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This is filed pursuant to Rule 497(c).
File Nos. 333-26229 and 811-08201.
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(LOGO) ALLIANCE GREATER CHINA '97 FUND, INC.
_________________________________________________________________
c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
For Literature: Toll Free (800) 227-4618
_________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
_________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the current Prospectus for Alliance Greater China '97 Fund, Inc.
(the "Fund") that offers the Class A, Class B and Class C shares
of the Fund and the current Prospectus for the Fund that offers
the Advisor Class shares of the Fund (the "Advisor Class
Prospectus" and, together with the Prospectus for the Fund that
offers the Class A, Class B and Class C shares, the
"Prospectus"). Copies of either Prospectus may be obtained by
contacting Alliance Fund Services, Inc. at the address or the
"For Literature" telephone number shown above.
TABLE OF CONTENTS
Page
Description of the Fund................................
Management of the Fund.................................
Expenses of the Fund...................................
Purchase of Shares.....................................
Redemption and Repurchase of Shares....................
Shareholder Services...................................
Net Asset Value........................................
Dividends, Distributions and Taxes.....................
Portfolio Transactions.................................
General Information....................................
Financial Statements and Report of Independent.........
Auditors.............................................
Appendix A: Additional Information About China,
Hong Kong and Taiwan.................... A-1
Appendix B: Certain Investment Practices.............. B-1
Appendix C: Debt Securities Ratings................... C-1
Appendix D: Certain Employee Benefit Plans............ D-1
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
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____________________________________________________________
DESCRIPTION OF THE FUND
____________________________________________________________
Alliance Greater China '97 Fund, Inc. (the "Fund") is a
non-diversified, open-end investment company. Except as
otherwise indicated, the investment policies of the Fund are not
"fundamental policies" and may, therefore, be changed by the
Board of Directors without a shareholder vote. However, the Fund
will not change its investment policies without contemporaneous
written notice to its shareholders. The Fund's investment
objective is fundamental and may not be changed without
shareholder approval. There can be, of course, no assurance that
the Fund will achieve its investment objective.
Investment Objective
The Fund's investment objective is to seek long-term
capital appreciation through investment of at least 80% of its
total assets in equity securities issued by Greater China
companies. In furtherance of its investment objective, the Fund
expects to invest a significant portion, which may be greater
than 50%, of its assets in equity securities of Hong Kong
companies and may invest, from time to time, all of its assets in
Hong Kong companies or companies of either of the other Greater
China countries.
Investment Policies and Practices
In addition to investing in equity securities of Greater
China companies, the Fund may invest up to 20% of its total
assets in (i) debt securities issued or guaranteed by Greater
China companies or by Greater China governments, their agencies
or instrumentalities, and (ii) equity or debt securities issued
by issuers other than Greater China companies. The Fund will not
invest in debt securities other than investment grade securities.
Should a debt security in which the Fund is invested be
downgraded below investment grade or be determined by Alliance
Capital Management L.P. the Fund's investment adviser (the
"Adviser") to have undergone a similar credit quality
deterioration, the Fund will dispose of that security. See
"Appendix C--Debt Securities Ratings."
The Fund may also: (i) invest up to 25% of its net
assets in the convertible securities of companies whose common
stocks are eligible for purchase by the Fund; (ii) invest up to
20% of its net assets in rights or warrants; (iii) invest in
depositary receipts, instruments of supranational entities
denominated in the currency of any country, securities of
multinational companies and "semi-governmental securities;"
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(iv) invest up to 25% of its net assets in equity-linked debt
securities with the objective of realizing capital appreciation;
(v) invest up to 20% of its net assets in loans and other direct
debt securities; (vi) write covered put and call options on
securities of the types in which it is permitted to invest and on
exchange-traded index options; (vii) enter into contracts for the
purchase or sale for future delivery of fixed-income securities
or foreign currencies, or contracts based on financial indices,
including any index of U.S. Government securities, securities
issued by foreign government entities, or common stock and may
purchase and write options on future contracts; (viii) purchase
and write put and call options on foreign currencies for hedging
purposes; (ix) purchase or sell forward contracts; (x) enter into
interest rate swaps and purchase or sell interest rate caps and
floors; (xi) enter into forward commitments for the purchase or
sale of securities; (xii) enter into standby commitment
agreements; (xiii) enter into currency swaps for hedging
purposes; (xiv) enter into repurchase agreements pertaining to
U.S. Government securities with member banks of the Federal
Reserve System or primary dealers in such securities; (xv) make
short sales of securities or maintain a short position, in each
case only if "against the box;" and (xvi) make secured loans of
its portfolio securities not in excess of 30% of its total assets
to entities with which it can enter into repurchase agreements.
All or some of the policies and practices listed above may not be
available to the Fund in one or more of the Greater China
countries, and the Fund will utilize these policies only to the
extent permissible.
With respect to currency swaps, standby commitment
agreements and other commitments that may have the effect of
requiring the Fund to increase its investment in a borrower or
other issuer, the net amount of the excess, if any, of the Fund's
obligations over its entitlements will be accrued on a daily
basis and an amount of liquid assets having an aggregate value at
least equal to the accrued excess will be maintained in a
segregated account by the Fund's Custodian.
Future Developments. The Fund may, following written
notice to its shareholders, take advantage of other investment
practices which are not at present contemplated for use by the
Fund or which currently are not available but which may be
developed, to the extent such investment practices are both
consistent with the Fund's investment objective and legally
permissible for the Fund. Such investment practices, if they
arise, may involve risks which exceed those involved in the
activities described above.
Portfolio Turnover. Generally, the Fund's policy with
respect to portfolio turnover is to sell any security whenever,
in the judgment of the Adviser, its appreciation possibilities
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have been substantially realized or the business or market
prospects for such security have deteriorated, irrespective of
the length of time that the security has been held. The Adviser
anticipates that the Fund's annual rate of portfolio turnover
will not exceed 150%. A 150% annual turnover rate would occur if
all the securities in the Fund's portfolio were replaced one and
one-half times within a period of one year. The turnover rate
has a direct effect on the transaction costs to be borne by the
Fund, and as portfolio turnover increases it is more likely that
the Fund will realize short-term capital gains or losses.
Certain Fundamental Investment Policies. The following
restrictions, which supplement those set forth in the Fund's
Prospectus, may not be changed without approval by the vote of a
majority of the Fund's outstanding voting securities, which means
the affirmative vote of the holders of (i) 67% or more or the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented, or (ii) more than 50% of the
outstanding shares, whichever is less. Whenever any investment
restriction states a maximum percentage of the Fund's assets
which may be invested in any security or other asset, it is
intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund'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.
The Fund may not:
(i) invest 25% or more of its total assets in securities
of issuers conducting their principal business activities in the
same industry;
(ii) borrow money except from banks for temporary or
emergency purposes, including the meeting of redemption requests
which might require the untimely disposition of securities;
borrowing in the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the
value of the Fund's total assets (including the amount borrowed)
less liabilities (not including the amount borrowed) at the time
the borrowing is made; outstanding borrowings in excess of 5% of
the value of the Fund's total assets will be repaid before any
investments are made;
(iii) pledge, hypothecate, mortgage or otherwise
encumber its assets, except to secure permitted borrowings;
(iv) make loans except through (a) the purchase of debt
obligations in accordance with its investment objectives and
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policies; (b) the lending of portfolio securities; or (c) the use
of repurchase agreements;
(v) participate on a joint or joint and several basis in
any securities trading account;
(vi) invest in companies for the purpose of exercising
control;
(vii) issue any senior security within the meaning of
the Act;
(viii) make short sales of securities or maintain a
short position, unless at all times when a short position is open
an equal amount of such securities or securities convertible into
or exchangeable for without payment of any further consideration,
securities of the same issue as, and equal in amount to, the
securities sold short ("short sales against the box") and unless
not more than 25% of the Fund's net assets (taken at market
value) is held as collateral for such sales at any one time (it
is the Fund's present intention to make such sales only for the
purpose of deferring realization of gain or loss for Federal
income tax purposes); or
(ix) (a) purchase or sell commodities or commodity
contracts including futures contracts (except foreign currencies,
foreign currency options and futures, options and futures on
securities and securities indices and forward contracts or
contracts for the future acquisition or delivery of securities
and foreign currencies and related options on futures contracts
and similar contracts); (b) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (c) act as an underwriter of securities,
except that the Fund may acquire restricted securities under
circumstances in which, if such securities were sold, the Fund
might be deemed to be an underwriter for purposes of the
Securities Act.
___________________________________________________________
MANAGEMENT OF THE FUND
___________________________________________________________
Directors and Officers
The business and affairs of the Fund are managed under
the direction of the Board of Directors. The Directors and
principal officers of the Fund, their ages and their primary
occupations during the past five years are set forth below.
Certain Directors and officers are also directors, trustees or
officers of other registered investment companies sponsored by
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the Adviser. Unless otherwise specified, the address of each of
the following persons is 1345 Avenue of the Americas, New York,
New York 10105.
DIRECTORS
JOHN D. CARIFA,* 54, Chairman of the Board, is the
President, Chief Operating Officer and a Director of Alliance
Capital Management Corporation ("ACMC"), with which he has been
associated since prior to 1994.
DAVID H. DIEVLER, 70, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
WILLIAM H. FOULK, JR., 67, is an Investment Adviser and
an independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1994. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
TAK-LUNG TSIM,* 52, is a consultant of T.L. Tsim &
Associates Limited, with which he has been associated since 1994.
He is a trustee of Shaw College of The Chinese University of Hong
Kong and is a member of L. Po Chun United World College. His
address is Suite 906-907, Sun Hung Kai Center, 30 Halbour Road,
Hong Kong.
OFFICERS
JOHN D. CARIFA, Chairman and President, see biography
above.
KATHLEEN A. CORBET, 39, Senior Vice President, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1994.
MATTHEW W.S. LEE, 36, Chief Investment Officer, is a
Vice President of ACMC, with which he has been associated since
1997. Prior thereto, he was a director of National Mutual Funds
Management (ASIA), and an employee of James Capel & Co. since
prior to 1994.
EDMUND P. BERGAN, JR., 49, Secretary, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
____________________
* An interested person of the Fund as defined in the
Investment Company Act of 1940, as amended (the "1940
Act").
6
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Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1994.
MARK D. GERSTEN, 49, Treasurer, and Chief Financial
Officer, is Senior Vice President of AFS and a Vice President of
AFD, with which he has been associated since prior to 1994.
VINCENT S. NOTO, 34, Controller, is a Vice President of
AFS, with which he has been associated since prior to 1994.
ANDREW L. GANGOLF, 45, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since December 1994. Prior thereto, he was a
Vice President and Assistant Secretary of Delaware Management
Company, Inc.
DOMENICK PUGLIESE, 38, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since May 1995. Prior thereto, he was a Vice
President and Associate General Counsel of Prudential Securities
since prior to 1994.
EMILIE D. WRAPP, 43, Assistant Secretary, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1994.
The aggregate compensation paid by the Fund to each of
the Directors during its current fiscal year ended July 31, 1999
and the aggregate compensation paid to each of the Directors
during calendar year 1998 by all of the registered investment
companies to which the Adviser provides investment advisory
services (collectively, the "Alliance Fund Complex"), and the
total number of registered investment companies (and separate
investment portfolios within those Companies) in the Alliance
Fund Complex with respect to which each of the Directors serves
as a director or trustee, are set forth below. Neither the Fund
nor any other registered investment company in the Alliance Fund
Complex provides compensation in the form of pensions or
retirement benefits to any of its directors or trustees. Some of
the Directors are a director or trustee of one or more other
registered investment companies in the Alliance Fund Complex.
