianceBernstein Bond Fund, Inc.
-AllianceBernstein Bond Inflation Strategy
-AllianceBernstein Floating-Rate Strategies Fund
-AllianceBernstein Government Reserves Portfolio
-AllianceBernstein Intermediate Bond Portfolio
-AllianceBernstein Limited Duration High Income Portfolio
-AllianceBernstein Municipal Bond Inflation Strategy
-AllianceBernstein Real Asset Strategy
AllianceBernstein Cap Fund, Inc.
-AllianceBernstein Dynamic All Market Fund
-AllianceBernstein Emerging Markets Multi-Asset Portfolio
-AllianceBernstein International Discovery Equity Portfolio
-AllianceBernstein Market Neutral Strategy - Global
-AllianceBernstein Market Neutral Strategy - U.S.
-AllianceBernstein Select US Equity Portfolio
-AllianceBernstein Select US Long/Short Portfolio
-AllianceBernstein Small Cap Growth Portfolio
AllianceBernstein Core Opportunities Fund, Inc.
AllianceBernstein Discovery Growth Fund, Inc.
AllianceBernstein Equity Income Fund, Inc.
AllianceBernstein Exchange Reserves
AllianceBernstein Global Bond Fund, Inc.
AllianceBernstein Global Real Estate Investment Fund, Inc.
AllianceBernstein Global Risk Allocation Fund, Inc.
AllianceBernstein Global Thematic Growth Fund, Inc.
AllianceBernstein Growth and Income Fund, Inc.
AllianceBernstein High Income Fund, Inc.
AllianceBernstein International Growth Fund, Inc.
AllianceBernstein Large Cap Growth Fund, Inc.
AllianceBernstein Municipal Income Fund, Inc.
-California Portfolio
-National Portfolio
-New York Portfolio
-AllianceBernstein High Income Municipal Portfolio
AllianceBernstein Municipal Income Fund II
-Arizona Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
AllianceBernstein Trust
-AllianceBernstein Discovery Value Fund
-AllianceBernstein Global Value Fund
-AllianceBernstein International Value Fund
-AllianceBernstein Value Fund
AllianceBernstein Unconstrained Bond Fund, Inc.
The AllianceBernstein Portfolios
-AllianceBernstein Balanced Wealth Strategy
-AllianceBernstein Conservative Wealth Strategy
-AllianceBernstein Growth Fund
-AllianceBernstein Tax-Managed Balanced Wealth Strategy
-AllianceBernstein Tax-Managed Conservative Wealth Strategy
-AllianceBernstein Tax-Managed Wealth Appreciation Strategy
-AllianceBernstein Wealth Appreciation Strategy
Sanford C. Bernstein Fund, Inc.
- Intermediate California Municipal Portfolio
- Intermediate Diversified Municipal Portfolio
- Intermediate New York Municipal Portfolio
- International Portfolio
- Short Duration Portfolio
- Tax-Managed International Portfolio
Prospectuses for the AllianceBernstein Mutual Funds may be obtained
without charge by contacting ABIS at the address or the "For Literature"
telephone number shown on the front cover of this SAI or on the Internet at
www.AllianceBernstein.com.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Portfolio may be combined with the
value of the shareholder's existing accounts, thereby enabling the shareholder
to take advantage of the quantity discounts described under "Alternative
Purchase Arrangements - Class A Shares". In such cases, the applicable sales
charge on the newly purchased shares will be based on the total of:
(i) the investor's current purchase;
(ii) the higher of cost or NAV (at the close of business on the
previous day) of (a) all shares of a Portfolio held by the
investor and (b) all shares held by the investor of any other
AllianceBernstein Mutual Fund, including AllianceBernstein
Institutional Funds and certain CollegeBoundfund accounts for
which the investor, his or her spouse or domestic partner or
child under the age of 21 is the participant; and
(iii) the higher of cost or NAV 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).
The initial charge you pay on each purchase of Class A shares will
take into account your accumulated holdings in all classes of shares of
AllianceBernstein Mutual Funds. Your accumulated holdings will be calculated as
(a) the value of your existing holdings as of the day prior to your additional
investment or (b) the amount you have invested including reinvested
distributions but excluding appreciation less the amount of any withdrawals,
whichever is higher.
For example, if an investor owned shares of an AllianceBernstein
Mutual Fund that were purchased for $200,000 and were worth $190,000 at their
then current NAV and, subsequently, purchased Class A shares of a Portfolio
worth an additional $100,000, the initial sales charge for the $100,000 purchase
would be at the 2% rate applicable to a single $300,000 purchase of shares of
the Portfolio, rather than the 3% rate.
Letter of Intent. Class A investors may also obtain the quantity
discounts described under "Alternative Purchase Arrangements - Class A Shares"
by means of a written Letter of Intent, which expresses the investor's intention
to invest at least $100,000 in Class A shares of a Portfolio or any
AllianceBernstein Mutual Fund within 13 months. Each purchase of shares under a
Letter of Intent 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 Letter of Intent.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the AllianceBernstein Mutual Funds under a single
Letter of Intent. The AllianceBernstein Mutual Funds will use the higher of cost
or current NAV of the investor's existing investments and of those accounts with
which investments are combined via Combined Purchase Privileges toward the
fulfillment of the Letter of Intent. For example, if at the time an investor
signs a Letter of Intent to invest at least $100,000 in Class A shares of a
Portfolio, the investor and the investor's spouse or domestic partner each
purchase shares of the Portfolio worth $20,000 (for a total cost of $40,000),
but the current NAV of all applicable accounts is $45,000 at the time a $100,000
Letter of Intent is initiated, it will only be necessary to invest a total of
$55,000 during the following 13 months in shares of the Portfolio or any other
AllianceBernstein 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 Letter of Intent is not a binding obligation upon the investor
to purchase the full amount indicated. The minimum initial investment under a
Letter of Intent 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 at their then NAV 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.
Investors wishing to enter into a Letter of Intent in conjunction
with their initial investment in Class A shares of a Portfolio can obtain a form
of Letter of Intent by contacting ABIS at the address or telephone numbers shown
on the cover of this SAI.
Reinstatement Privilege. A shareholder who has redeemed any or all
of his or her Class A shares of a Portfolio may reinvest all or any portion of
the proceeds from that redemption in Class A shares of any AllianceBernstein
Mutual Fund at NAV without any sales charge, provided that such reinvestment is
made within 120 calendar days after the redemption or repurchase date. Shares
are sold to a reinvesting shareholder at the NAV 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 the
Portfolio within 30 calendar days after the redemption or repurchase
transaction. Investors may exercise the reinstatement privilege by written
request sent to the Portfolio at the address shown on the cover of this SAI.
Dividend Reinvestment Program. Under a Portfolio's Dividend
Reinvestment Program, unless you specify otherwise, your dividends and
distributions will be automatically reinvested in the same class of shares of
the Portfolio without an initial sales charge or CDSC. If you elect to receive
your distributions in cash, you will only receive a check if the distribution is
equal to or exceeds $25.00. Distributions of less than $25.00 will automatically
be reinvested in Portfolio shares. To receive distributions of less than $25.00
in cash, you must have bank instructions associated to your account so that
distributions can be delivered to you electronically via Electronic Funds
Transfer using the Automated Clearing House or "ACH". If you elect to receive
distributions by check, your distributions and all subsequent distributions may
nonetheless be reinvested in additional shares of the Portfolio under the
following circumstances:
(a) the postal service is unable to deliver your checks to your
address of record and the checks are returned to the
Strategy's transfer agent as undeliverable; or
(b) your checks remain uncashed for nine months.
Additional shares of the Portfolio will be purchased at the then
current NAV. You should contact the Portfolio's transfer agent to change your
distribution option. Your request to do so must be received by the transfer
agent before the record date for a distribution in order to be effective for
that distribution. No interest will accrue on amounts represented by uncashed
distribution checks.
Dividend Direction Plan. A shareholder who already maintains
accounts in more than one AllianceBernstein Mutual Fund may direct that income
dividends and/or capital gains paid by one AllianceBernstein Mutual Fund be
automatically reinvested, in any amount, without the payment of any sales or
service charges, in shares of the same class of the other AllianceBernstein
Mutual Fund(s). Further information can be obtained by contacting ABIS at the
address or the "For Literature" telephone number shown on the cover of this SAI.
Investors wishing to establish a dividend direction plan in connection with
their initial investment should complete the appropriate section of the Mutual
Fund Application. Current shareholders should contact ABIS to establish a
dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares of a Portfolio
having a current NAV of at least $5,000 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. The $5,000 account minimum does
not apply to a shareholder owning shares through an individual retirement
account or other retirement plan who has attained the age of 70-1/2 who wishes
to establish a systematic withdrawal plan to help satisfy a required minimum
distribution. Systematic withdrawal plan participants must elect to have their
dividends and distributions from a Portfolio automatically reinvested in
additional shares of the Portfolio.
Shares of a Portfolio owned by a participant in the Portfolio's
systematic withdrawal plan will be redeemed as necessary to meet withdrawal
payments and such payments will be subject to any taxes applicable to
redemptions and, except as discussed below with respect to Class A, Class B and
Class C shares, any applicable CDSC. 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 Portfolio.