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Total Number
Total Number of Investment
of Investment Portfolios
Companies in Within the
the Alliance Alliance Fund
Total Fund Complex, Complex,
Compensation Including the Including the
from the Fund, as to Fund, as to
Alliance Fund which the which the
Name of Aggregate Complex, Director is a Director is
Director Compensation Including the Director or a Director
of the Fund from the Fund Fund Trustee or Trustee
___________ ____________ ______________ _____________ _____________
John D. Carifa $0 $0 50 116
David H. Dievler $2,518 $216,288 44 86
William H. Foulk, Jr. $3,021 $241,003 45 111
T.L. Tsim $3,000 $3,500 1 1
As of October 8, 1999, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
Adviser
Alliance Capital Management L.P. a Delaware limited
partnership with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision and control of the Fund's Board of Directors.
The Adviser is a leading international adviser managing
client accounts with assets as of September 30, 1999 totaling
more than $317 billion (of which more than $143 billion
represented assets of investment companies). As of September 30,
1999, the Adviser managed retirement assets for many of the
largest public and private employee benefit plans (including 28
of the nation's FORTUNE 100 companies), for public employee
retirement funds in 31 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide.
The 52 registered investment companies managed by the Adviser,
comprising 118 separate investment portfolios, currently have
approximately 4.8 million shareholder accounts.
ACMC is the general partner of the Adviser. As of
September 30, 1999, The Equitable Life Assurance Society of the
United States ("Equitable"), ACMC, Inc. and Equitable Capital
Management Corporation ("ECMC") were the beneficial owners of
approximately 56% of the outstanding Units of the Adviser. ACMC,
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ECMC and ACMC, Inc. are wholly owned subsidiaries of Equitable,
one of the largest life insurance companies in the United States.
ECMC is a registered investment adviser and ACMC, Inc. is a
holding company for Units of the Adviser. Equitable is a wholly
owned subsidiary of AXA Financial, Inc. ("AXA Financial"), a
Delaware corporation whose shares are traded on the New York
Stock Exchange. AXA Financial serves as the holding company for
the Adviser, Equitable and Donaldson, Lufkin & Jenrette, Inc., a
broker-dealer holding company. As of September 30, 1999, AXA, a
French insurance holding company, owned approximately 56% of the
issued and outstanding shares of the common stock of AXA
Financial.
Under the Advisory Agreement, the Adviser provides
investment advisory services and order placement facilities for
the Fund and pays all compensation of Directors and officers of
the Fund who are affiliated persons of the Adviser. The Adviser
or its affiliates also furnishes the Fund, without charge,
management supervision and assistance and office facilities and
provides persons satisfactory to the Fund's Board of Directors to
serve as the Fund's officers.
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of services other than those specifically provided to
the Fund by the Adviser, the Fund may employ its own personnel.
For such services, it also may utilize personnel employed by the
Adviser or by other subsidiaries of Equitable. In such event,
the services will be provided to the Fund at cost and the
payments specifically approved by the Fund's Board of Directors.
For the year ended July 31, 1999, the cost of certain legal and
accounting services amounting to $127,000, provided to the Fund by
the Adviser was waived.
Under the Advisory Agreement, the Fund pays the Adviser
a fee at the annual rate of 1.00% of the value of the average
daily net assets of the Fund. The fee is accrued daily and paid
monthly. For its fiscal year ended July 31, 1999, the Adviser
was entitled to receive $27,234 pursuant to the Advisory
Agreement, all of which was voluntarily waived by the Adviser.
The Adviser has agreed for the current fiscal year to waive its
fee and bear certain expenses so that total expenses do not
exceed on an annual basis 2.52%, 3.22%, 3.22% and 2.22% of
average net assets, respectively, for Class A, Class B, Class C
and Advisor Class shares. For the year ended July 31, 1999, such
waiver of management fees amounted to $331,024.
The Advisory Agreement became effective on July 29, 1997
having been approved by the unanimous vote, cast in person, of
the Fund's Directors, including the Directors who are not parties
to the Advisory Agreement or interested persons as defined in the
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1940 Act of any such party, at a meeting called for that purpose
and held on July 29, 1997, and by the Fund's initial shareholder
on July 30, 1997.
The Advisory Agreement will remain in force until
June 30, 2000 and thereafter for successive twelve-month periods
(computed from each July 1), provided that such continuance is
approved at least annually by a vote of a majority of the Fund's
outstanding voting securities or by the Fund's Board of
Directors, including in either case, approval by a majority of
the Directors who are not parties to the Advisory Agreement or
interested persons of any such party as defined by the 1940
Act.
The Advisory Agreement is terminable without penalty by
a vote of a majority of the Fund's outstanding voting securities
or by a vote of a majority of the Fund's Directors on 60 days'
written notice, or by the Adviser on 60 days' written notice, and
will automatically terminate in the event of its assignment. The
Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Adviser, or of reckless disregard of its obligations thereunder,
the Adviser shall not be liable for any action or failure to act
in accordance with its duties thereunder.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. It is
the policy of the Adviser to allocate advisory recommendations
and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Adviser (including the
Fund) are purchasing or selling the same security on a given day
from the same broker-dealer, such transactions may be averaged as
to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to AFD Exchange Reserves, Alliance
All-Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Bond Fund, Inc., Alliance Capital Reserves, Alliance
Global Dollar Government Fund, Inc., Alliance Global Environment
Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global
Strategic Income Trust, Inc., Alliance Government Reserves,
Alliance Growth and Income Fund, Inc., Alliance Health Care Fund,
Inc., Alliance High Yield Fund, Inc., Alliance International
10
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Fund, Alliance International Premier Growth Fund, Inc., Alliance
Institutional Funds, Inc., Alliance Institutional Reserves, Inc.,
Alliance Limited Maturity Government Fund, Inc., Alliance Money
Market Fund, Alliance Mortgage Securities Income Fund, Inc.,
Alliance Multi-Market Strategy Trust, Inc., Alliance Municipal
Income Fund, Inc., Alliance Municipal Income Fund II, Alliance
Municipal Trust, Alliance New Europe Fund, Inc., Alliance North
American Government Income Trust, Inc., Alliance Premier Growth
Fund, Inc., Alliance Quasar Fund, Inc., Alliance Real Estate
Investment Fund, Inc., Alliance Select Investor Series, Inc.,
Alliance Technology Fund, Inc., Alliance Utility Income Fund,
Inc., Alliance Variable Products Series Fund, Inc., Alliance
Worldwide Privatization Fund, Inc., The Alliance Fund, Inc., The
Alliance Portfolios, and The Hudson River Trust, all registered
open-end investment companies; and to ACM Government Income Fund,
Inc., ACM Government Securities Fund, Inc., ACM Government
Spectrum Fund, Inc., ACM Government Opportunity Fund, Inc., ACM
Managed Dollar Income Fund, Inc., ACM Managed Income Fund, Inc.,
ACM Municipal Securities Income Fund, Inc., Alliance Global
Environment Fund, Inc., Alliance World Dollar Government Fund,
Inc., Alliance World Dollar Government Fund II, Inc., The Austria
Fund, Inc., The Korean Investment Fund, Inc., The Southern Africa
Fund, Inc. and The Spain Fund, Inc., all registered closed-end
investment companies.
Consultant to the Adviser
In connection with its provision of advisory services to
the Fund, Alliance has retained at its expense as a consultant
New-Alliance Asset Management (Asia) Limited ("New Alliance"), a
joint venture company headquartered in Hong Kong which was formed
in 1997 by Alliance and Sun Hung Kai Properties Limited ("SHKP").
New Alliance will provide Alliance with ongoing current and
comprehensive information and analysis of conditions and
developments in Greater China countries consisting of, but not
limited to, statistical and factual research and assistance with
respect to economic, financial, political, technological and
social conditions and trends in Greater China countries,
including information on markets and industries. In addition to
its own staff of professionals, New Alliance has access to the
expertise and personnel of SHKP, one of Hong Kong's preeminent
property and business groups. SHKP is one of the largest
enterprises in Hong Kong measured by market capitalization at
over HK$78.6 billion as of June 30, 1998 and has considerable
expertise in evaluating business and market conditions in Hong
Kong and the other Greater China countries. Although SHKP is
best known for its strength in the residential sector, its
developments span every major property use, including shopping
centers, office and industrial properties, hotels and warehouses.
Its activities complementary to property development include
11
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insurance and estate management, and SHKP is diversified as well
into telecommunications and infrastructure projects.
___________________________________________________________
EXPENSES OF THE FUND
___________________________________________________________
Distribution Services Agreement
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Fund's principal underwriter (the "Principal
Underwriter"), to permit the Principal Underwriter to distribute
the Fund's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with the distribution
of its Class A shares, Class B shares and Class C shares in
accordance with a plan of distribution which is included in the
Agreement and has been duly adopted and approved in accordance
with Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan").
During the Fund's fiscal year ended July 31, 1999, the
Fund paid distribution services fees for expenditures under the
Agreement, with respect to Class A shares, in amounts aggregating
$1,963 which constituted 0.30%, annualized, of the Fund's
aggregate average daily net assets attributable to Class A shares
during the period, and the Adviser made payments from its own
resources as described above aggregating $315,201. Of the
$317,164 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class A shares, $32,325 was spent on
advertising, $6,219 on the printing and mailing of prospectuses
for persons other than current shareholders, $138,925 for
compensation to broker-dealers and other financial intermediaries
(including, $86,133 to the Fund's Principal Underwriters), $543
for compensation to sales personnel, $139,152 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Fund's fiscal year ended July 31, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class B shares, in amounts
aggregating $18,363, which constituted 1.00%, annualized, of the
Fund's aggregate average daily net assets attributable to Class B
shares during the period, and the Adviser made payments from its
own resources as described above aggregating $454,205. Of the
$472,568 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class B shares, $48,292 was spent on
advertising, $28,965 on the printing and mailing of prospectuses
for persons other than current shareholders, $202,875 for
compensation to broker-dealers and other financial intermediaries
(including, $123,902 to the Fund's Principal Underwriters), $245
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for compensation to sales personnel, $188,489 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses, and $3,702 was spent on
interest on Class B shares financing.
During the Fund's fiscal year ended July 31, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class C shares, in amounts
aggregating $1,174, which constituted 1.00%, annualized, of the
Fund's aggregate average daily net assets attributable to Class C
shares during the period, and the Adviser made payments from its
own resources as described above aggregating $22,721. Of the
$23,895 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class C shares, $1,583 was spent on
advertising, $2,133 on the printing and mailing of prospectuses
for persons other than current shareholders, $10,226 for
compensation to broker-dealers and other financial intermediaries
(including, $6,153 to the Fund's Principal Underwriters), $32 for
compensation to sales personnel, $9,848 was spent on printing of
sales literature, travel, entertainment, due diligence and other
promotional expenses, and $73 was spent on interest on Class C
shares financing.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Fund as accrued. The
distribution services fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge and at the same time to permit the Principal
Underwriter to compensate broker-dealers in connection with the
sale of such shares. In this regard, the purpose and function of
the combined contingent deferred sales charges and distribution
services fees on the Class B shares and Class C shares are the
same as those of the initial sales charge and distribution
services fee with respect to the Class A shares in that in each
case the sales charge and distribution services fee provide for
the financing of the distribution of the relevant class of the
Fund's shares.
With respect to Class A shares of the Fund, distribution
expenses accrued by AFD in one fiscal year may not be paid from
distribution services fees received from the Fund in subsequent
fiscal years. AFD's compensation with respect to Class B and
Class C shares for any given year, however, will probably exceed
the distribution services fee payable under the Rule 12b-1 Plan
with respect to the class involved and, in the case of Class B
and Class C shares, payments received from contingent deferred
sales charges ("CDSCs"). The excess will be carried forward by
AFD and reimbursed from distribution services fees payable under
the Rule 12b-1 Plan with respect to the class involved and, in
the case of Class B and Class C shares, payments subsequently
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received through CDSCs, so long as the Rule 12b-1 Plan is in
effect.
Unreimbursed distribution expenses incurred as of the
end of the Fund's most recently completed fiscal period, and
carried over for reimbursement in future years in respect of the
Class B and Class C shares for the Fund were, respectively,
$31,995 (1.68% of the net assets of Class B) and $-0- (-0-% of
the net assets of Class C).
In approving the 12b-1 Plan, the Directors of the Fund
determined that there was a reasonable likelihood that the Rule
12b-1 Plan would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect for successive
twelve-month periods (computed from each July 1), provided,
however, that such continuance is specifically approved at least
annually by the Directors of the Fund or by vote of the holders
of a majority of the outstanding voting securities (as defined in
the 1940 Act) of that class, and, in either case, by a majority
of the Directors of the Fund who are not parties to the Agreement
or interested persons, as defined in the 1940 Act, of any such
party (other than as directors of the Fund) and who have no
direct or indirect financial interest in the operation of the
Rule 12b-1 Plan or any agreement related thereto. Most recently,
continuance of the Agreement was approved for the period ending
June 30, 2000 by the Board of Directors, including a majority of
the Directors who are not interested persons, as defined in the
1940 Act, at their Annual Meeting held on April 14, 1999.
In the event that the Rule 12b-1 Plan is terminated or
not continued with respect to the Class A shares, Class B shares
or Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class, and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
14
<PAGE>
The Glass-Steagall Act and other applicable laws may
limit the ability of a bank or other depository institution to
become an underwriter or distributor of securities. However, in
the opinion of the Fund's management, based on the advice of
counsel, these laws do not prohibit such depository institutions
from providing services for investment companies such as the
administrative, accounting and other services referred to in the
Agreements. In the event that a change in these laws prevented a
bank from providing such services, it is expected that other
services arrangements would be made and that shareholders would
not be adversely affected.
Transfer Agency Agreement
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Adviser located at 500 Plaza Drive, Secaucus,
New Jersey 07094, receives a transfer agency fee per account
holder of each of the Class A shares, Class B shares, Class C
shares and Advisor Class shares of the Fund, plus reimbursement
for out-of-pocket expenses. The transfer agency fee with respect
to the Class B shares and Class C shares is higher than the
transfer agency fee with respect to the Class A and Advisor Class
shares. For the fiscal period ended July 31, 1999, the Transfer
Agent was entitled to receive $6,591 under the Transfer Agent
Agreement, all of which was waived voluntarily by the Transfer
Agent.
_______________________________________________________________
PURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares -- How To Buy Shares."
General
Shares of the Fund are offered on a continuous basis at
a price equal to their net asset value plus an initial sales
charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares"), without any
initial sales charge and, as long as the shares are held for one
year or more, without any contingent deferred sales charge
("Class C shares"), or, to investors eligible to purchase Advisor
Class shares, without any initial, contingent deferred or asset-
based sales charge, in each case as described below. Shares of
the Fund that are offered subject to a sales charge are offered
through (i) investment dealers that are members of the National
Association of Securities Dealers, Inc. and have entered into
selected dealer agreements with the Principal Underwriter
15
<PAGE>
("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates that have entered
into selected agent agreements with the Principal Underwriter
("selected agents") and (iii) the Principal Underwriter.
Advisor Class shares of the Fund may be purchased and
held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers
or other financial intermediaries and approved by the Principal
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by the
categories of investors described in clauses (i) through (iv)
below under "--Sales at Net Asset Value" (other than officers,
directors and present and full-time employees of selected dealers
or agents, or relatives of such person, or any trust, individual
retirement account or retirement plan account for the benefit of
such relative, none of whom is eligible on the basis solely of
such status to purchase and hold Advisor Class shares) or,
(iv) by directors and present or retired full-time employees of
CB Richard Ellis, Inc. Generally, a fee-based program must
charge an asset-based or other similar fee and must invest at
least $250,000 in Advisor Class shares of the Fund in order to be
approved by the Principal Underwriter for investment in Advisor
Class shares.
Investors may purchase shares of the Fund either through
selected broker-dealers, agents, financial intermediaries or
other financial representatives, or directly through the
Principal Underwriter. A transaction, service, administrative or
other similar fee may be charged by your broker-dealer, agent,
financial intermediary or other financial representative with
respect to the purchase, sale or exchange of Class A, Class B,
Class C or Advisor Class shares made through such financial
representative. Such financial representative may also impose
requirements with respect to the purchase, sale or exchange of
shares that are different from, or in addition to, those imposed
by the Fund, including requirements as to the minimum initial and
subsequent investment amounts. Sales personnel of selected
dealers and agents distributing the Fund's shares may receive
differing compensation for selling Class A, Class B, Class C or
Advisor Class shares.
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of its
shares to the public in response to conditions in the securities
markets or for other reasons.
The public offering price of shares of the Fund is their
net asset value, plus, in the case of Class A shares, a sales
charge which will vary depending on the purchase alternative
16
<PAGE>
chosen by the investor, as shown in the table below under "Class
A Shares." On each Fund business day on which a purchase or
redemption order is received by the Fund and trading in the types
of securities in which the Fund invests might materially affect
the value of Fund shares, the per share net asset value is
computed in accordance with the Fund's Articles of Incorporation
and By-Laws as of the next close of regular trading on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
time) by dividing the value of the Fund's total assets, less its
liabilities, by the total number of its shares then outstanding.
A Fund business day is any day, on which the Exchange is open for
trading.
The respective per share net asset values of the
Class A, Class B, Class C and Advisor Class shares are expected
to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class B and
Class C shares may be lower than the per share net asset values
of the Class A and Advisor Class shares, as a result of the
differential daily expense accruals of the distribution and
transfer agency fees applicable with respect to those classes of
shares. Even under those circumstances, the per share net asset
values of the four classes eventually will tend to converge
immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differential
among the classes.
The Fund will accept unconditional orders for its shares
to be executed at the public offering price equal to their net
asset value next determined (plus applicable Class A sales
charges), as described below. Orders received by the Principal
Underwriter prior to the close of regular trading on the Exchange
on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on
the Exchange on that day (plus applicable Class A sales charges).
In the case of orders for purchases of shares placed through
selected dealers, agents or financial representatives, as
applicable, the applicable public offering price will be the net
asset value as so determined, but only if the selected dealer,
agent or financial representative receives the order prior to the
close of regular trading on the Exchange and transmits it to the
Principal Underwriter prior to 5:00 p.m. Eastern time. The
selected dealer, agent or financial representative, as
applicable, is responsible for transmitting such orders by
5:00 p.m. Eastern time (certain selected dealers, agents or
financial representatives may enter into operating agreements
permitting them to transmit purchase information to the Principal
Underwriter after 5:00 p.m. Eastern time and receive that day's
net asset value). If the selected dealer, agent or financial
representative fails to do so, the investor's right to that day's
closing price must be settled between the investor and the
17
<PAGE>
selected dealer, agent or financial representative, as
applicable. If the selected dealer, agent or financial
representatives, as applicable, receives the order after the
close of regular trading on the Exchange, the price will be based
on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of Fund shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate
portion of the Subscription Application or an "Autobuy"
application obtained by calling the "For Literature" telephone
number shown on the cover of this Statement of Additional
Information. Except with respect to certain omnibus accounts,
telephone purchase orders may not exceed $500,000. Payment for
shares purchased by telephone can be made only by Electronic
Funds Transfer from a bank account maintained by the shareholder
at a bank that is a member of the National Automated Clearing
House Association ("NACHA"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a
Fund business day, the order to purchase shares is automatically
placed the following Fund business day, and the applicable public
offering price will be the public offering price determined as of
the close of business on such following business day.
Full and fractional shares are credited to a
subscriber's account in the amount of his or her subscription. As
a convenience to the subscriber, and to avoid unnecessary expense
to the Fund, stock certificates representing shares of the Fund
are not issued except upon written request to the Fund by the
shareholder or his or her authorized selected dealer or agent.
This facilitates later redemption and relieves the shareholder of
the responsibility for and inconvenience of lost or stolen
certificates. No certificates are issued for fractional shares,
although such shares remain in the shareholder's account on the
books of the Fund.
In addition to the discount or commission paid to
dealers or agents, the Principal Underwriter from time to time
pays additional cash or other incentives to dealers or agents, in
connection with the sale of shares of the Fund. Such additional
amounts may be utilized, in whole or in part to provide
additional compensation to registered representatives who sell
shares of the Fund. On some occasions, such cash or other
incentives may take the form of payment for attendance at
seminars, meals, sporting events or theater performances, or
payment for travel, lodging and entertainment incurred in
connection with travel taken by persons associated with a dealer
or agent to urban locations within or outside the United States.
Such dealer or agent may elect to receive cash incentives of
equivalent amount in lieu of such payments.
18
<PAGE>
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects,
except that (i) Class A shares bear the expense of the initial
sales charge (or contingent deferred sales charge when applicable)
and Class B and Class C shares bear the expense of the contingent
deferred sales charge, (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 that borne by Class A and Advisor
Class shares, (iv) each of Class A, Class B and Class C shares
has exclusive voting rights with respect to provisions of the
Rule 12b-1 Plan pursuant to which its distribution services fee
is paid and other matters for which separate class voting is
appropriate under applicable law, provided that, if the Fund
submits to a vote of the Class A shareholders, an amendment to
the Rule 12b-1 Plan that would materially increase the amount to
be paid thereunder with respect to the Class A shares, then such
amendment will also be submitted to the Class B and Advisor Class
shareholders, and the Class A, the Class B and Advisor Class
shareholders will vote separately by class, and (v) Class B and
Advisor Class shares are subject to a conversion feature. Each
class has different exchange privileges and certain different
shareholder service options available.
The Directors of the Fund have determined that currently
no conflict of interest exists between or among the Class A,
Class B, Class C and Advisor Class shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties
under the 1940 Act and state law, will seek to ensure that no
such conflict arises.
Alternative Retail Purchase Arrangements -- Class A, Class B
and Class C Shares**
The alternative purchase arrangements available with
respect to Class A shares, Class B shares and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of purchase, the length of
time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the accumulated
distribution services fee and contingent deferred sales charge on
Class B shares prior to conversion, or the accumulated
distribution services fee and contingent deferred sales charge on
Class C shares, would be less than the initial sales charge and
____________________
** Advisor Class shares are sold only to investors described
above in this section under "General."
19
<PAGE>
accumulated distribution services fee on Class A shares purchased
at the same time, and to what extent such differential would be
offset by the higher return of Class A shares. Class A shares
will normally be more beneficial than Class B shares to the
investor who qualifies for reduced initial sales charges on
Class A shares, as described below. In this regard, the
Principal Underwriter will reject any order (except orders from
certain retirement plans) and certain employee benefit plans for
more than $250,000 for Class B shares. (See Appendix D for
information concerning the eligibility of certain employee
benefit plans to Purchase Class B shares at net asset value
without being subject to a contingent deferred sales charge and
the ineligibility of certain such plans to purchase Class A
shares. Class C shares will normally not be suitable for the
investor who qualifies to purchase Class A shares at net asset
value. For this reason, the Principal Underwriter will reject
any order for more than $1,000,000 for Class C shares.
Class A shares are subject to a lower distribution
services fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares.
However, because initial sales charges are deducted at the time
of purchase, investors purchasing Class A shares would not have
all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for
an extended period of time might consider purchasing Class A
shares because the accumulated continuing distribution charges on
Class B shares or Class C shares may exceed the initial sales
charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration
against the fact that, because of such initial sales charges, not
all their funds will be invested initially.
Other investors might determine, however, that it would
be more advantageous to purchase Class B shares or Class C shares
in order to have all their funds invested initially, although
remaining subject to higher continuing distribution charges and
being subject to a contingent deferred sales charge for a four-
year and one-year period, respectively. For example, based on
current fees and expenses, an investor subject to the 4.25%
initial sales charge would have to hold his or her investment
approximately seven years for the Class C distribution services
fee to exceed the initial sales charge plus the accumulated
distribution services fee of Class A shares. In this example, an
investor intending to maintain his or her investment for a longer
period might consider purchasing Class A shares. This example
does not take into account the time value of money, which further
reduces the impact of the Class C distribution services fees on
the investment, fluctuations in net asset value or the effect of
different performance assumptions.