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 a Portfolio's involuntary redemption provisions. See
"Redemption and Repurchase of Shares - General". Purchases of additional shares
concurrently with withdrawals are undesirable because of sales charges
applicable when purchases are made. While an occasional lump-sum investment may
be made by a holder 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 Mutual Fund Application, while current Portfolio shareholders
desiring to do so can obtain an application form by contacting ABIS at the
address or the "For Literature" telephone number shown on the cover of this SAI.
CDSC Waiver for Class A, Class B Shares and Class C Shares. Under
the systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3% quarterly
of the value at the time of redemption of the Class A, Class B or Class C shares
in a shareholder's account may be redeemed free of any CDSC.
Class B shares that are not subject to a CDSC (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. Redemptions of Class B shares in excess
of the foregoing limitations will be subject to any otherwise applicable CDSC.
With respect to Class A and Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing limitations.
Redemptions in excess of those limitations will be subject to any otherwise
applicable CDSC.
Payments to Financial Advisors and Their Firms
Financial intermediaries market and sell shares of the Portfolios.
These financial intermediaries employ financial advisors and receive
compensation for selling shares of the Portfolios. This compensation is paid
from various sources, including any sales charge, CDSC and/or Rule 12b-1 fee
that you or the Portfolio may pay. Your individual financial advisor may receive
some or all of the amounts paid to the financial intermediary that employs him
or her.
In the case of Class A shares, all or a portion of the initial sales
charge that you pay may be paid by ABI to financial intermediaries selling Class
A shares. ABI may also pay these financial intermediaries a fee of up to 1% on
purchases of $1 million or more. Additionally, up to 100% of the Rule 12b-1 fees
applicable to Class A shares each year may be paid to financial intermediaries,
including your financial intermediary, that sell Class A shares.
In the case of Class B shares, ABI may pay, at the time of your
purchase, a commission to financial intermediaries selling Class B shares in an
amount equal to 4% of your investment. Additionally, up to 30% of the Rule 12b-1
fees applicable to Class B shares each year may be paid to financial
intermediaries, including your financial intermediary, that sell Class B shares.
In the case of Class C shares, ABI may pay, at the time of your
purchase, a commission to firms selling Class C shares in an amount equal to 1%
of your investment. Additionally, up to 100% of the Rule 12b-1 fee applicable to
Class C shares each year may be paid to financial intermediaries, including your
financial intermediary, that sell Class C shares.
In the case of Advisor Class shares, your financial intermediary may
charge ongoing fees or transactional fees. ABI may pay a portion of "ticket" or
other transactional charges.
Your financial advisor's firm receives compensation from the
Portfolio, ABI and/or the Adviser in several ways from various sources, which
include some or all of the following:
o upfront sales commissions;
o Rule 12b-1 fees;
o additional distribution support;
o defrayal of costs for educational seminars and training; and
o payments related to providing shareholder record-keeping
and/or transfer agency services.
Please read your Prospectus carefully for information on this
compensation.
Other Payments for Distribution Services and Educational Support
In addition to the commissions paid to financial intermediaries at
the time of sale and the fees described under "Asset-Based Sales Charges or
Distribution and/or Service (Rule 12b-1) Fees," in your Prospectus, some or all
of which may be paid to financial intermediaries (and, in turn, to your
financial advisor), ABI, at its expense, currently provides additional payments
to firms that sell shares of the AllianceBernstein Mutual Funds. Although the
individual components may be higher and the total amount of payments made to
each qualifying firm in any given year may vary, the total amount paid to a
financial intermediary in connection with the sale of shares of the
AllianceBernstein Mutual Funds will generally not exceed the sum of (a) 0.25% of
the current year's fund sales by that firm and (b) 0.10% of average daily net
assets attributable to that firm over the year. These sums include payments to
reimburse directly or indirectly the costs incurred by these firms and their
employees in connection with educational seminars and training efforts about the
AllianceBernstein Mutual Funds for the firms' employees and/or their clients and
potential clients. The costs and expenses associated with these efforts may
include travel, lodging entertainment and meals.
For 2014, ABI's additional payments to these firms for distribution
services and education support related to the AllianceBernstein Mutual Funds are
expected to be approximately 0.05% of the average monthly assets of the
AllianceBernstein Mutual Funds, or approximately $22 million. In 2013, ABI paid
approximately 0.05% of the average monthly assets of the AllianceBernstein
Mutual Funds or approximately $21 million for distribution services and
education support related to the AllianceBernstein Mutual Funds.
A number of factors are considered in determining the additional
payments, including each firm's AllianceBernstein Mutual Fund sales, assets and
redemption rates, and the willingness and ability of the firm to give ABI access
to its financial advisors for educational or marketing purposes. In some cases,
firms will include the AllianceBernstein Mutual Funds on a "preferred list".
ABI's goal is to make the financial advisors who interact with current and
prospective investors and shareholders more knowledgeable about the
AllianceBernstein Mutual Funds so that they can provide suitable information and
advice about the funds and related investor services.
The Portfolios and ABI also make payments for sub-accounting or
shareholder servicing to financial intermediaries that sell AllianceBernstein
Mutual Fund shares. Please see "Expenses of the Funds - Transfer Agency
Agreements" above. These expenses paid by the Portfolios are included in "Other
Expenses" under "Fees and Expenses of the Portfolios - Annual Portfolio
Operating Expenses" in the Prospectus.
If one mutual fund sponsor makes greater distribution assistance
payments than another, your financial advisor and his or her firm may have an
incentive to recommend one fund complex over another. Similarly, if your
financial advisor or his or her firm receives more distribution assistance for
one share class versus another, then they may have an incentive to recommend
that class.
Please speak with your financial advisor to learn more about the
total amounts paid to your financial advisor and his or her firm by the
Portfolios, the Adviser, ABI and by sponsors of other mutual funds he or she may
recommend to you. You should also consult disclosures made by your financial
advisor at the time of your purchase.
ABI anticipates that the firms that will receive additional payments
for distribution services and/or educational support include:
Advisor Group, Inc.
Ameriprise Financial Services
AXA Advisors
Cadaret, Grant & Co.
CCO Investment Services Corp.
Commonwealth Financial Network
Donegal Securities
Financial Network Investment Company
JP Morgan Securities
LPL Financial
Merrill Lynch
Morgan Stanley
Northwestern Mutual Investment Services
Raymond James
RBC Wealth Management
Robert W. Baird
Santander Securities
UBS Financial Services
Wells Fargo Advisors
ABI expects that additional firms may be added to this list from time to
time.
Although the Portfolios may use brokers and dealers that sell shares
of the Portfolios to effect portfolio transactions, the Portfolios do not
consider the sale of AllianceBernstein Mutual Fund shares as a factor when
selecting brokers or dealers to effect portfolio transactions.
REDEMPTION AND REPURCHASE OF SHARES
The following information supplements that set forth in your
Prospectus under the heading "Investing in the Portfolios". 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 Portfolio that are
different from those described herein. A transaction fee may be charged by your
financial intermediary with respect to the purchase, sale or exchange of Advisor
Class shares made through such financial intermediary. Similarly, if you are a
shareholder through a group retirement plan, your plan may impose requirements
with respect to the purchase, sale or exchange of shares of a Fund that are
different from those imposed below. Each Fund has authorized one or more brokers
to receive on the Portfolios' behalf purchase and redemption orders. Such
brokers are authorized to designate other intermediaries to receive purchase and
redemption orders on the Portfolios' behalf. In such cases, orders will receive
the NAV next computed after such order is properly received by the authorized
broker or designee and accepted by the Portfolios.
Redemption
Subject only to the limitations described below, the Funds' Charter
or Agreement and Declaration of Trust requires that the Portfolios redeem the
shares of each Portfolio tendered to them, as described below, at a redemption
price equal to their NAV as next computed following the receipt of shares
tendered for redemption in proper form. Except for any CDSC which may be
applicable to Class A, Class B or Class C shares, there is no redemption charge.
Payment of the redemption price normally will be made within seven days after a
Portfolio's receipt of such tender for redemption. If a shareholder is in doubt
about what documents are required by his or her fee-based program or employee
benefit plan, the shareholder should contact his or her financial intermediary.
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 SEC determines
that trading thereon is restricted, or for any period during which an emergency
(as determined by the SEC) exists as a result of which disposal by the
Portfolios of securities owned by them is not reasonably practicable or as a
result of which it is not reasonably practicable for the Funds fairly to
determine the value of their net assets, or for such other periods as the SEC
may by order permit for the protection of security holders of the Funds.
Payment of the redemption price normally will be made in cash but
may be made, at the option of a Portfolio, in kind. No interest will accrue on
uncashed redemption checks. 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 a Portfolio'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 CDSC, if any. Payment
received by a shareholder upon redemption or repurchase of his or her shares,
assuming the shares constitute capital assets in his or her hands, will result
in long-term or short-term capital gains (or losses) depending upon the
shareholder's holding period and basis in respect of the shares redeemed.
To redeem shares of a Portfolio for which no stock certificates have
been issued, the registered owner or owners should forward a letter to the Funds
containing a request for redemption. The Portfolios may require the signature or
signatures on the letter to be Medallion Signature Guaranteed. Please contact
ABIS to confirm whether a Medallion Signature Guarantee is needed.
To redeem shares of a Portfolio represented by stock certificates,
the investor should forward the appropriate stock certificate or certificates,
endorsed in blank or with blank stock powers attached, to the Portfolios 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 stock
certificate surrendered to the Portfolio for redemption must be signed by the
registered owner or owners exactly as the registered name appears on the face of
the certificate or, alternatively, a stock power signed in the same manner may
be attached to the share certificate or certificates or, where tender is made by
mail, separately mailed to the Portfolios. The signature or signatures on the
assignment form must be guaranteed in the manner described above.
Telephone Redemption By Electronic Funds Transfer. Each 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 if
the shareholder has completed the appropriate portion of the Mutual Fund
Application or, if an existing shareholder has not completed this portion, by an
"Autosell" application obtained from ABIS (except for certain omnibus accounts).
A telephone redemption request by electronic funds transfer may not exceed
$100,000 and must be made before the Portfolio Closing 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 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 the Portfolio Closing
Time, on a Fund business day in an amount not exceeding $100,000 per day.
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 ABIS, or by checking the
appropriate box on the Mutual Fund Application.
Telephone Redemptions - General. During periods of drastic economic,
market or other developments, such as the terrorist attacks on September 11,
2001, it is possible that shareholders would have difficulty in reaching ABIS by
telephone (although no such difficulty was apparent at any time in connection
with the attacks). If a shareholder were to experience such difficulty, the
shareholder should issue written instructions to ABIS at the address shown on
the cover of this SAI. The Portfolios reserve 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 Funds,
the Portfolios, the Adviser, ABI nor ABIS will be responsible for the
authenticity of telephone requests for redemptions that the Portfolios
reasonably believe to be genuine. The Portfolios 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 Portfolios did not employ such procedures, it could be
liable for losses arising from unauthorized or fraudulent telephone
instructions. Financial intermediaries may charge a commission for handling
telephone requests for redemptions.
A Portfolio may redeem shares through ABI or financial
intermediaries. The repurchase price will be the NAV next determined after ABI
receives the request (less the CDSC, if any, with respect to the Class A, Class
B and Class C shares), except that requests placed through financial
intermediaries before the Portfolio Closing Time on the Exchange on any day will
be executed at the NAV determined as of the Portfolio Closing Time on that day
if received by ABI prior to its close of business on that day (normally 5:00
p.m., Eastern time). The financial intermediary is responsible for transmitting
the request to ABI by 5:00 p.m., Eastern time (certain financial intermediaries
may enter into operating agreements permitting them to transmit purchase
information that was received prior to the close of business to ABI after 5:00
p.m., Eastern time, and receive that day's NAV). If the financial intermediary
fails to do so, the shareholder's right to receive that day's closing price must
be settled between the shareholder and that financial intermediary. A
shareholder may offer shares of a Portfolio to ABI either directly or through a
financial intermediary. Neither the Funds nor ABI charge a fee or commission in
connection with the redemption of shares (except for the CDSC, 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, the redemption is
settled by the shareholder as an ordinary transaction with or through that
financial intermediary, who may charge the shareholder for this service. The
redemption of shares of a Portfolio as described above with respect to financial
intermediaries is a voluntary service of the Funds and a Fund may suspend or
terminate this practice at any time.
Account Closure
Each Portfolio reserves the right to close out an account that has
remained below $1,000 for 90 days. No CDSC 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 Portfolio 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 your
Prospectus under the heading "Investing in the Portfolios". The shareholder
services set forth below are applicable to all classes of shares unless
otherwise indicated. If you are an Advisor Class shareholder through an account
established under a fee-based program or a shareholder in a group retirement
program, your fee-based program or retirement program may impose requirements
with respect to the purchase, sale or exchange of shares of the Portfolio that
are different from those described herein.
Automatic Investment Program
Investors may purchase shares of a Portfolio through an automatic
investment program utilizing electronic funds transfer drawn on the investor's
own bank account. Under such a program, pre-authorized monthly drafts for a
fixed amount are used to purchase shares through the financial intermediary
designated by the investor at the public offering price next determined after
ABI receives the proceeds from the investor's bank. The monthly drafts must be
in minimum amounts of either $50 or $200, depending on the investor's initial
purchase. If an investor makes an initial purchase of at least $2,500, the
minimum monthly amount for pre-authorized drafts is $50. If an investor makes an
initial purchase of less than $2,500, the minimum monthly amount for
pre-authorized drafts is $200 and the investor must commit to a monthly
investment of at least $200 until the investor's account balance is $2,500 or
more. 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 Mutual Fund Application. Current shareholders
should contact ABIS at the address or telephone numbers shown on the cover of
this SAI to establish an automatic investment program. As of January 31, 2009,
the Automatic Investment Program is available for purchase of Class B shares
only if a shareholder was enrolled in the program prior to January 31, 2009.
Shareholders committed to monthly investments of $25 or more through
the Automatic Investment Program by October 15, 2004 are able to continue their
program despite the $50 monthly minimum.
Exchange Privilege
You may exchange your investment in a Portfolio for shares of the
same class of other AllianceBernstein Mutual Funds (including AllianceBernstein
Exchange Reserves, a money market fund managed by the Adviser) if the other
AllianceBernstein Mutual Fund in which you wish to invest offers shares of the
same class. In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any AllianceBernstein Mutual
Fund, (iii) certain employee benefit plans for employees of the Adviser, ABI,
ABIS and their affiliates and (iv) certain persons participating in a fee-based
program, sponsored and maintained by a registered broker-dealer or other
financial intermediary and approved by ABI, under which such persons pay an
asset-based fee for service in the nature of investment advisory or
administrative services may, on a tax-free basis, exchange Class A or Class C
shares of the Portfolio for Advisor Class shares of the Portfolio or Class C
shares of the Fund for Class A shares of the Portfolio. Exchanges of shares are
made at the NAV next determined and without sales or service charges. Exchanges
may be made by telephone or written request. In order to receive a day's NAV,
ABIS must receive and confirm a telephone exchange request by the Portfolio
Closing Time on that day.
Shares will continue to age without regard to exchanges for purpose
of determining the CDSC, if any, upon redemption and, in the case of Class B
shares, for the purpose of conversion to Class A shares. After an exchange, your
Class B shares will automatically convert to Class A shares in accordance with
the conversion schedule applicable to the Class B shares of the
AllianceBernstein Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the original shares is
applied.
Please read carefully the prospectus of the AllianceBernstein Mutual
Fund into which you are exchanging before submitting the request. Call ABIS at
(800) 221-5672 to exchange uncertificated shares. Except with respect to
exchanges of Class A or Class C shares of a Portfolio for Advisor Class shares
or Class C shares for Class A shares of the same Portfolio, exchanges of shares
as described above in this section are taxable transactions for federal income
tax purposes. The exchange service may be modified, restricted, 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 AllianceBernstein
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 NAVs as next determined following receipt by the
AllianceBernstein Mutual Fund whose shares are being exchanged of (i) proper
instructions and all necessary supporting documents as described in such fund's
prospectus, or (ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges involving the
redemption of shares recently purchased by check will be permitted only after
the AllianceBernstein Mutual Fund whose shares have been tendered for exchange
is reasonably assured that the check has cleared, normally up to 15 calendar
days following the purchase date. Exchanges of shares of AllianceBernstein
Mutual Funds will generally result in the realization of a capital gain or loss
for federal income tax purposes.
Each Portfolio shareholder and the shareholder's financial
intermediary are authorized to make telephone requests for exchanges unless ABIS
receives written instruction to the contrary from the shareholder, or the
shareholder declines the privilege by checking the appropriate box on the Mutual
Fund Application. Such telephone requests cannot be accepted with respect to
shares then represented by share certificates. Shares acquired pursuant to a
telephone request for exchange will be held under the same account registration
as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange should telephone
ABIS with their account number and other details of the exchange, at (800)
221-5672 before the Portfolio Closing Time, on a Fund business day. Telephone
requests for exchange received before the Portfolio Closing Time, on a Fund
business day will be processed as of the close of business on that day. During
periods of drastic economic, market or other developments, such as the terrorist
attacks on September 11, 2001, it is possible that shareholders would have
difficulty in reaching ABIS by telephone (although no such difficulty was
apparent at any time in connection with the attacks). If a shareholder were to
experience such difficulty, the shareholder should issue written instructions to
ABIS at the address shown on the cover of this SAI.
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 AllianceBernstein Mutual
Fund.
None of the AllianceBernstein Mutual Funds, the Adviser, ABI or ABIS
will be responsible for the authenticity of telephone requests for exchanges
that the Funds reasonably believe to be genuine. The Funds will employ
reasonable procedures in order to verify that telephone requests for exchanges
are genuine, including, among others, recording such telephone instructions and
causing written confirmations of the resulting transactions to be sent to
shareholders. If the Funds did not employ such procedures, it could be liable
for losses arising from unauthorized or fraudulent telephone instructions.
Financial intermediaries may charge a commission for handling telephone requests
for exchanges.
The exchange privilege is available only in states where shares of
the AllianceBernstein Mutual Fund being acquired may be legally sold. Each
AllianceBernstein Mutual Fund reserves the right, at any time on 60 days'
written notice to its shareholders, to modify, restrict or terminate the
exchange privilege.