20
<PAGE>
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Fund shares for the
four-year period during which Class B shares are subject to a
contingent deferred sales charge may find it more advantageous to
purchase Class C shares.
During the Fund's fiscal year ended July 31, 1999 and the
fiscal period ended July 31, 1998, the aggregate amount of
underwriting commission payable with respect to shares of the
Fund were $33,100 and $159,184, respectively. Of that amount,
the Principal Underwriter received the amounts of $2,204 and $146,
respectively, which represented that portion of the sales charges
paid on shares of the Fund sold during the period which was not
reallowed to selected dealers (and was, accordingly, retained by
the Principal Underwriter). During the Fund's fiscal year ended
July 31, 1999, the Principal Underwriter received contingent
deferred sales charges of $0 and $0, respectively, on Class A
shares, $21,655 and $9,615, respectively, on Class B shares and
$0 and $0, respectively, on Class C shares.
Class A Shares
The public offering price of Class A shares is the net
asset value plus a sales charge, as set forth below.
Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
________ ________ ________ ____________
Less than
$100,000 . . . 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000. . . . 3.36 3.25 3.00
$250,000 but
less than
$500,000. . . . 2.30 2.25 2.00
$500,000 but
less than
$1,000,000**** . 1.78 1.75 1.50
_____________
**** There is no initial sales charge on transactions of
$1,000,000 or more.
21
<PAGE>
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain redemptions, as described below under "--Class B
Shares." In determining the contingent deferred sales charge
applicable to a redemption of Class A shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because an
initial sales charge was paid with respect to the shares, or they
have been held beyond the period during which the charge applies
or were acquired upon the reinvestment of dividends and
distributions) and, second, of shares held longest during the
time they are subject to the sales charge. Proceeds from the
contingent deferred sales charge on Class A shares are paid to
the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sales of Class A shares, such as the payment
of compensation to selected dealers and agents for selling
Class A Shares. With respect to purchases of $1,000,000 or more
made through selected dealers or agents, the Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
1% of the amount invested to compensate such dealers or agents
for their distribution assistance in connection with such
purchases.
No initial sales charge is imposed on Class A shares
issued (i) pursuant to the automatic reinvestment of income
dividends or capital gains distributions, (ii) in exchange for
Class A shares of other "Alliance Mutual Funds" (as that term is
defined under "Combined Purchase Privilege" below), except that
an initial sales charge will be imposed on Class A shares issued
in exchange for Class A shares of AFD Exchange Reserves ("AFDER")
that were purchased for cash without the payment of an initial
sales charge and without being subject to a contingent deferred
sales charge or (iii) upon the automatic conversion of Class B
shares or Advisor Class shares as described below under "Class B
Shares-Conversion Feature" and "--Conversion of Advisor Class
Shares to Class A Shares." The Fund receives the entire net
asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
22
<PAGE>
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may elect to reallow the entire sales charge to
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act of 1933, as amended.
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but be subject in most such cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which such investors may pay a reduced
initial sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of the
Fund into a single "purchase," if the resulting "purchase" totals
at least $100,000. The term "purchase" refers to: (i) a single
purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of
21 years purchasing shares of the Fund for his, her or their own
account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single
fiduciary account although more than one beneficiary is involved;
or (iii) a single purchase for the employee benefit plans of a
single employer. The term "purchase" also includes purchases by
any "company," as the term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected
dealer or agent, of any other "Alliance Mutual Fund." Currently,
the Alliance Mutual Funds include:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-Quality Bond Portfolio
-U.S. Government Portfolio
23
<PAGE>
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
-Alliance Growth Fund
-Alliance Conservative Investors Fund
-Alliance Growth Investors Fund
-Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
24
<PAGE>
Cumulative Quantity Discount (Right of Accumulation). An
investor's purchase of additional Class A shares of the Fund may
qualify for a Cumulative Quantity Discount. The applicable sales
charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business
on the previous day) of (a) all shares of the
Fund held by the investor and (b) all shares
of any other Alliance Mutual Fund held by the
investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with
that of the investor into a single "purchase"
(see above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Fund worth an
additional $100,000, the sales charge for the $100,000 purchase
would be at the 2.25% rate applicable to a single $300,000
purchase of shares of the Fund, rather than the 3.25% rate.
To qualify for the Combined Purchase Privilege or to
obtain the Cumulative Quantity Discount on a purchase through a
selected dealer or agent, the investor or selected dealer or
agent must provide the Principal Underwriter with sufficient
information to verify that each purchase qualifies for the
privilege or discount.
Statement of Intention. Class A investors may also
obtain the reduced sales charges shown in the table above by
means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B,
Class C and/or Advisor Class shares) of the Fund or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
applicable at the time of such purchase to a single transaction
of the dollar amount indicated in the Statement of Intention. At
the investor's option, a Statement of Intention may include
purchases of shares of the Fund or any other Alliance Mutual Fund
made not more than 90 days prior to the date that the investor
signs the Statement of Intention; however, the 13-month period
during which the Statement of Intention is in effect will begin
on the date of the earliest purchase to be included.
25
<PAGE>
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at
least $100,000 in Class A shares of the Fund, the investor and
the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will be necessary to invest
only a total of $60,000 during the following 13 months in shares
of the Fund or any other Alliance Mutual Fund, to qualify for the
3.25% sales charge on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow.
When the full amount indicated has been purchased, the escrow
will be released. To the extent that an investor purchases more
than the dollar amount indicated on the Statement of Intention
and qualifies for a further reduced sales charge, the sales
charge will be adjusted for the entire amount purchased at the
end of the 13-month period. The difference in the sales charge
will be used to purchase additional shares of the Fund subject to
the rate of the sales charge applicable to the actual amount of
the aggregate purchases.
Investors wishing to enter into a Statement of Intention
in conjunction with their initial investment in Class A shares of
the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
Certain Retirement Plans. Multiple participant payroll
deduction retirement plans may also purchase shares of the Fund
or any other Alliance Mutual Fund at a reduced sales charge on a
monthly basis during the 13-month period following such a plan's
initial purchase. The sales charge applicable to such initial
purchase of shares of the Fund will be that normally applicable,
under the schedule of the sales charges set forth in this
Statement of Additional Information, to an investment 13 times
larger than such initial purchase. The sales charge applicable
26
<PAGE>
to each succeeding monthly purchase will be that normally
applicable, under such schedule, to an investment equal to the
sum of (i) the total purchase previously made during the 13-month
period and (ii) the current month's purchase multiplied by the
number of months (including the current month) remaining in the
13-month period. Sales charges previously paid during such
period will not be retroactively adjusted on the basis of later
purchases.
Reinstatement Privilege. A shareholder who has caused
any or all of his or her Class A or Class B shares of the Fund to
be redeemed or repurchased may reinvest all or any portion of the
redemption or repurchase proceeds in Class A shares of the Fund
at net asset value without any sales charge, provided that
(i) such reinvestment is made within 120 calendar days after the
redemption or repurchase date and (ii) for Class B shares, a
contingent deferred sales charge has been paid and the Principal
Underwriter has approved, at its discretion, the reinvestment of
such shares. Shares are sold to a reinvesting shareholder at the
net asset value next determined as described above. A
reinstatement pursuant to this privilege will not cancel the
redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal income tax purposes,
except that no loss will be recognized to the extent that the
proceeds are reinvested in shares of the Fund within 30 calendar
days after the redemption or repurchase transaction. Investors
may exercise the reinstatement privilege by written request sent
to the Fund at the address shown on the cover of this Statement
of Additional Information.
Sales at Net Asset Value. The Fund may sell its Class A
shares at net asset value (i.e., without an initial sales charge)
and without a contingent deferred sales charge to certain
categories of investors including:
(i) investment management clients of the
Adviser or its affiliates;
(ii) officers and present or former Directors
of the Fund; present or former directors
and trustees of other investment
companies managed by the Adviser; present
or retired full-time employees of the
Adviser, the Principal Underwriter,
Alliance Fund Services, Inc. and their
affiliates; officers and directors of
ACMC, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates;
officers, directors and present full-time
employees of selected dealers or agents;
or the spouse, or a sibling, direct
27
<PAGE>
ancestor or direct descendent
(collectively, "relatives") of any such
person; or any trust, individual
retirement account or retirement plan
account for the benefit of any such
person or relative; or the estate of any
such person or relative, if such shares
are purchased for investment purposes
(such shares may not be resold except to
the Fund);
(iii) the Adviser, the Principal Underwriter,
Alliance Fund Services, Inc. and their
affiliates; certain employee benefit
plans for employees of the Adviser, the
Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates;
(iv) registered investment advisers or other
financial intermediaries who charge a
management, consulting or other fee for
their service and who purchase shares
through a broker or agent approved by the
Principal Underwriter and clients of such
registered investment advisers or
financial intermediaries whose accounts
are linked to the master account of such
investment adviser or financial
intermediary on the books of such
approved broker or agent;
(v) persons participating in a fee-based
program, sponsored and maintained by a
registered broker-dealer or other
financial intermediary and approved by
the Principal Underwriter, pursuant to
which such persons pay an asset-based fee
to such broker-dealer or financial
intermediary, or its affiliates or
agents, for services in the nature of
investment advisory or administrative
services;
(vi) persons who establish to the Principal
Underwriter's satisfaction that they are
investing within such time period as may
be designated by the Principal
Underwriter, proceeds of redemption of
shares of such other registered
investment companies as may be designated
28
<PAGE>
from time to time by the Principal
Underwriter; and
(vii) employer-sponsored qualified pensions or
profit-sharing plans (including Section
401(k) plans), custodial accounts
maintained pursuant to Section 403(b)(7),
retirement plans and individual
retirement accounts (including individual
retirement accounts to which simplified
employee pension ("SEP") contributions
are made), if such plans or accounts are
established or administered under
programs sponsored by administrators or
other persons that have been approved by
the Principal Underwriter.
Class B Shares
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Fund will
receive the full amount of the investor's purchase payment.
Proceeds from the contingent deferred sales charge on
the Class B shares are paid to the Principal Underwriter and are
used by the Principal Underwriter to defray the expenses of the
Principal Underwriter related to providing distribution-related
services to the Fund in connection with the sale of the Class B
shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the
contingent deferred sales charge and the distribution services
fee enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares that
are redeemed within four years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
29
<PAGE>
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares
(proceeds of $600), 10 Class B shares will not be subject to
charge because of dividend reinvestment. With respect to the
remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.0% (the
applicable rate in the second year after purchase).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales Charge as a
Years Since Purchase % of Dollar Amount Subject to Charge
____________________ ____________________________________
Less than one 4.0%
One 3 0%
Two 2.0%
Three 1.0%
Four or more None
In determining the contingent deferred sales charge
applicable to a redemption of Class B shares, it will be assumed
that the redemption is, first, of any shares that were acquired
upon the reinvestment of dividends or distributions and, second,
of shares held longest during the time they are subject to the
sales charge. When shares acquired in an exchange are redeemed,
the applicable contingent deferred sales charge and conversion
schedules will be the schedules that applied at the time of the
purchase of shares of the corresponding class of the Alliance
Mutual Fund originally purchased by the shareholder.
The contingent deferred sales charge is waived on
redemptions of shares (i) following the death or disability, as
defined in the Code, of a shareholder, (ii) to the extent that
the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2, (iii) that had
been purchased by present or former Directors of the Fund, by the
relative of any such person, by any trust, individual retirement
account or retirement plan account for the benefit of any such
person or relative or by the estate of any such person or
30
<PAGE>
relative, or (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services - Systematic Withdrawal Plan" below).
Conversion Feature. Eight years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee
for an indefinite period which may extend beyond the period
ending eight years after the end of the calendar month in which
the shareholder's purchase order was accepted.