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 Funds' independent registered
public accounting firm, Ernst & Young LLP, 5 Times Square, New York, New York
10036 as well as a monthly cumulative dividend statement and a confirmation of
each purchase and redemption. By contacting his or her financial intermediary or
ABIS 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 Mutual Fund Application to authorize the Funds 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 NAV 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 Funds 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 Funds 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 Funds to redeem, at the NAV next determined, a
sufficient number of full and fractional shares of a Portfolio in the
shareholder's account to cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various factors, to market
fluctuations, a shareholder should not attempt to close his or her account by
use of a check. In this regard, the Bank has the right to return checks (marked
"insufficient funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks are returned to
the shareholder. The checkwriting service enables the shareholder to receive the
daily dividends declared on the shares to be redeemed until the day that the
check is presented to the Bank for payment.
NET ASSET VALUE
The NAV of each Portfolio is computed at the close of regular
trading on each day the Exchange is open (ordinarily 4:00 p.m., Eastern time,
but sometimes earlier, as in the case of scheduled half-day trading or
unscheduled suspensions of trading) following receipt of a purchase or
redemption order by a Portfolio on each Portfolio business day on which such an
order is received and on such other days as the Board deems appropriate or
necessary in order to comply with Rule 22c-1 under the 1940 Act. A Portfolio's
NAV is calculated by dividing the value of the Portfolio's total assets, less
its liabilities, by the total number of its shares then outstanding. A Portfolio
business day is any weekday on which the Exchange is open for trading.
Portfolio securities are valued at current market value or at fair
value as determined in accordance with applicable rules under the 1940 Act and
the Portfolios' pricing policies and procedures (the "Pricing Policies")
established by and under the general supervision of the Board. The Board has
delegated to the Adviser, subject to the Board's continuing oversight, certain
of the Board's duties with respect to the Pricing Policies. The Adviser has
established a Valuation Committee, which operates under policies and procedures
approved by the Board, to value a Portfolio's assets on behalf of the Portfolio.
Whenever possible, securities are valued based on market information
on the business day as of which the value is being determined, as follows:
(a) an equity security listed on the Exchange, or on another
national or foreign exchange (other than securities listed on the NASDAQ Stock
Exchange ("NASDAQ")), is valued at the last sale price reflected on the
consolidated tape at the close of the exchange. If there has been no sale on the
relevant business day, the security is valued at the last traded price from the
previous day. On the following day, the security is valued in good faith at fair
value by, or in accordance with procedures approved by, the Board;
(b) an equity security traded on NASDAQ is valued at the NASDAQ
Official Closing Price. An OTC equity security is valued at the mid level
between the current bid and asked prices. If the mid price is not available, the
security will be valued at the bid price. An equity security traded on more than
one exchange is valued in accordance with paragraph (a) above by reference to
the principal exchange (as determined by the Adviser) on which the security is
traded;
(c) a listed or OTC put or call option is valued at the mid level
between the current bid and asked prices (for options or futures contracts, see
item (e)). If neither a current bid nor current ask price is available, the
Adviser will have discretion to determine the best valuation (e.g., last trade
price) and then bring the issue to the Valuation Committee the next day;
(d) an open futures contract and any option thereon is valued at 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 relevant business
day, the security is valued at the last available closing settlement price;
(e) a listed right is valued at the last traded price provided by
approved vendors. If there has been no sale on the relevant business day, the
right is valued at the last traded price from the previous day. On the following
day, the security is valued in good faith at fair value. For an unlisted right,
the calculation used in determining a value is the price of the reference
security minus the subscription price multiplied by the terms of the right.
There may be some instances when the subscription price is greater than the
referenced security right. In such instances, the right would be valued as
worthless;
(f) a listed warrant is valued at the last traded price provided by
approved vendors. If there is no sale on the relevant business day, the warrant
is valued at the last traded price from the previous day. On the following day,
the security is valued in good faith at fair value. All unlisted warrants are
valued in good faith at fair value. Once a warrant has expired, it will no
longer be valued;
(g) preferred securities are valued based on prices received from
approved vendors that use last trade data for listed preferreds and evaluated
bid prices for non-listed preferreds, as well as for listed preferreds when
there is no trade activity;
(h) U.S. Government securities and any other debt instrument having
60 days or less remaining until maturity are generally valued at amortized cost
if their original maturity was 60 days or less. If the original term to maturity
exceeded 60 days, the securities are valued by an independent pricing vendor, if
a market is available. If a market price is not available, the securities are
valued by using amortized cost as of the 61st day prior to maturity if the
original term to maturity exceeded 60 days. The Adviser is responsible for
monitoring whether any circumstances have incurred that indicate that the use of
the amortized cost method for any security is not appropriate due to such
factors as, but not limited to, an impairment of the creditworthiness of the
issuer or material changes in interest rates;
(i) a fixed-income security is typically valued on the basis of bid
prices provided by a pricing vendor when the Adviser reasonably believes that
such prices reflect the market value of the security. In certain markets the
market convention may be to use the mid price between bid and offer.
Fixed-income securities may be valued on the basis of mid prices when the
approved pricing vendors normally provide mid prices, reflecting the convention
of the particular markets. The prices provided by a pricing vendor may take into
account many factors, including institutional size trading in similar groups of
securities and any developments related to specific securities. If the Adviser
determines that an appropriate pricing vendor does not exist for a security in a
market that typically values such securities on the basis of a bid price, the
security is valued on the basis of a quoted bid price or spread over the
applicable yield curve (a bid spread) by a broker-dealer in such security. If
the Adviser receives multiple broker quotes that are deemed to be reliable, then
the Adviser will utilize the second highest broker quote. If an appropriate
pricing vendor does not exist for a security in a market where convention is to
use the mid price, the security is valued on the basis of a quoted mid price by
a broker-dealer in such security;
(j) bank loans are valued on the basis of bid prices provided by a
pricing vendor;
(k) bridge loans are valued at fair value, which equates to the
outstanding loan amount unless it is determined by the Valuation Committee that
any particular bridge loan should be valued at something other than outstanding
loan amount. This may occur due to, for example, a significant change in the
high yield market and/or a significant change in the status of any particular
issuer or issuers of bridge loans;
(l) whole loans: residential and commercial mortgage whose loans and
whole loan pools are market priced by an approved vendor;
(m) forward and spot currency pricing is provided by an independent
pricing vendor. The rate provided by the approved vendor is a mid price for
forward and spot rates. In most instances whenever both an "onshore" rate and an
"offshore" (i.e., non deliverable forward "NDF") rate is available, the Adviser
will use the offshore (NDF) rate. NDF contracts are used for currencies where it
is difficult (and sometimes impossible) to take actual delivery of the currency;
(n) swap pricing: Various approved external vendors are used to
obtain pricing information and analysis. This information is placed into various
pricing models (depending on the type of derivative) to devise a price for each
investment. These pricing models are monitored/reviewed on an ongoing basis by
the Adviser;
(o) interest rate caps, floors and swaptions are valued at the
present value of the terms of theagreements, which is provided by approved
vendors; and
(p) open-end mutual funds are valued at the closing NAV per share
and closed-end funds and exchange-traded funds are valued at the closing market
price per share.
Each Portfolio values its securities at their current market value
determined on the basis of market quotations as set forth above or, if market
quotations are not readily available (including restricted securities) or are
unreliable, at "fair value" as determined in accordance with procedures
established by and under the general supervision of the Boards. When a Portfolio
uses fair value pricing, it may take into account any factors it deems
appropriate. A Portfolio may determine fair value based on factors such as, but
not limited to, information obtained by contacting the issuer or analysts or by
analysis of the issuer's financial statements. The Portfolios may value these
securities using fair value prices based on independent pricing services. The
prices of securities used by the Portfolio to calculate its NAV may differ from
quoted or published prices for the same securities. Fair value pricing involves
subjective judgments and it is possible that the fair value determined for a
security is materially different than the value that could be realized upon the
sale of that security.
Subject to their oversight, the Boards have delegated responsibility
for valuing each Portfolio's assets to the Adviser. The Adviser has established
a Valuation Committee, which operates under the policies and procedures approved
by the Boards, to value the Portfolio's assets on behalf of the Portfolio. The
Valuation Committee values Portfolio assets as described above.
Each Portfolio's Board may suspend the determination of its NAV (and
the offering and sale of shares), subject to the rules of the SEC 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 Portfolio 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 SEC by order permits a suspension of
the right of redemption or a postponement of the date of payment on redemption.
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 NAV 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 plans adopted by the Funds in accordance
with Rule 18f-3 under the 1940 Act.
DIVIDENDS, DISTRIBUTIONS AND TAXES
General
Each Portfolio of each Fund intends for each taxable year to qualify
to be taxed as a "regulated investment company" under the Code. Such
qualification relieves a Portfolio of federal income tax liability on the part
of its net investment company taxable income and net realized capital gains
which it timely distributes to its shareholders. Such qualification does not, of
course, involve governmental supervision of management or investment practices
or policies. Investors should consult their own counsel for a complete
understanding of the requirements each Portfolio must meet to qualify for such
treatment.
Until the Directors or Trustees otherwise determine, each income
dividend and capital gains distribution, if any, declared by a 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 Funds 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 Portfolio's taxable
year will be distributed; however the Portfolio may retain any long-term capital
gains realized by the Portfolio if this is determined by the Directors or
Trustees to be in the best interests of the Portfolio. Dividends paid by a
Portfolio, if any, with respect to Class A, Class B, Class C and Advisor Class
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 A, 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 Funds and assumes that each Portfolio of
the Funds qualifies to be taxed as a regulated investment company. Investors
should consult their own tax counsel with respect to the specific tax
consequences of their being shareholders of a Portfolio, including the effect
and applicability of federal, state, and local tax laws to their own particular
situation and the possible effects of changes therein.
Each Portfolio intends to declare and distribute dividends in the
amounts and at the times necessary to avoid the application of the 4% federal
excise tax imposed on certain undistributed income of regulated investment
companies. For federal income and excise tax purposes, dividends declared and
payable to shareholders of record as of a date in October, November or December
but actually paid during the following January will be treated as having been
distributed by the Portfolio, and will be taxable to these shareholders, for the
year declared, and not for the subsequent calendar year in which the
shareholders actually receive the dividend.
For shareholders' federal income tax purposes, distributions to
shareholders out of tax-exempt interest income earned by each Portfolio are not
subject to federal income tax if, at the close of each quarter of such
Portfolio's taxable year, at least 50% of the value of such Portfolio's total
assets consists of tax-exempt obligations. Each Portfolio intends to meet this
requirement. Insurance proceeds received by a Portfolio under any insurance
policies in respect of scheduled interest payments on defaulted municipal
securities, as described herein, will be excludable from gross income in the
same manner as interest payments from the insured municipal securities, and
consequently such insurance proceeds may be included in exempt-interest
dividends which are designated and paid by the Funds.
Substantially all of the dividends paid by the Funds are anticipated
to be exempt from federal income taxes. See, however, "Investment Policies and
Restrictions--Alternative Minimum Tax" above. 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.
Distributions out of taxable interest income, other investment
income, and short-term capital gains are taxable to shareholders as ordinary
income. Since each Portfolio's investment income is derived from interest rather
than dividends, no portion of such distributions is eligible for the
dividends-received deduction available to corporations. Furthermore, since each
Portfolio's investment income is derived from interest rather than dividends, it
is expected that for non-corporate shareholders no portion of such distributions
will be treated as "qualified dividend income" taxable at the same preferential
tax rates applicable to long-term capital gains. Long-term capital gains, if
any, distributed by a Portfolio to a shareholder are taxable to the shareholder
as long-term capital gain, irrespective such shareholder's holding period in his
or her shares.
If a Portfolio's distributions exceed its income and capital gains
realized in any year and the Portfolio has current and accumulated earnings and
profits for federal income tax purposes, then all or a portion of those
distributions may be treated as ordinary income to shareholders for federal
income tax purposes.
Any distributions and redemption proceeds payable to a shareholder
may be subject to "backup withholding" tax (currently at a rate of 28%) if such
shareholder fails to provide the Funds with his or her correct taxpayer
identification number, fails to make certain required certifications, or is
notified by the Internal Revenue Service (the "IRS") that he or she is subject
to backup withholding. Certain categories of shareholders, including all
corporations, are exempt from such backup withholding. Backup withholding is not
an additional tax; rather, a shareholder generally may obtain a refund of any
amounts withheld under backup withholding rules that exceed such shareholder's
income tax liability by filing a refund claim with the IRS, provided that the
required information is furnished to the IRS.
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.
Cost Basis Reporting. As part of the Energy Improvement and
Extension Act of 2008, mutual funds are required to report to the Internal
Revenue Service the "cost basis" of shares acquired by a shareholder on or after
January 1, 2012 ("covered shares") and subsequently redeemed. These requirements
do not apply to investments through a tax-deferred arrangement, such as a 401(k)
plan or an individual retirement plan. The "cost basis" of a share is generally
its purchase price adjusted for dividends, return of capital, and other
corporate actions. Cost basis is used to determine whether a sale of the shares
results in a gain or loss. The amount of gain or loss recognized by a
shareholder on the sale or redemption of shares is generally the difference
between the cost basis of such shares and their sale price. If you redeem
covered shares during any year, then the Funds will report the cost basis of
such covered shares to the IRS and you on Form 1099-B along with the gross
proceeds received on the redemption, the gain or loss realized on such
redemption and the holding period on the redeemed shares.
Your cost basis in your covered shares is permitted to be calculated
using any one of three alternative methods: Average Cost, First In-First Out
(FIFO) and Specific Share Identification. You may elect which method you want to
use by notifying the Portfolios. This election may be revoked or changed by you
at any time up to the date of your first redemption of covered shares. If you do
not affirmatively elect a cost basis method, then a Portfolio's default cost
basis calculation method, which is currently the Average Cost method, will be
applied to your account(s). The default method will also be applied to all new
accounts established unless otherwise requested.
If you hold Portfolio shares through a broker (or other nominee),
please contact that broker (nominee) with respect to the reporting of cost basis
and available elections for your account.
You are encouraged to consult your tax advisor regarding the
application of the new cost basis reporting rules and, in particular, which cost
basis calculation method you should elect.
United States Federal Income Taxation of the Portfolios
The following discussion relates to certain significant United
States federal income tax consequences to the Portfolios with respect to the
determination of their "investment company taxable income" each year. This
discussion assumes that each Portfolio will be taxed as a regulated investment
company for each of its taxable years.
Options and Futures Contracts. Certain listed options and regulated
futures contracts are considered "section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by a Portfolio at the end of each taxable
year will be "marked to market" and treated for federal income tax purposes as
though sold for fair market value on the last business day of such taxable year.
Gain or loss realized by a Portfolio on section 1256 contracts will generally be
considered 60% long-term and 40% short-term capital gain or loss. A Portfolio
can elect to exempt its section 1256 contracts which are part of a "mixed
straddle" (as described below) from the application of section 1256.
With respect to OTC 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 by a Portfolio all of
the offsetting positions of which consist of section 1256 contracts.
Zero-coupon Municipal Securities. Under current federal income tax
law, a Portfolio will include in its net investment income as interest each
year, in addition to stated interest received on obligations held by the
Portfolio, tax-exempt interest income attributable to the Portfolio from holding
zero-coupon municipal securities. Current federal income tax law requires that a
holder (such as a Portfolio) of a zero-coupon municipal security accrue as
income each year a portion of the original issue discount (i.e., the amount
equal to the excess of the stated redemption price of the security at maturity
over its issue price) attributable to such obligation even though the Portfolio
does not receive interest payments in cash on the security during the year which
reflect the accrued discount. As a result of the above rules, in order to make
the distributions necessary for a Portfolio not to be subject to federal income
or excise taxes, a Portfolio may be required to pay out as an income
distribution each year an amount greater than the total amount of cash which the
Portfolio has actually received as interest during the year. Such distributions
will be made from the cash assets of the Portfolio, from borrowings or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Adviser will select
which securities to sell. A Portfolio may realize a gain or loss from such
sales. In the event a Portfolio realizes capital gains from such sales, its
shareholders may receive larger distributions than they would receive in the
absence of such sales.
State Taxation of the Portfolios
California Portfolio. It is anticipated that substantially all of
the dividends paid by the California Portfolio will be exempt from California
personal income tax. Dividends will be exempt from this tax to the extent
derived from interest income from municipal securities issued by the State of
California or its political subdivisions. Distributions of capital gains will be
subject to California personal income tax. Distributions paid to corporate
shareholders will be subject to the California corporate franchise tax but
exempt from the California corporate income tax.
New York Portfolio. It is anticipated that substantially all of the
dividends paid by the New York Portfolio will be exempt from New York State and
New York City personal and fiduciary income taxes. Dividends will be so exempt
to the extent that they are exempt from regular federal income tax and
attributable to interest from New York municipal securities or U.S. Government
Securities. Distributions of capital gains will be subject to New York State and
New York City personal and fiduciary income taxes. Interest on indebtedness
incurred to buy or carry shares of the New York Portfolio generally will not be
deductible for New York income tax purposes. Distributions paid to corporate
shareholders will be included in New York entire net income for purposes of the
New York State franchise tax and the New York City general corporate tax. The
value of shares of the Portfolios will be included in computing investment
capital or business capital (but not both) for purposes of the franchise tax.
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.
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. 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
taxes. Dividends will be exempt from such taxes to the extent that they are
derived from Michigan municipal securities and U.S. Government securities.
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 taxes.
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 taxes
to the extent that they are derived from Minnesota municipal securities,
provided that at least 95% of the federal exempt-interest dividends paid by the
Portfolio during its fiscal year are derived from Minnesota municipal
securities. Distributions of capital gains from the Minnesota Portfolio will be
subject to Minnesota and fiduciary incomes taxes and certain taxpayers may also
be subject to the Minnesota alternative minimum tax ("AMT") on distributions
attributable to the AMT-Subject bonds in which the Portfolio invests. Interest
on indebtedness incurred to purchase or carry securities which yield income
which is exempt from Minnesota income tax will not be deductible for Minnesota
income tax purposes. Distributions to corporate shareholders are subject to
Minnesota franchise tax.
New Jersey Portfolio. It is anticipated that substantially all
distributions paid by the New Jersey Portfolio to individuals and fiduciaries
will be exempt from the New Jersey income tax, provided the Portfolio is a New
Jersey "qualified investment fund". Distributions of dividends and capital gains
will be exempt from such taxes to the extent derived from New Jersey or U.S.
Government securities provided, among other things, that the Portfolio invests
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 related thereto. 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. Net gains or income derived from the
disposition of securities which evidence ownership in a "qualified investment
fund" are excluded from gross income. Distributions to corporate shareholders
are subject to New Jersey corporation business (franchise) tax.