Class C Shares
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of
a sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that the Fund
will receive the full amount of the investor's purchase payment
and, as long as the shares are held for one year or more, without
a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. The Class C distribution services fee
31
<PAGE>
enables the Fund to sell Class C shares without either an initial
or contingent deferred sales charge, as long as the shares are
held for one year or more. Class C shares do not convert to any
other class of shares of the Fund and incur higher distribution
services fees and transfer agency costs than Class A shares and
Advisor Class shares, and will thus have a higher expense ratio
and pay correspondingly lower dividends than Class A shares and
Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
shares will be waived on certain redemptions, as described above
under "--Class B Shares." In determining the contingent deferred
sales charge applicable to a redemption of Class C shares, it
will be assumed that the redemption is, first, of any shares that
are not subject to a contingent deferred sales charge (for
example, because the shares have been held beyond the period
during which the charge applies or were acquired upon the
reinvestment of dividends or distributions) and, second, of
shares held longest during the time they are subject to the sales
charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
related to providing distribution-related services to the Fund in
connection with the sale of the Class C shares, such as the
payment of compensation to selected dealers and agents for
selling Class C shares. The combination of the contingent
deferred sales charge and the distribution services fee enables
the Fund to sell the Class C shares without a sales charge being
deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
32
<PAGE>
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary, in each case that
satisfies the requirements to purchase shares set forth under
"Purchase of Shares--General" or (ii) the holder is otherwise no
longer eligible to purchase Advisor Class shares as described in
the Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically to
Class A shares of the Fund during the calendar month following
the month in which the Fund is informed of the occurrence of the
Conversion Event. The Fund will provide the shareholder with at
least 30 days' notice of the conversion. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on the
basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee.
Advisor Class shares do not have any distribution services fee.
As a result, Class A shares have a higher expense ratio and may
pay correspondingly lower dividends and have a lower net asset
value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem the shareholder's Advisor Class shares, which would
constitute a taxable event under federal income tax law.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares -- How to Sell Shares." If you are an Advisor Class
shareholder through an account established under a fee-based
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Fund that are different from those described herein. A
transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
33
<PAGE>
Redemption
Subject only to the limitations described below, the
Fund's Articles of Incorporation require that the Fund redeem the
shares tendered to it, as described below, at a redemption price
equal to their net asset value as next computed following the
receipt of shares tendered for redemption in proper form. Except
for any contingent deferred sales charge which may be applicable
to Class A shares, Class B shares or Class C shares, there is no
redemption charge. Payment of the redemption price will be made
within seven days after the Fund's receipt of such tender for
redemption. If a shareholder is in doubt about what documents
are required by his or her fee-based program or employee benefit
plan, the shareholder should contact his or her financial
representative.
The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during
which an emergency (as determined by the Commission) exists as a
result of which disposal by the Fund of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the
Fund.
Payment of the redemption price will be made in cash.
The value of a shareholder's shares on redemption or repurchase
may be more or less than the cost of such shares to the
shareholder, depending upon the market value of the Fund's
portfolio securities at the time of such redemption or
repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment received by a shareholder upon
redemption or repurchase of the shareholder's shares, assuming
the shares constitute capital assets in the shareholder's hands,
will result in long-term or short-term capital gains (or loss)
depending upon the shareholder's holding period and basis in
respect of the shares redeemed.
To redeem shares of the Fund for which no certificates
have been issued, the registered owner or owners should forward a
letter to the Fund containing a request for redemption. The
signature or signatures on the letter must be guaranteed by an
"eligible guarantor institution" as defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended.
34
<PAGE>
To redeem shares of the Fund represented by share
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Fund with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
stock certificate surrendered to the Fund for redemption must be
signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the stock certificate or certificates or, where
tender is made by mail, separately mailed to the Fund. The
signature or signatures on the assignment form must be guaranteed
in the manner described above.
Telephone Redemption by Electronic Funds Transfer. Each
Fund shareholder is entitled to request redemption by electronic
funds transfer of shares for which no stock certificates have
been issued by telephone at (800) 221-5672 by a shareholder who
has completed the appropriate portion of the Subscription
Application or, in the case of an existing shareholder, an
"Autosell" application obtained from Alliance Fund Services, Inc.
A telephone redemption request by electronic funds transfer may
not exceed $100,000 (except for certain omnibus accounts), and
must be made by 4:00 p.m. Eastern time on a Fund business day as
defined above. Proceeds of telephone redemptions will be sent by
Electronic Funds Transfer to a shareholder's designated bank
account at a bank selected by the shareholder that is a member of
the NACHA.
Telephone Redemption by Check. Each Fund shareholder is
eligible to request redemption by check of Fund shares for which
no stock certificates have been issued by telephone at
(800) 221-5672 before 4:00 p.m. Eastern time on a Fund business
day in an amount not exceeding $50,000. Proceeds of such
redemptions are remitted by check to the shareholder's address of
record. A shareholder otherwise eligible for telephone redemption
by check may cancel the privilege by written instruction to
Alliance Fund Services, Inc. or by checking the appropriate box
on the Subscription Application found in the Prospectus.
Telephone Redemptions - General. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
35
<PAGE>
redemption service at any time without notice. Telephone
redemption by check is not available with respect to shares
(i) for which certificates have been issued, (ii) held in nominee
or "street name" accounts, (iii) held by a shareholder who has
changed his or her address of record within the preceding 30
calendar days or (iv) held in any retirement plan account.
Neither the Fund nor the Adviser, the Principal Underwriter or
Alliance Fund Services, Inc. will be responsible for the
authenticity of telephone requests for redemptions that the Fund
reasonably believes to be genuine. The Fund will employ
reasonable procedures in order to verify that telephone requests
for redemptions are genuine, including, among others, recording
such telephone instructions and causing written confirmations of
the resulting transactions to be sent to shareholders. If the
Fund did not employ such procedures, it could be liable for
losses arising from unauthorized or fraudulent telephone
instructions. Selected dealers or agents may charge a commission
for handling telephone requests for redemptions.
Repurchase
The Fund may repurchase shares through the Principal
Underwriter, selected financial intermediaries or selected
dealers or agents. The repurchase price will be the net asset
value next determined after the Principal Underwriter receives
the request (less the contingent deferred sales charge, if any,
with respect to the Class A, Class B and Class C shares), except
that requests placed through selected dealers or agents before
the close of regular trading on the Exchange on any day will be
executed at the net asset value determined as of such close of
regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value). If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of the Fund to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of the Fund are offered through a financial intermediary
or selected dealer or agent, the repurchase is settled by the
shareholder as an ordinary transaction with or through the
36
<PAGE>
selected dealer or agent, who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
General
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days' written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of the Fund recently purchased by check, redemption proceeds will
not be made available until the Fund is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date.
_______________________________________________________________
SHAREHOLDER SERVICES
_______________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Sale of
Shares--Shareholder Services." The shareholder services set forth
below are applicable to Class A, Class B, Class C and Advisor
Class shares unless otherwise indicated. If you are an Advisor
Class shareholder through an account established under a fee-
based program, your fee-based program may impose requirements
with respect to the purchase, sale or exchange of Advisor Class
shares of the Fund that are different from those described
herein. A transaction fee may be charged by your financial
representative with respect to the purchase, sale or exchange of
Advisor Class shares made through such financial representative.
Automatic Investment Program
Investors may purchase shares of the Fund through an
automatic investment program utilizing electronic funds transfers
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
37
<PAGE>
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
Exchange Privilege
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may on a tax-free basis,
exchange Class A shares of the Fund for Advisor Class shares of
the Fund. Exchanges of shares are made at the net asset value
next determined and without sales or service charges. Exchanges
may be made by telephone or written request. Telephone exchange
requests must be received by Alliance Fund Services, Inc. by
4:00 p.m. Eastern time on a Fund business day in order to receive
that day's net asset value.
Shares will continue to age without regard to exchanges
for purpose of determining the CDSC, if any, upon redemption and,
in the case of Class B shares, for the purpose of conversion to
Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request.
Call Alliance Fund Services, Inc. at 800-221-5672 to exchange
uncertificated shares. Except with respect to exchanges of
Class A shares of the Fund for Advisor Class shares of the Fund,
exchanges of shares as described above in this section are
taxable transactions for federal income tax purposes. The
exchange service may be changed, suspended, or terminated on 60
days' written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
38
<PAGE>
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
will be permitted only after the Alliance Mutual Fund whose
shares have been tendered for exchange is reasonably assured that
the check has cleared, normally up to 15 calendar days following
the purchase date. Exchanges of Shares of Alliance Mutual Funds
will generally result in the realization of a capital gain or
loss for federal income tax purposes.
Each Fund shareholder and the shareholder's selected
dealer, agent or financial representative, as applicable, are
authorized to make telephone requests for exchanges unless
Alliance Fund Services, Inc. receives written instruction to the
contrary from the shareholder, or the shareholder declines the
privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. During periods of drastic
economic or market developments (such as the market break of
October 1987) it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the following
Fund business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
39
<PAGE>
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Fund being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
Retirement Plans
The Fund may be a suitable investment vehicle for part
or all of the assets held in various types of retirement plans,
such as those listed below. The Fund has available forms of such
plans pursuant to which investments can be made in the Fund and
other Alliance Mutual Funds. Persons desiring information
concerning these plans should contact Alliance Fund Services,
Inc. at the "For Literature" telephone number on the cover of
this Statement of Additional Information, or write to:
Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, New Jersey 07096-1520
Individual Retirement Account ("IRA"). Individuals who
receive compensation, including earnings from self-employment,
are entitled to establish and make contributions to an IRA.
Taxation of the income and gains paid to an IRA by the Fund is
deferred until distribution from the IRA. An individual's
eligible contribution to an IRA will be deductible if neither the
individual nor his or her spouse is an active participant in an
employer-sponsored retirement plan. If the individual or his or
her spouse is an active participant in an employer-sponsored
retirement plan, the individual's contributions to an IRA may be
deductible, in whole or in part, depending on the amount of the
adjusted gross income of the individual and his or her spouse.
Employer-Sponsored Qualified Retirement Plans. Sole
proprietors, partnerships and corporations may sponsor qualified
money purchase pension and profit-sharing plans, including
Section 401(k) plans ("qualified plans"), under which annual tax-
deductible contributions are made within prescribed limits based
on compensation paid to participating individuals. The minimum
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initial investment requirement may be waived with respect to
certain of these qualified plans.
If the aggregate net asset value of shares of the
Alliance Mutual Funds held by a qualified plan reaches $5 million
on or before December 15 in any year, all Class B shares or
Class C shares of the Fund held by the plan can be exchanged, at
the plan's request, without any sales charge, for Class A shares
of the Fund.
Simplified Employee Pension Plan ("SEP"). Sole
proprietors, partnerships and corporations may sponsor a SEP
under which they make annual tax-deductible contributions to an
IRA established by each eligible employee within prescribed
limits based on employee compensation.
403(b)(7) Retirement Plan. Certain tax-exempt
organizations and public educational institutions may sponsor
retirement plans under which an employee may agree that monies
deducted from his or her compensation (minimum $25 per pay
period) may be contributed by the employer to a custodial account
established for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of Equitable, which serves as custodian or trustee
under the retirement plan prototype forms available from the
Fund, charges certain nominal fees for establishing an account
and for annual maintenance. A portion of these fees is remitted
to Alliance Fund Services, Inc. as compensation for its services
to the retirement plan accounts maintained with the Fund.
Distributions from retirement plans are subject to
certain Code requirements in addition to normal redemption
procedures. For additional information please contact Alliance
Fund Services, Inc.
Dividend Direction Plan
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Fund account, a
Class A, Class B, Class C or Advisor Class account with one or
more other Alliance Mutual Funds may direct that income dividends
and/or capital gains distributions paid on the shareholder's
Class A, Class B, Class C or Advisor Class Fund shares be
automatically reinvested, in any amount, without the payment of
any sales or service charges, in shares of the same class of such
other Alliance Mutual Fund(s). Further information can be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information. Investors
wishing to establish a dividend direction plan in connection with
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their initial investment should complete the appropriate section
of the Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
Systematic Withdrawal Plan
General. Any shareholder who owns or purchases shares
of the Fund having a current net asset value of at least $4,000
(for quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Fund automatically reinvested in additional shares of
the Fund.