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 corporate 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, and that shares of the Portfolio will be exempt from Pennsylvania county
personal property taxes. Dividends will be exempt from such taxes to the extent
attributable to interest received from the Portfolio's investments in
Pennsylvania municipal securities and U.S. Government securities. Distributions
of capital gain from the Portfolio are subject to Pennsylvania individual,
fiduciary and corporate income taxes, but are not taxable for purposes of the
Philadelphia School District investment net income tax. Portfolio shares are
included for purposes of determining a corporation's capital stock value subject
to the Pennsylvania capital stock/franchise tax (scheduled to expire on December
31, 2015).
Virginia Portfolio. It is anticipated that substantially all of the
dividends paid by the Virginia Portfolio will be exempt from Virginia
individual, 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) generally 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 oversight of the Boards, the Adviser is
responsible for the investment decisions and the placing of orders for portfolio
transactions for each of the Portfolios. The Adviser determines the broker or
dealer to be used in each specific transaction with the objective of negotiating
a combination of the most favorable commission (for transactions on which a
commission is payable) and the best price obtainable on each transaction
(generally defined as "best execution"). In connection with seeking best price
and execution, the Portfolios do not consider sales of shares of the Portfolios
or other investment companies managed by the Adviser as a factor in the
selection of brokers and dealers to effect portfolio transactions and has
adopted a policy and procedures reasonably designed to preclude such
considerations.
Most transactions for the Portfolios, including transactions in
listed securities, are executed in the OTC market by approximately fifteen
principal market maker dealers with whom the Adviser maintains regular contact.
Most transactions made by the Portfolios will be principal transactions at net
prices and the Portfolios will incur little or no brokerage costs. Where
possible, securities will be purchased directly from the issuer or from an
underwriter or market maker for the securities unless the Adviser believes a
better price and execution is available elsewhere. Purchases from underwriters
of newly-issued securities for inclusion in a Portfolio usually will include a
concession paid to the underwriter by the issuer and purchases from dealers
serving as market makers will include the spread between the bid and ask
price.
No Portfolio has an 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 a Portfolio 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 Portfolios. The supplemental information received from a dealer is in
addition to the services required to be performed by the Adviser under the
Advisory Agreements, and the expenses of the Adviser will not necessarily be
reduced as a result of the receipt of such information.
Neither the Portfolios nor the Adviser has entered into agreements
or understandings with any brokers regarding the placement of securities
transactions because of research services they provide. To the extent that such
persons or firms supply investment information to the Adviser for use in
rendering investment advice to a Portfolio, such information may be supplied at
no cost to the Adviser and, therefore, may have the effect of reducing the
expenses of the Adviser in rendering advice to the Portfolio. While it is
impracticable to place an actual dollar value on such investment information,
the Adviser believes that its receipt probably does not reduce the overall
expenses of the Adviser to any material extent.
The investment information provided to the Adviser is of the type
described in Section 28(e) of the Securities Exchange Act of 1934, as amended,
and is designed to augment the Adviser's own internal research and investment
strategy capabilities. Research services furnished by brokers through which the
Portfolio effects securities transactions are used by the Adviser in carrying
out its investment management responsibilities with respect to all its clients'
accounts but not all such services may be used by the Adviser in connection with
the Portfolio.
Investment decisions for a Portfolio are made independently from
those of other investment companies and other advisory accounts managed by the
Adviser. It may happen, on occasion, that the same security is held in the
portfolio of a Portfolio or one more of such other investment companies or
accounts. Simultaneous transactions are likely when several funds or accounts
are managed by the same Adviser, particularly, when a security is suitable for
the investment objectives of more than one of such companies or accounts. When
two or more companies or accounts managed by the Adviser are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated to the respective companies or accounts both as to amount and price,
in accordance with a method deemed equitable to each company or account. In some
cases, this system may adversely affect the price paid or received by the
Portfolio or the size of the position obtainable for the Portfolio. Allocations
are made by the officers of the Funds or of the Adviser. Purchases and sales of
portfolio securities are determined by the Adviser and are placed with
broker-dealers by the order department of the Adviser.
The Portfolios did not pay any brokerage commissions for the past
three fiscal years.
The Portfolios may, from time to time, place orders for the purchase
or sale of securities with SCB & Co., an affiliate of the Adviser (the
"Affiliated Broker"). In such instances the placement of orders with such broker
would be consistent with the Portfolios' objective of obtaining best execution
and would not be dependent upon the fact that the Affiliated Broker is an
affiliate of the Adviser. With respect to orders placed with the Affiliated
Broker for execution on a national securities exchange, commissions received
must conform to Section 17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder,
which permit an affiliated person of a registered investment company (such as a
Portfolio), or any affiliated person of such person, to receive a brokerage
commission from such registered investment company provided that such commission
is reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. The Portfolios paid no brokerage commissions to the
Affiliated Broker during the three most recent fiscal years.
Disclosure of Portfolio Holdings
The Funds believe that the ideas of the Adviser's investment staff
should benefit the Portfolios and their shareholders, and does not want to
afford speculators an opportunity to profit by anticipating Portfolio trading
strategies or using Portfolio information for stock picking. However, the Funds
also believe that knowledge of each Portfolio's portfolio holdings can assist
shareholders in monitoring their investment, making asset allocation decisions,
and evaluating portfolio management techniques.
The Adviser has adopted, on behalf of the Portfolios, policies and
procedures relating to disclosure of the Portfolios' portfolio securities. The
policies and procedures relating to disclosure of a Portfolios' portfolio
securities are designed to allow disclosure of portfolio holdings information
where necessary to the operation of the Portfolios or useful to the Portfolios'
shareholders without compromising the integrity or performance of the
Portfolios. Except when there are legitimate business purposes for selective
disclosure and other conditions (designed to protect the Portfolios and their
shareholders) are met, the Portfolios do not provide or permit others to provide
information about a Portfolio's portfolio holdings on a selective basis.
Each Portfolio includes portfolio holdings information as required
in regulatory filings and shareholder reports, disclose portfolio holdings
information as required by federal or state securities laws and may disclose
portfolio holdings information in response to requests by governmental
authorities. In addition, the Adviser may post portfolio holdings information on
the Adviser's website (www.AllianceBernstein.com). The Adviser generally posts
on the website a complete schedule of the Portfolios' securities, generally as
of the last day of each calendar month, approximately 30 days after the end of
that month. This posted information generally remains accessible on the website
for three months. For each portfolio security, the posted information includes
its name, the number of shares held by a Portfolio, the market value of the
Portfolio's holdings, and the percentage of the Portfolio's assets represented
by the portfolio security. In addition to the schedule of portfolio holdings,
the Adviser may post information about the number of securities the Portfolios
hold, a summary of the Portfolios' top ten holdings (including name and the
percentage of each Portfolio's assets invested in each holding), and a
percentage breakdown of the Portfolios' investments by country, sector and
industry, as applicable approximately 10-15 days after the end of the month. The
day after portfolio holdings information is publicly available on the website,
it may be mailed, e-mailed or otherwise transmitted to any person.
The Adviser may distribute or authorize the distribution of
information about a Portfolio's portfolio holdings that is not publicly
available, on the website or otherwise, to the Adviser's employees and
affiliates that provide services to the Funds. In addition, the Adviser may
distribute or authorize distribution of information about a Portfolio's
portfolio holdings that is not publicly available, on the website or otherwise,
to the Funds' service providers who require access to the information in order
to fulfill their contractual duties relating to the Portfolios, to facilitate
the review of the Portfolios by rating agencies, for the purpose of due
diligence regarding a merger or acquisition, or for the purpose of effecting
in-kind redemption of securities to facilitate orderly redemption of portfolio
assets and minimal impact on remaining Portfolio shareholders. The Adviser does
not expect to disclose information about a Portfolio's portfolio holdings that
is not publicly available to the Portfolio's individual or institutional
investors or to intermediaries that distribute the Portfolio's shares.
Information may be disclosed with any frequency and any lag, as appropriate.
Before any non-public disclosure of information about a Portfolio's
portfolio holdings is permitted, however, the Adviser's Chief Compliance Officer
(or his designee) must determine that the Portfolio has a legitimate business
purpose for providing the portfolio holdings information, that the disclosure is
in the best interests of the Portfolio's shareholders, and that the recipient
agrees or has a duty to keep the information confidential and agrees not to
trade directly or indirectly based on the information or to use the information
to form a specific recommendation about whether to invest in the Portfolio or
any other security. Under no circumstances may the Adviser or its affiliates
receive any consideration or compensation for disclosing the information.
The Adviser has established procedures to ensure that each
Portfolio's portfolio holdings information is only disclosed in accordance with
these policies. Only the Adviser's Chief Compliance Officer (or his designee)
may approve the disclosure, and then only if he or she and a designated senior
officer in the Adviser's product management group determines that the disclosure
serves a legitimate business purpose of a Portfolio and is in the best interest
of the Portfolio's shareholders. The Adviser's Chief Compliance Officer (or his
designee) approves disclosure only after considering the anticipated benefits
and costs to the Portfolio and its shareholders, the purpose of the disclosure,
any conflicts of interest between the interests of the Portfolio and its
shareholders and the interests of the Adviser or any of its affiliates, and
whether the disclosure is consistent with the policies and procedures governing
disclosure. Only someone approved by the Adviser's Chief Compliance Officer (or
his designee) may make approved disclosures of portfolio holdings information to
authorized recipients. The Adviser reserves the right to request certifications
from senior officers of authorized recipients that the recipient is using the
portfolio holdings information only in a manner consistent with the Adviser's
policy and any applicable confidentiality agreement. The Adviser's Chief
Compliance Officer (or his designee) or another member of the compliance team
reports all arrangements to disclose portfolio holdings information to the
Funds' Boards on a quarterly basis. If the Directors or Trustees determine that
disclosure was inappropriate, the Adviser will promptly terminate the disclosure
arrangement.
In accordance with these procedures, each of the following third
parties have been approved to receive information concerning each Portfolio's
portfolio holdings: (i) the Funds' independent registered public accounting
firm, for use in providing audit opinions; (ii) RR Donnelley Financial, Data
Communique International and, from time to time, other financial printers, for
the purpose of preparing Portfolio regulatory filings; (iii) the Funds'
custodian in connection with its custody of the assets of the Portfolios; (iv)
Institutional Shareholder Services, Inc. for proxy voting services; and (v) data
aggregators, such as Vestek. Information may be provided to these parties at any
time with no time lag. Each of these parties is contractually and ethically
prohibited from sharing a Portfolio's portfolio holdings information unless
specifically authorized.
GENERAL INFORMATION
Municipal Income Fund
The Fund is a Maryland corporation organized in 1987. Effective
March 31, 2003, the Fund changed its name from Alliance Municipal Income Fund,
Inc. to AllianceBernstein Municipal Income Fund, Inc.
All shares of each Portfolio participate equally in dividends and
distributions from that Portfolio, including any distributions in the event of a
liquidation. Each share of a Portfolio is entitled to one vote for all purposes,
except that, if approved by the Board and pursuant to the issuance of an
exemptive order from the SEC, each holder of stock may be entitled one vote for
each dollar of NAV per share of a class. Shares of all series vote for the
election of Directors and on any other matter that affects all Portfolios in
substantially the same manner as a single series, except as otherwise required
by law. As to matters affecting each Portfolio differently, such as approval of
the Advisory Agreement and changes in investment policy, shares of each
Portfolio vote as a separate series. The Board may determine whether an issue
pertains only to a one class or a particular series where it is not otherwise
specified by law. There are no conversion or pre-emptive rights in connection
with any shares of the Fund. Since voting rights are noncumulative, holders of
more than 50% of the shares voting for the election of Directors can elect all
of the Directors. All shares of the Fund when duly issued will be fully paid and
non-assessable. The rights of the holders of shares of a series or class may not
be modified except by the vote of a majority of the aggregate number of shares
entitled to be cast such series.
Municipal Income Fund II
The Fund II is a Massachusetts business trust organized in 1993.
Effective March 31, 2003, the Fund II changed its name from Alliance Municipal
Income Fund II to AllianceBernstein Municipal Income Fund II.
Under Massachusetts law shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder of that Portfolio held liable on account of being or having been
a shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Portfolio of which he or she was a shareholder would be unable to meet its
obligations.
Both Funds
It is anticipated that annual shareholder meetings will not be held;
shareholder meetings will be held only when required by federal or state law.
Shareholders have available certain procedures for the removal of Directors.
A shareholder will be entitled to share pro rata with other holders
of the same class of shares all dividends and distributions arising from a
Portfolio's assets and, upon redeeming shares, will receive the then current NAV
of the Portfolio represented by the redeemed shares less any applicable CDSC.
The Funds is empowered to establish, without shareholder approval, additional
portfolios, which may have different investment objectives and policies than
those of the Portfolios, and additional classes of shares within each Portfolio.
If an additional portfolio or class were established in a Portfolio, each share
of the portfolio or class would normally be entitled to one vote for all
purposes. Generally, shares of each portfolio and class would vote together as a
single class on matters, such as the election of Directors, that affect each
portfolio and class in substantially the same manner. Each class of shares of
the Portfolios has the same rights and is identical in all respects, except that
each of Class A, Class B and Class C shares of a Portfolio bears its own
distribution expenses and Class B and Advisor Class shares convert to Class A
shares under certain circumstances. Each class of shares of a Portfolio votes
separately with respect to the Funds' Rule 12b-1 distribution plan and other
matters for which separate class voting is appropriate under applicable law.
Shares are freely transferable, are entitled to dividends as determined by the
Directors and, in liquidation of a Portfolio, are entitled to receive the net
assets of the Portfolio.
The Boards are authorized to issue and sale shares of a Portfolio
and reclassify and issue any unissued shares to any number of additional series
without shareholder approval. Accordingly, the Directors in the future, for
reasons such as the desire to establish one or more additional portfolios with
different investment objectives, policies or restrictions, may create additional
series of shares. Any issuance of shares of another series would be governed by
the 1940 Act and applicable law.
Principal Holders
The following is a list of all persons who owned of record or
beneficially 5% or more of each class or shares of each Portfolio as of January
10, 2014.
NO. OF SHARES % OF
NAME AND ADDRESS OF CLASS CLASS
---------------- --------- ------
|
NATIONAL PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 5,606,288 8.56%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 5,946,600 9.07%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 5,224,630 7.97%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 3,939,306 6.01%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 5,756,883 8.79%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 9,370,428 14.30%
CLASS B SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 44,090 13.96%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 29,897 9.47%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 34,722 11.00%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 38,777 12.28%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 56,234 17.81%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,684,330 11.55%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 4,175,706 28.65%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,473,189 10.11%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,335,280 9.16%
Raymond James
Omnibus For Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 835,090 5.73%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 1,139,421 7.82%
ADVISOR CLASS SHARES:
--------------------
Charles Schwab & Co.
For the Exclusive Benefit of Customers
Mutual Fund Operations
211 Main Street
San Francisco, CA 94105-1905 1,971,819 11.79%
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,825,586 10.92%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 3,070,475 18.36%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 2,800,606 16.75%
Raymond James
Omnibus for Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 5,518,923 33.00%
|
HIGH INCOME PORTFOLIO
CLASS A SHARES:
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 6,496,130 11.26%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 9,047,655 15.69%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 5,971,521 10.35%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 14,621,225 25.35%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 4,072,088 20.00%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 4,762,263 23.39%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 4,805,671 23.60%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,087,105 5.34%
Raymond James
Omnibus for Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 1,271,396 6.24%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 1,623,547 7.97%
ADVISOR CLASS SHARES:
--------------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 4,456,599 10.96%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 8,832,524 21.71%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 5,692,873 14.00%
|
NEW YORK PORTFOLIO
CLASS A SHARES:
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 7,531,144 15.74%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 2,992,657 6.25%
MLPF&S for the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484 2,607,343 5.45%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 2,574,268 5.38%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 7,400,002 15.47%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 10,377,559 21.69%
CLASS B SHARES:
--------------
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 124,319 21.86%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 33,334 5.86%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 81,073 14.25%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 42,948 7.55%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 64,348 11.31%
Vitzeslav R. Rafaelov &
Yori Rafaelov JTWROS
242 East 7th Street
Brooklyn, NY 11218-2611 37,969 6.68%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 682,766 8.22%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 1,917,053 23.08%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 1,134,384 13.66%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 518,779 6.25%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 441,631 5.32%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 2,196,951 26.45%
ADVISOR CLASS SHARES:
--------------------
First Clearing, LLC
Special Custody Acct for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 223,204 13.34%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 189,917 11.35%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 415,413 24.84%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 331,782 19.84%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 398,207 23.81%
|
CALIFORNIA PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 6,697,299 15.69%
MLPF&S
For the Sole Benefit of its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 6,071,956 14.23%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 5,559,407 13.03%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 4,079,611 9.56%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 2,604,382 6.10%
CLASS B SHARES:
---------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 11,167 11.90%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 22,431 23.89%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 5,596 5.96%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 28,426 30.28%
Raymond James
Omnibus For Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 6,079 6.48%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 877,147 10.90%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 2,307.554 28.67%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,464,755 18.20%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 801,287 9.95%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 530,107 6.59%
ADVISOR CLASS SHARES:
---------------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 589,673 17.33%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 265,522 7.80%
MLPF&S
For the Sole Benefit of its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 843,331 24.79%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,379,065 40.53%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 218,662 6.43%
|
ARIZONA PORTFOLIO
CLASS A SHARES:
Edward D. Jones & Co.
For the Benefit of Customers
12555 Manchester Road
Saint Louis, MO 63131-3729 629,578 5.75%
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,790,214 16.35%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 2,407,039 21.98%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 1,277,458 11.67%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 644,029 5.88%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,002,946 9.16%
CLASS B SHARES:
---------------
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 44,936 62.55%
RBC Capital Markets LLC
Mutual Fund Omnibus Processing
Omnibus
Attn: Mutual Fund Ops Manager
510 Marquette Avenue S.
Minneapolis, MN 55402-1110 5,197 7.23%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 3,783 5.27%
CLASS C SHARES:
---------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 452,785 16.12%
JPMorgan Clearing Corp. Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 354,268 12.61%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 398,545 14.19%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 349,560 12.44%
Raymond James
Omnibus for Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 169,802 6.04%
RBC Capital Markets LLC
Mutual Fund Omnibus Processing
Omnibus
Attn: Mutual Fund OPS Manager
510 Marquette Ave. S
Minneapolis, MN 55402-1110 150,250 5.35%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 140,726 5.01%
|
MASSACHUSETTS PORTFOLIO
CLASS A SHARES:
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 2,413,991 13.19%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,331,396 7.27%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 5,909,964 32.28%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,638,887 8.95%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 1,154,215 6.31%
|
CLASS B SHARES:
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 46,911 36.27%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 16,385 12.67%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 21,171 16.37%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 19,595 15.15%
Tariq J Hashmi &
Lubna Hashmi JTWROS
47 Pineridge Dr.
Westfield, MA 01085-4544 8,415 6.51%
|
CLASS C SHARES:
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 1,078,918 18.50%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 354,210 6.08%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 1,081,169 18.54%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 874,370 15.00%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 378,429 6.49%
|
MICHIGAN PORTFOLIO
CLASS A SHARES:
Edward D. Jones & Co.