Shares of the Fund owned by a participant in the Fund's
systematic withdrawal plan will be redeemed as necessary to meet
withdrawal payments and such withdrawal payments will be subject
to any taxes applicable to redemptions and, except as discussed
below, any applicable contingent deferred sales charge. Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Fund.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Fund's involuntary redemption provisions. See "Redemption and
Repurchase of Shares--General." Purchases of additional shares
concurrently with withdrawals are undesirable because of sales
charges when purchases are made. While an occasional lump-sum
investment may be made by a 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 the Fund should complete the appropriate portion of the
Subscription Application found in the Prospectus, while current
Fund shareholders desiring to do so can obtain an application
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form by contacting Alliance Fund Services, Inc. at the address or
the "Literature" telephone number shown on the cover of this
Statement of Additional Information.
CDSC Waiver for Class B and Class C Shares. Under a
systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3%
quarterly of the value at the time of redemption of the Class B
or Class C shares in a shareholder's account may be redeemed free
of any contingent deferred sales charge.
With respect to Class B shares, the waiver applies only
with respect to shares acquired after July 1, 1995. Class B
shares that are not subject to a contingent deferred sales charge
(such as shares acquired with reinvested dividends or
distributions) will be redeemed first and will count toward the
foregoing limitations. Remaining Class B shares that are held
the longest will be redeemed next. Redemptions of Class B shares
in excess of the foregoing limitations will be subject to any
otherwise applicable contingent deferred sales charge.
With respect to Class C shares, shares held the longest
will be redeemed first and will count toward the foregoing
limitations. Redemptions in excess of those limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
Statements and Reports
Each shareholder of the Fund receives semi-annual and
annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a confirmation of each purchase and redemption. By
contacting his or her broker or Alliance Fund Services, Inc., a
shareholder can arrange for copies of his or her account
statements to be sent to another person.
_______________________________________________________________
NET ASSET VALUE
_______________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Board of Directors of the
Fund deems appropriate or necessary in order to comply with Rule
22c-1 under the 1940 Act. The Fund's per share net asset value
is calculated by dividing the value of the Fund's total assets,
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less its liabilities, by the total number of its shares then
outstanding. A Fund business day is any weekday on which the
Exchange is open for trading.
In accordance with applicable rules under the 1940 Act,
portfolio securities are valued at current market value or at
fair value as determined in good faith by the Board of Directors.
The Board of Directors has delegated to the Adviser certain of
the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange or on a
foreign securities exchange (other than foreign securities
exchanges whose operations are similar to those of the United
States over-the-counter market) are valued, except as indicated
below, at the last sale price reflected on the consolidated tape
at the close of the Exchange or, in the case of a foreign
securities exchange, at the last quoted sale price, in each case
on the business day as of which such value is being determined.
If there has been no sale on such day, the securities are valued
at the mean of the closing bid and asked prices on such day. If
no bid or asked prices are quoted on such day, then the security
is valued in good faith at fair value by, or in accordance with,
procedures established by, the Board of Directors. Readily
marketable securities not listed on the Exchange or on a foreign
securities exchange are valued in like manner. Portfolio
securities traded on the Exchange and on one or more other
foreign or other national securities exchanges, and portfolio
securities not traded on the Exchange but traded on one or more
foreign or other national securities exchanges are valued in
accordance with these procedures by reference to the principal
exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and securities listed on a
national securities exchange whose primary market is believed to
be over-the-counter (but excluding securities traded on the
Nasdaq Stock Market, Inc.), are valued at the mean of the current
bid and asked prices as reported by Nasdaq or, in the case of
securities not quoted by Nasdaq, the National Quotation Bureau or
comparable source.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
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quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups-
of securities and any developments related to specific
securities.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Fund business
day. In addition, trading in foreign markets may not take place
on all Fund business days. Furthermore, trading may take place
in various foreign markets on days that are not Fund business
days. The Fund's calculation of the net asset value per share,
therefore, does not always take place contemporaneously with the
most recent determination of the prices of portfolio securities
in these markets. Events affecting the values of these portfolio
securities that occur between the time their prices are
determined in accordance with the above procedures and the close
of the Exchange will not be reflected in the Fund's calculation
of net asset value unless it is believe that these prices do not
reflect current market value, in which case the securities will
be valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors.
The Board of Directors may suspend the determination of
the Fund's net asset value (and the offering and sales of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
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order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in a
foreign currency will be converted into U.S. Dollars at the mean
of the current bid-and asked prices of such currency against the
U.S. Dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of Directors.
The assets attributable to the Class A shares, Class B
shares, Class C shares and Advisor Class shares will be invested
together in a single portfolio. The net asset value of each
class will be determined separately by subtracting the
liabilities allocated to that class from the assets belonging to
that class in conformance with the provisions of a plan adopted
by the Fund in accordance with Rule 18f-3 under the 1940 Act.
_______________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_______________________________________________________________
Dividends paid by the Fund, 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 applicable to Class B and C shares, and any
incremental transfer agency costs relating to Class B and Class C
shares, will be borne exclusively by the class to which they
relate.
The following summary addresses only principal United
States federal income tax considerations pertinent to the Fund
and to shareholders of the Fund who are United States citizens or
residents or United States corporations. The effects of federal
income tax law on shareholders who are nonresident alien
individuals, foreign corporations or other foreign persons may be
substantially different. Following the summary of federal income
tax matters is a summary of principal Greater China country tax
matters pertinent to the Fund and its shareholders. The
summaries for the United States and the Greater China countries
are based upon the advice of counsel for the Fund with respect to
the country involved and upon current law and interpretations
thereof. No confirmation has been obtained from the relevant tax
46
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authorities. There is no assurance that the applicable laws and
interpretations will not change.
In view of the individual nature of tax consequences,
each shareholder is advised to consult the shareholder's own tax
adviser with respect to the specific tax consequences of being a
shareholder of the Fund, including the effect and applicability
of federal, state, local, foreign and other tax laws and the
effects of changes therein.
United States Federal Income Taxation
of Dividends and Distributions
General. The Fund intends to qualify to be taxed as a
"regulated investment company" under sections 851 through 855 of
the Code. To so qualify, the Fund must, among other things,
(i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or
securities or foreign currency, or certain other income
(including, but not limited to, gains from options, futures and
forward contracts) derived with respect to its business of
investing in stock, securities or currency; and (ii) diversify
its holdings so that, at the end of each quarter of its taxable
year, the following two conditions are met: (a) at least 50% of
the value of the Fund's assets is represented by cash, U.S.
Government Securities, securities of other regulated investment
companies and other securities with respect to which the Fund's
investment is limited, in respect of any one issuer, to an amount
not greater than 5% of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (b) not more
than 25% of the value of the Fund's assets is invested in
securities of any one issuer (other than U.S. Government
Securities or securities of other regulated investment companies)
or of two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or
businesses or related trades or businesses. These requirements,
among other things, may limit the Fund's ability to write and
purchase options, futures, and forward foreign currency
contracts.
If the Fund qualifies as a regulated investment company
for any taxable year and makes timely distributions to its
shareholders of 90% or more of its net investment income for that
year (calculated without regard to its net capital gain, i.e.,
the excess of its net long-term capital gain over its net short-
term capital loss), it will not be subject to federal income tax
on the portion of its taxable income for the year (including any
net capital gain) that it distributes to shareholders.
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The Fund will also avoid the 4% federal excise tax that
would otherwise apply to certain undistributed income for a given
calendar year if it makes timely distributions to its
shareholders equal to at least the sum of (i) 98% of its ordinary
income for that year; (ii) 98% of its capital gain net income and
foreign currency gains for the twelve-month period ending on
October 31 of that year; and (iii) any ordinary income or capital
gain net income from the preceding calendar year that was not
distributed during that year. For this purpose, income or gain
retained by the Fund that is subject to corporate income tax will
be considered to have been distributed by the Fund by year-end.
For federal income and excise tax purposes, dividends declared
and payable to shareholders of record as of a date in October,
November or December of a given year but actually paid during the
immediately following January will be treated as if paid by the
Fund on December 31 of that calendar year, and will be taxable to
these shareholders for the year declared, and not for the year in
which the shareholders actually receive the dividend.
The Fund intends to make timely distributions of the
Fund's taxable income (including any net capital gain) so that
the Fund will not be subject to federal income or excise taxes.
However, exchange control or other regulations on the
repatriation of investment income, capital or the proceeds of
securities sales, if any exist or are enacted in the future, may
limit the Fund's ability to make distributions sufficient in
amount to avoid being subject to one or both of such federal
taxes.
Dividends and Distributions. Dividends of the Fund's
net ordinary income and distributions of any net realized short-
term capital gain will be taxable to shareholders as ordinary
income. Distributions of net capital gain are taxable as long-
term capital gain, regardless of how long a shareholder has held
shares in the Fund. Any dividend or distribution received by a
shareholder on shares of the Fund will have the effect of
reducing the net asset value of such shares by the amount of such
dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of such shares by a
shareholder, although in effect a return of capital to that
particular shareholder, would be taxable to him as described
above. Dividends are taxable in the manner discussed regardless
of whether they are paid to the shareholder in cash or are
reinvested in additional shares of the Fund. The investment
objective of the Fund is such that only a small portion, if any,
of the Fund's distributions is expected to qualify for the
dividends-received deduction for corporate shareholders.
After the end of the taxable year, the Fund will notify
shareholders of the federal income tax status of any
distributions made by the Fund to shareholders during such year.
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A dividend or capital gains distribution with respect to
shares of the Fund held by a tax-deferred or qualified plan, such
as an individual retirement account, 403(b)(7) retirement plan or
corporate pension or profit-sharing plan, generally will not be
taxable to the plan. Distributions from such plans will be
taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the
qualified plan.
It is the present policy of the Fund to distribute to
shareholders all net investment income and to distribute realized
capital gains, if any, annually. There is no fixed dividend rate
and there can be no assurance that the Fund will pay any
dividends. The amount of any dividend or distribution paid on
shares of the Fund must necessarily depend upon the realization
of income and capital gains from the Fund's investments.
Sales and Redemptions. Any gain or loss arising from a
sale or redemption of Fund shares generally will be capital gain
or loss except in the case of dealers or certain financial
institutions. Such gain or loss will be long-term capital gain
or loss if the shareholder has held such shares for more than one
year at the time of the sale or redemption; and otherwise short-
term capital gain or loss. If a shareholder has held shares in
the Fund for six months or less and during that period has
received a distribution of net capital gain, any loss recognized
by the shareholder on the sale of those shares during the six-
month period will be treated as a long-term capital loss to the
extent of the distribution. In determining the holding period of
such shares for this purpose, any period during which a
shareholder's risk of loss is offset by means of options, short
sales or similar transactions is not counted.
Any loss realized by a shareholder on a sale or exchange
of shares of the Fund will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30
days before and ending 30 days after the shares are sold or
exchanged. For this purpose, acquisitions pursuant to the
Dividend Reinvestment Plan would constitute a replacement if made
within the period. If disallowed, the loss will be reflected in
an upward adjustment to the basis of the shares acquired.
Foreign Taxes. As discussed below under "Foreign
Taxation," income received by the Fund may be subject to foreign
income taxes, including withholding taxes. It is not possible to
determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested within various
countries is not known. If, as is contemplated, more than 50% of
the value of the Fund's total assets at the close of its taxable
year consists of stocks or securities of foreign corporations,
the Fund will be eligible and intends to file an election with
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<PAGE>
the Internal Revenue Service to pass through to its shareholders
the amount of foreign taxes paid by the Fund. However, there can
be no assurance that the Fund will be able to do so. Pursuant to
this election a shareholder will be required to (i) include in
gross income (in addition to taxable dividends actually received)
his pro rata share of foreign taxes paid by the Fund, (ii) treat
his pro rata share of such foreign taxes as having been paid by
him, and (iii) either deduct such pro rata share of foreign taxes
in computing his taxable income or treat such foreign taxes as a
credit against United States federal income taxes. Shareholders
who are not liable for federal income taxes, such as retirement
plans qualified under section 401 of the Code, will not be
affected by any such pass through of taxes by the Fund. No
deduction for foreign taxes may be claimed by an individual
shareholder who does not itemize deductions. In addition,
certain shareholders may be subject to rules which limit or
reduce their ability to fully deduct, or claim a credit for,
their pro rata share of the foreign taxes paid by the Fund. A
shareholder's foreign tax credit with respect to a dividend
received from the Fund will be disallowed unless the shareholder
holds shares in the Fund on the ex-dividend date and for at least
15 other days during the 30-day period beginning 15 days prior to
the ex-dividend date. Each shareholder will be notified within
60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will pass through for that year
and, if so, such notification will designate (i) the
shareholder's portion of the foreign taxes paid to each such
country and (ii) the portion of dividends that represents income
derived from sources within each such country.
Backup Withholding. The Fund may be required to
withhold United States federal income tax at the rate of 31% of
all distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification numbers or to
make required certifications, or who have been notified by the
Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other
shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax; any
amounts so withheld may be credited against a shareholder's
federal income tax liability or refunded.
United States Federal Income Taxation of the Fund
The following discussion relates to certain significant
United States federal income tax consequences to the Fund with
respect to the determination of its "investment company taxable
income" each year. This discussion assumes that the Fund will be
taxed as a regulated investment company for each of its taxable
years.
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Passive Foreign Investment Companies. If the Fund owns
shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax
purposes and the Fund does not elect to treat the foreign
corporation as a "qualified electing fund" within the meaning of
the Code, the Fund may be subject to United States federal income
taxation on a portion of any "excess distribution" it receives
from the PFIC or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend
by the Fund to its shareholders. The Fund may also be subject to
additional interest charges in respect of deferred taxes arising
from such distributions or gains. Any tax paid by the Fund as a
result of its ownership of shares in a PFIC will not give rise to
any deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year
involved, either (i) it derives at least 75% of its gross income
from "passive income" (including, but not limited to, interest,
dividends, royalties, rents and annuities), or (ii) on average,
at least 50% of the value (or adjusted tax basis, if elected) of
the assets held by the corporation produce "passive income." The
Fund could elect to "mark-to market" stock in a PFIC. Under such
an election, the Fund would include in income each year an amount
equal to the excess, if any, of the fair market value of the PFIC
stock as of the close of the taxable year over the Fund's
adjusted basis in the PFIC stock. The Fund would be allowed a
deduction for the excess, if any, of the adjusted basis of the
PFIC stock over the fair market value of the PFIC stock as of the
close of the taxable year, but only to the extent of any net
mark-to-market gains included by the Fund for prior taxable
years. The Fund's adjusted basis in the PFIC stock would be
adjusted to reflect the amounts included in, or deducted from,
income under this election. Amounts included in income pursuant
to this election, as well as gain realized on the sale or other
disposition of the PFIC stock, would be treated as ordinary
income. The deductible portion of any mark-to-market loss, as
well as loss realized on the sale or other disposition of the
PFIC stock to the extent that such loss does not exceed the net
mark-to-market gains previously included by the Fund, would be
treated as ordinary loss. The Fund generally would not be
subject to the deferred tax and interest charge provisions
discussed above with respect to PFIC stock for which a mark-to-
market election has been made. If the Fund purchases shares in a
PFIC and the Fund does elect to treat the foreign corporation as
a "qualified electing fund" under the Code, the Fund may be
required to include in its income each year a portion of the
ordinary income and net capital gains of the foreign corporation,
even if this income is not distributed to the Fund. Any such
income would be subject to the 90% and calendar year distribution
requirements described above.
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Currency Fluctuations-"Section 988" Gains or Losses.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
are treated as ordinary income or ordinary loss. Similarly,
gains or losses from the disposition of foreign currencies, from
the disposition of debt securities denominated in a foreign
currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also
are treated as ordinary income or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as
ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. Because section 988 losses
reduce the amount of ordinary dividends the Fund will be allowed
to distribute for a taxable year, such section 988 losses may
result in all or a portion of prior dividend distributions for
such year being recharacterized as a non-taxable return of
capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's basis in his Fund shares. If such
distributions exceed such shareholder's basis, such excess will
be treated as a gain from the sale of shares.
Options, Futures and Forward Contracts. Certain listed
options, regulated futures contracts, and forward foreign
currency contracts are considered "section 1256 contracts" for
federal income tax purposes. Section 1256 contracts held by the
Fund 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 the Fund on section 1256 contracts other
than forward foreign currency contracts will be considered 60%
long-term and 40% short-term capital gain or loss. Gain or loss
realized by the Fund on forward foreign currency contracts
generally will be treated as section 988 gain or loss and will
therefore be characterized as ordinary income or loss and will
increase or decrease the amount of the Fund's net investment
income available to be distributed to shareholders as ordinary
income, as described above. The Fund can elect to exempt its
section 1256 contracts which are part of a "mixed straddle" (as
described below) from the application of section 1256.
The Treasury Department has the authority to issue
regulations that would permit or require the Fund either to
integrate a foreign currency hedging transaction with the
investment that is hedged and treat the two as a single
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<PAGE>
transaction, or otherwise to treat the hedging transaction in a
manner that is consistent with the hedged investment. The
regulations issued under this authority to date generally should
not apply to the type of hedging transactions in which the Fund
intends to engage.
With respect to equity options or options traded over-
the-counter or on certain foreign exchanges, gain or loss
realized by the Fund upon the lapse or sale of such options held
by the Fund will be either long-term or short-term capital gain
or loss depending upon the Fund'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 the Fund will be
treated as short-term capital gain or loss. In general, if the
Fund exercises an option, or an option that the Fund 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.
Gain or loss realized by the Fund on the lapse or sale
of put and call options on foreign currencies which are traded
over-the-counter or on certain foreign exchanges will be treated
as section 988 gain or loss and will therefore be characterized
as ordinary income or loss and will increase or decrease the
amount of the Fund's net investment income available to be
distributed to shareholders as ordinary income, as described
above. The amount of such gain or loss shall be determined by
subtracting the amount paid, if any, for or with respect to the
option (including any amount paid by the Fund upon termination of
an option written by the Fund) from the amount received, if any,
for or with respect to the option (including any amount received
by the Fund upon termination of an option held by the Fund). In
general, if the Fund exercises such an option on a foreign
currency, or such an option that the Fund has written is
exercised, gain or loss on the option will be recognized in the
same manner as if the Fund had sold the option (or paid another
person to assume the Fund's obligation to make delivery under the
option) on the date on which the option is exercised, for the
fair market value of the option. The foregoing rules will also
apply to other put and call options which have as their
underlying property foreign currency and which are traded over-
the-counter or on certain foreign exchanges to the extent gain or
loss with respect to such options is attributable to fluctuations
in foreign currency exchange rates.
Tax Straddles. Any option, futures contract, forward
foreign currency contract, currency swap, or other position
entered into or held by the Fund in conjunction with any other
position held by the Fund may constitute a "straddle" for federal
income tax purposes. A straddle of which at least one, but not
53
<PAGE>
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 the Fund'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 the
Fund has unrealized gains with respect to the other position in
such straddle; (ii) the Fund'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. The Treasury Department is authorized to issue
regulations providing for the proper treatment of a mixed
straddle where at least one position is ordinary and at least one
position is capital. No such regulations have yet been issued.
Various elections are available to the Fund 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 the Fund all of the
offsetting positions of which consist of section 1256 contracts.
Foreign Taxation
Set forth below is information concerning the taxation
by the Greater China countries of income received by the Fund, of
shareholders of the Fund and of transactions by the Fund.
The Fund has been advised that neither the Fund nor any
of the Fund's shareholders will be considered, insofar as
relevant for tax purposes, as a resident of or having an
establishment or a permanent establishment in any Greater China
country, or as engaged in, as carrying on a trade, profession or
business in, or as rendering independent personal services from a
fixed base in, any of these countries solely as a result of the
activities contemplated by the Prospectus and this Statement of
Additional Information. Certain of the tax exemptions and
reductions referred to below are dependent on the Fund's not
having such a status, and it is the intention of the Fund to
conduct its affairs in such a manner. To the extent applicable
law or the manner in which such law is interpreted changes or the
Fund otherwise changes the manner in which it conducts its
activities, the Fund and its shareholders may be subject to
higher taxes than those indicated.
54
<PAGE>
China. The Fund will not currently be subject to any
China income tax either (i) on dividends it receives on "B"
shares of a China company listed on the Shanghai or Shenzhen
Stock Exchanges or on shares of a China company listed on a non-
China securities exchange, including "H" shares listed on the
Hong Kong Stock Exchange, or (ii) on capital gains which the Fund
derives from the sale of any such shares. These shares, which
are primary categories of equities of China companies for
acquisition by the Fund, are discussed in "Appendix A: Additional
Information about China, Hong Kong and Taiwan--China--Securities
Markets" in this Statement of Additional Information. These
exemptions are pursuant to a July 21, 1993 notice issued by the
China State Tax Bureau. Absent this notice, which may hereafter
be withdrawn, such dividends would be subject to withholding tax
at the rate of 10%, the maximum rate permitted by application of
the current tax treaty between the U.S. and China (the
"U.S./China Treaty"), and such gains would be subject to
withholding at the normal rate, currently 20%. Other China-
source dividends and gains on the disposition of securities,
including debt securities, would be taxable to the Fund at the
rates of 10% and 20%, respectively. Interest on China source
indebtedness will be subject to withholding tax at the maximum
rate of 10% as so limited by the U.S./China Treaty. Transfers of
"B" shares are subject to a stamp duty at the rate of 0.4% of the
transaction price imposed on each of the buyer and seller.
Hong Kong. Dividends and interest received by the Fund
in respect of investments in securities of Hong Kong companies,
whether or not listed on the Hong Kong Stock Exchange, will not
be subject to any Hong Kong income tax. Also, Hong Kong does not
impose any tax on capital gains realized by the Fund from the
disposition of such securities. Transfers of shares of companies
on a Hong Kong share register, including "H" Shares and shares of
other companies incorporated outside of Hong Kong which are
listed on the Hong Kong Stock Exchange, are subject to a stamp
duty at the rate of .25% of the amount of the transfer price or,
if higher, the fair value of the shares, which tax is usually
borne equally by the buyer and the seller in respect of
transactions on the Hong Kong Stock Exchange. There is at
present no tax treaty between the United States and Hong Kong.
Taiwan. Dividends and interest received by the Fund as
a QFII (See "Appendix A: Additional Information about China, Hong
Kong and Taiwan--Taiwan--Securities Transactions" in the
Statement of Additional Information for information concerning
QFIIs) from sources in Taiwan will be subject to Taiwan income
withholding tax at the rate of 20%. A tax on capital gains
arising from securities transactions is currently suspended and
gains on transactions in securities realized by the Fund are
therefore not currently subject to tax. A transaction tax on the
transaction price is imposed on the seller at the rate of 0.3%
55
<PAGE>
for most stock transactions and at the rate of 0.1% for most
transactions in debt securities, other than government debt.
There is at present no tax treaty between the United States and
Taiwan.
Other Taxation
The Fund may be subject to other state, local and
foreign taxes than those discussed above. Also, distributions by
the Fund may be subject to additional state, local and foreign
taxes depending on each shareholder's particular circumstances.
_______________________________________________________________
PORTFOLIO TRANSACTIONS
_______________________________________________________________
The management of the Fund has the responsibility for
allocating its brokerage orders and may direct orders to any
broker. It is the Fund's general policy to seek favorable net
prices and prompt reliable execution in connection with the
purchase or sale of all portfolio securities. In the purchase
and sale of over-the-counter securities, it is the Fund's policy
to use the primary market makers except when a better price can
be obtained by using a broker. The Board of Directors has
approved, as in the best interests of the Fund and the
shareholders, a policy of considering, among other factors, sales
of the Fund's shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to best
execution. The Adviser is authorized under the Advisory
Agreement to place brokerage business with such brokers and
dealers. The use of brokers who supply supplemental research and
analysis and other services may result in the payment of higher
commissions than those available from other brokers and dealers
who provide only the execution of portfolio transactions. In
addition, the supplemental research and analysis and other
services that may be obtained from brokers and dealers through
which brokerage transactions are effected may be useful to the
Adviser in connection with advisory clients other than the Fund.