For the Benefit of Customers
12555 Manchester Rd.
Saint Louis, MO 63131-3729 285,268 5.83%
First Clearing, LLC
Special Custody Account for the Exclusive Benefit
of Customer
2801 Market St.
Saint Louis, MO 63103-2523 474,336 9.70%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 642,853 13.14%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 268,556 5.49%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 405,734 8.29%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 337,903 6.91%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 496,508 10.15%
CLASS B SHARES:
--------------
Cheryle A. Diehl and Alton V. Obrecht as
TTEES of the Obrecht Fam. Tr.
U/A DTD 4-27-09
17618 E. Kirkwood Drive
Clinton Twp., MI 48038-1209 2,782 6.18%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 3,084 6.84%
Leslie W. Neinas TTEE
Linda C. Luke TTEE
einas Fam. Rev. Liv. Tr.
UA DTD 11/05/2004
47762 N. Shore Dr.
Belleville, MI 48111-2231 16,555 36.75%
Michael B. Maxwell &
Ruth A. Maxwell
JTWROS TOD/DE
2273 Tamara Rd., NW
Kalkaska, MI 49646-8941 4,885 10.84%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 3,317 7.36%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 4,488 9.96%
CLASS C SHARES:
--------------
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 209,229 9.39%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 316,566 14.21%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 121,808 5.47%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 113,468 5.09%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 153,230 6.88%
Raymond James
Omnibus for Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 293,699 13.18%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 152,380 6.84%
|
MINNESOTA PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 641,110 8.99%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,359,202 19.06%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
4999 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 416,862 5.85%
Raymond James
Omnibus for Mutual Funds
Attn: Courtney Waller
880 Carillon Parkway
St. Petersburg, FL 33716-1102 375,013 5.26%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 567,570 7.96%
CLASS B SHARES:
--------------
Charles Schwab & Co.
For the Exclusive Benefit
of Customers
Mutual Fund Operations
211 Main Street
San Francisco, CA 94105-1905 3,120 24.58%
Judith Jorgensen
7314 Landau Drive
Bloomington, MN 55438-2308 797 6.28%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 937 7.38%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 5,787 45.58%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,179 9.29%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 322,086 17.13%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 121,948 6.48%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 283,896 15.10%
RBC Capital Markets LLC
Mutual Fund Omnibus Processing
Omnibus
Attn: Mutual Fund Ops Manager
510 Marquette Ave. S
Minneapolis, MN 55402-1110 172,309 9.16%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Blvd., 5th Floor
Weehawken, NJ 07086-6761 204,565 10.88%
|
NEW JERSEY PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,230,252 10.39%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 596,848 5.04%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 1,233,243 10.41%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,590,877 13.43%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 2,245,221 18.96%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 967,496 8.17%
CLASS B SHARES:
---------------
Charles Schwab & Co.
For the Exclusive Benefit
of Customers
Mutual Fund Operations
211 Main Street
San Francisco, CA 94105-1905 14,284 13.94%
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 9,179 8.96%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 14,257 13.91%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 22,276 21.74%
Patricia Barrett
131 East Magnolia Ave.
Maywood, NJ 07607-1945 12,239 11.94%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 12,586 12.28%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 798,267 23.21%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 389,144 11.32%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 945,265 27.49%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 263,888 7.67%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 193,174 5.62%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 222,480 6.47%
|
OHIO PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,548,157 14.67%
JPMorgan Clearing Corp Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Dept.
Brooklyn, NY 11245-0001 838,069 7.94%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 736,837 6.98%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 882,001 8.36%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 728,776 6.90%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 874,989 8.29%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,536,123 14.55%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Blvd., 5th Floor
Weehawken, NJ 07086-6761 606,709 5.75%
CLASS B SHARES:
--------------
JPMorgan Clearing Corp. Omni Account
For the Exclusive Benefit of Customers
3 Chase Metrotech Center
3rd Floor Mutual Fund Center
Brooklyn, NY 11245-0001 14,495 17.53%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 18,842 22.79%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 17,099 20.68%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 13,688 16.55%
CLASS C SHARES:
---------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 463,794 11.97%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 684,661 17.68%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 219,227 5.66%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 285,261 7.36%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 394,906 10.20%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 635,149 16.40%
|
PENNSYLVANIA PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 967,648 11.09%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 723,272 8.29%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 1,709,544 19.60%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 692,446 7.94%
CLASS B SHARES:
--------------
Arthur L. Altemose Jr. TTEE
Margaret B. Altemose TTEE
Altemose Living Trust
UA DTD 07/20/1998
1500 Princeton Avenue
Williamsport, PA 17701-1307 5,747 6.45%
Glenn A. Salisbury &
Diana K. Salisbury JTWROS
910 Spring Circle
Mechanicsburg, PA 17055-4054 6,209 6.96%
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 11,512 12.91%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 8,497 9.53%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 8,712 9.77%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 733,169 31.16%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 444,295 18.89%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 205,485 8.73%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 128,773 5.47%
|
VIRGINIA PORTFOLIO
CLASS A SHARES:
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 2,402,892 13.79%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 1,423,879 8.17%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 3,492,351 20.04%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 1,344,992 7.72%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 1,072,526 6.16%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 1,017,350 5.84%
UBS WM USA
Omni Account M/F
Attn: Department Manager
1000 Harbor Boulevard, 5th Floor
Weehawken, NJ 07086-6761 1,047,644 6.01%
CLASS B SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 32,230 27.18%
LPL Financial
FBO Customer Accounts
Attn: Mutual Fund Operations
P.O. Box 509046
San Diego, CA 92150-9046 13,569 11.44%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 18,713 15.78%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 29,304 24.71%
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052 8,090 6.82%
CLASS C SHARES:
--------------
First Clearing, LLC
Special Custody Acct. for the
Exclusive Benefit of Customer
2801 Market Street
Saint Louis, MO 63103-2523 1,051,310 18.95%
MLPF&S
For the Sole Benefit of Its Customers
Attn: Fund Admin.
4800 Deer Lake Dr., East
2nd Floor
Jacksonville, FL 32246-6484 1,705,171 30.74%
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza II, 3rd Floor
Jersey City, NJ 07311 601,589 10.85%
National Financial Services LLC
For the Exclusive Benefit of Our Customers
Attn: Mutual Funds Dept.
499 Washington Boulevard, 4th Floor
Jersey City, NJ 07310 322,017 5.81%
|
Custodian and Accounting Agent
State Street Bank and Trust Company, One Lincoln Street, Boston, MA
02111, acts as custodian for the securities and cash of the Funds but plays no
part in deciding the purchase or sale of portfolio securities.
Principal Underwriter
ABI, an indirect wholly-owned subsidiary of the Adviser, located at
1345 Avenue of the Americas, New York, NY 10105, is the principal underwriter of
shares of the Funds. Under the Distribution Services Agreements between the
Funds and ABI, the Funds have agreed to indemnify ABI, 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, NY.
Independent Registered Public Accounting Firm
Ernst & Young LLP, 5 Times Square, New York, NY 10036, has been
appointed as the independent registered public accounting firm for the Funds.
Code of Ethics and Proxy Voting Policies and Procedures
The Funds, the Adviser and ABI have each adopted Codes of Ethics
pursuant to Rule 17j-1 of the Act. These codes of ethics permit personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the Funds.
The Funds have adopted the Adviser's proxy voting policies and
procedures. The Adviser's proxy voting policies and procedures are attached as
Appendix B.
Information regarding how each Portfolio voted proxies related to
portfolio securities during the most recent 12-month period ended June 30, 2013
is available (1) without charge, upon request, by calling (800) 227-4618; or on
or through the Fund's website at www.AllianceBernstein.com; or both; and (2) on
the SEC's website at www.sec.gov.
Additional Information
Any shareholder inquiries may be directed to the shareholder's
financial intermediary or to ABIS at the address or telephone numbers shown on
the front cover of this SAI. This SAI does not contain all the information set
forth in the Registration Statement filed by the Funds with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the
offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of AllianceBernstein Municipal Income Fund,
Inc. for the fiscal year ended October 31, 2013, and the report of Ernst & Young
LLP, independent registered public accounting firm, are incorporated herein by
reference to the Fund's annual report. The annual report, dated October 31,
2013, was filed on Form N-CSR with the SEC on January 8, 2014.
The financial statements of AllianceBernstein Municipal Income Fund
II for the fiscal year ended September 30, 2013, and the report of Ernst & Young
LLP, independent registered public accounting firm, are incorporated herein by
reference to the Fund II's annual report. The annual report, dated September 30,
2013, was filed on Form N-CSR with the SEC on December 9, 2013.
The annual reports are available without charge upon request by
calling ABIS at (800) 227-4618 or on the Internet at www.AllianceBernstein.com.