Investment decisions for the Fund are made independently
from those for 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 the Fund and
one or more of such other 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
56
<PAGE>
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 Fund or the size of the position
obtainable for the Fund.
Allocations are made by the officers of the Fund 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 extent to which commissions that will be charged by
broker-dealers selected by the Fund may reflect an element of
value for research cannot presently be determined. To the extent
that research services of value are provided by broker-dealers
with or through whom the Fund places portfolio transactions, the
Adviser may be relieved of expenses which it might otherwise
bear. Research services furnished by broker-dealers could be
useful and of value to the Adviser in servicing its other clients
as well as the Fund; but, on the other hand, certain research
services obtained by the Adviser as a result of the placement of
portfolio brokerage of other clients could be useful and of value
to it in serving the Fund. Consistent with the Conduct Rules of
the National Association of Securities Dealers, Inc., and subject
to seeking best execution, the Fund may consider sales of shares
of the Fund or other investment companies managed by the Adviser
as a factor in the selection of brokers to execute portfolio
transactions for the Fund.
The Fund may from time to time place orders for the
purchase or sale of securities (including listed call options)
with Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
an affiliate of the Adviser, and with brokers which may have
their transactions cleared or settled, or both, by the Pershing
Division of DLJ, for which DLJ may receive a portion of the
brokerage commissions. In such instances, the placement of
orders with such brokers would be consistent with the Fund's
objective of obtaining best execution and would not be dependent
upon the fact that DLJ is an affiliate of the Adviser.
During the Fund's fiscal year ended July 31, 1999 and
the period from September 3, 1997 (commencement of operations)
through July 31, 1998, the Fund incurred brokerage commissions
amounting in the aggregate to $23,040 and $34,049. During the
Fund's fiscal year ended July 31, 1999 and the period from
September 3, 1997 (commencement of operations) through July 31,
1998, no brokerage commissions were paid to DLJ and no brokerage
commissions were paid to brokers utilizing the Pershing Division
of DLJ. During the Fund's fiscal year ended July 31, 1999 and
the period from September 3, 1997 (commencement of operations)
through July 31, 1998, the brokerage commissions paid to DLJ
57
<PAGE>
constituted -0-% of the Fund's aggregate brokerage commissions
and the brokerage commissions paid to brokers utilizing the
Pershing Division of DLJ constituted -0-% and -0-% of the Fund's
aggregate brokerage commissions. During the Fund's fiscal year
ended July 31, 1999 and the period from September 3, 1997
(commencement of operations) through July 31, 1998, the Fund's
aggregate dollar amount of brokerage transactions involving the
payment of commissions, -0-% were effected through DLJ and -0-%
and -0-% were effected through brokers utilizing the Pershing
Division of DLJ. During the Fund's fiscal year ended July 31,
1999 and the period from September 3, 1997 (commencement of
operations) through July 31, 1998, transactions in portfolio
securities of the fund aggregating $5,324,352 and with associated
brokerage commissions of approximately $23,040 and $-0- were
allocated to persons of firms supplying research services to the
Fund or the Adviser.
Many of the Fund's portfolio transactions in equity
securities will occur on foreign stock exchanges. Transactions
on stock exchanges involve the payment of brokerage commissions.
On many foreign stock exchanges these commissions are fixed.
Securities traded in foreign over-the-counter markets (including
most fixed-income securities) are purchased from and sold to
dealers acting as principal. Over-the-counter transactions
generally do not involve the payment of a stated commission, but
the price usually includes an undisclosed commission or markup.
The prices of underwritten offerings, however, generally include
a stated underwriter's discount. The Adviser expects to effect
the bulk of its transactions in securities of companies based in
foreign countries through brokers, dealers or underwriters
located in such countries. U.S. Government or other U.S.
securities constituting permissible investments will be purchased
and sold through U.S. brokers, dealers or underwriters.
_______________________________________________________________
GENERAL INFORMATION
_______________________________________________________________
Capitalization
The Fund is a Maryland corporation organized in 1997.
The authorized capital stock of the Fund currently consists of
3,000,000,000 shares of Class A Common Stock, 3,000,000,000
shares of Class B Common Stock, 3,000,000,000 shares of Class C
Common Stock and 3,000,000,000 shares of Advisor Class Common
Stock, each having a par value of $.001 per share. All shares of
the Fund, when issued, are fully paid and non-assessable. The
Directors are authorized to reclassify and issue any unissued
shares to any number of additional series and classes without
shareholder approval. Accordingly, the Directors in the future,
58
<PAGE>
for reasons such as the desire to establish one or more
additional portfolios with different investment objectives,
policies or restrictions, may create additional classes or series
of shares. Any issuance of shares of another class or series
would be governed by the 1940 Act and the law of the State of
Maryland. If shares of another series were issued in connection
with the creation of a second portfolio, each share of either
portfolio would normally be entitled to one vote for all
purposes. Generally, shares of both portfolios would vote as a
single series on matters, such as the election of Directors, that
affected both portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of
the Investment Advisory Contract and changes in investment
policy, shares of each portfolio would vote as a separate series.
Procedures for calling a shareholders' meeting for the
removal of Directors of the Fund, similar to those set forth in
Section 16(c) of the 1940 Act will be available to shareholders
of the Fund. The rights of the holders of shares of a series may
not be modified except by the vote of a majority of the
outstanding shares of such series.
It is anticipated that annual shareholder meetings will
not be held; shareholder meetings will be held only when required
by federal or state law. Shareholders have available certain
procedures for the removal of Directors.
A shareholder will be entitled to share pro rata with
other holders of the same class of shares all dividends and
distributions arising from the Fund's assets and, upon redeeming
shares, will receive the then current net asset value of the Fund
represented by the redeemed shares less any applicable CDSC. The
Fund is empowered to establish, without shareholder approval,
additional portfolios, which may have different investment
objectives and policies than those of the Fund, and additional
classes of shares within the Fund. If an additional portfolio or
class were established in the Fund, each share of the portfolio
or class would normally be entitled to one vote for all purposes.
Generally, shares of each portfolio and class would vote together
as a single class on matters, such as the election of Directors,
that affect each portfolio and class in substantially the same
manner. Class A, B, C and Advisor Class shares have identical
voting, dividend, liquidation and other rights, except that each
class bears its own transfer agency expenses, each of Class A,
Class B and Class C shares of the Fund bears its own distribution
expenses and Class B shares and Advisor Class shares convert to
Class A shares under certain circumstances. Each class of shares
of the Fund votes separately with respect to the Fund's Rule 12b-
1 distribution plan and other matters for which separate class
voting is appropriate under applicable law. Shares are freely
transferable, are entitled to dividends as determined by the
59
<PAGE>
Directors and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund.
As of the close of business on October 8, 1999, there
were 424,460 shares of common stock of the Fund outstanding,
including 137,011 Class A shares, 238,332 Class B shares, 29,458,
Class C shares and 19,659 Advisor Class shares. To the knowledge
of the Fund, the following persons owned of record or
beneficially 5% or more of the outstanding shares of the Fund as
of October 8, 1999.
No. of % of
Name and Address Shares Class
Class A
Merrill Lynch, Pierce, Fenner
& Smith for the Sole Benefit
of Its Customers
Attn: Fund Admin. (97RU8)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 35,747 26.02%
Donaldson Lufkin Jenrette
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052 8,278 6.03%
Class B
Merrill Lynch, Pierce, Fenner
& Smith For the Sole Benefit
of Its Customers
Attn: Fund Admin. (97RO1)
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484 69,042 29.19%
Wexford Clearing Services
Corp.
Michael S. Weinstock TTEE
Michael s. Weinstock
Liv Trust UA DT 4/13/90 15,282 6.46%
c/o Grill Concepts Inc.
Los Angeles, CA 90049
Class C
60
<PAGE>
Wexford Clearing Services
Corp. FBO
Horace R. Medieros, Connie
Medieros Co-TTEES, Horace
Medieros and Connie Medieros
Trust UA DTD 7/21/83 7,139 24.24%
Torrance, CA 90505
Wexford Clearing Services
Corp. FBO
David L. Dollins, Linda M.
Dollins Co TTEES Dollins
Family Trust UA DTD 12/07/96 2,513 8.53%
Escondido, CA 92025
Prudential Securities Inc. FBO
Paul M. Atlas
IRA DTD 04/24/96
212 Old Mill Path
Nissequogue, NY 11780-1352 1,683 5.71%
Wexford Clearing Services
Corp. FBO Norman W. Kermode &
Karen D. Schaffer JTTEN
608 Alameda Dr.
Cortez, CO 81321-4005 3,071 10.43%
NFSC FEBO #BMA-864455
Donald J. Capuano
FMT Ttee NFRP PS
2640 Ridgeway Avenue
Rochester, NY 14626-4109 3,816 12.96%
Advisor Class
Alliance Capital Mgmt. LP
Attn: Sarah Powell
1345 Avenue of the Americas
New York, NY 10105-0302 10,000 50.87%
Robert A. deLucia
249-1/2 West Norwalk Rd
Norwalk, CT 06850-4320 2,586 13.16%
Amy M. Levin
151 W. 86th Street, Apt. 8D
New York 10024-3401 5,836 29.69%
61
<PAGE>
Custodian
Brown Brothers Harriman & Co. ("Brown Brothers"), 40
Water Street, Boston, Massachusetts, will act as the Fund's
custodian for the assets of the Fund but plays no part in
deciding the purchase or sale of portfolio securities. Subject
to the supervision of the Fund's Directors, Brown Brothers
Harriman & Co. may enter into sub-custodial agreements for the
holding of the Fund's foreign securities.
Principal Underwriter
Alliance Fund Distributors, Inc., an indirect wholly-
owned subsidiary of the Adviser, located at 1345 Avenue of the
Americas, New York, New York 10105, is the principal underwriter
of shares of the Fund. Under the Agreement, the Fund has agreed
to indemnify the Principal Underwriter, in the absence of its
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act of
1933, as amended.
Counsel
Legal matters in connection with the issuance of the
shares offered hereby are passed upon by Seward & Kissel LLP, New
York, New York. Seward & Kissel LLP has relied upon the opinion
of Venable, Baetjer and Howard, LLP, Baltimore, Maryland, for
matters relating to Maryland law.
Independent Auditors
Ernst & Young LLP, New York, New York, has been
appointed as independent auditors for the Fund.
Performance Information
From time to time, the Fund advertises its "total
return," which is computed separately for Class A, Class B,
Class C and Advisor Class shares. Such advertisements disclose
the Fund's average annual compounded total return for the periods
prescribed by the Commission. The Fund's total return for each
such period is computed by finding, through the use of a formula
prescribed by the Commission, the average annual compounded rate
of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the
period. For purposes of computing total return, income dividends
and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales
charges applicable to purchases and redemptions of the Fund's
shares are assumed to have been paid.
62
<PAGE>
The Fund's total return is computed separately for
Class A, Class B, Class C and Advisor Class shares. The Fund's
total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and
quality of the securities in the Fund's portfolio and the Fund's
expenses. Total return information is useful in reviewing the
Fund's performance but such information may not provide a basis
for comparison with bank deposits or other investments which pay
a fixed yield for a stated period of time. An investor's
principal invested in the Fund is not fixed and will fluctuate in
response to prevailing market conditions.
The Fund's average annual total return for for each class
for the one-, five- and ten-year periods ended July 31, 1999 (or
since inception through the date, as noted) were as follows:
5 Years 10 Years
Year Ended Ended Ended
7/31/99 7/31/99 7/31/99
---------- ------- --------
Class A 69.42% (9.48%)* N/A
Class B 68.46% (10.07%)* N/A
Class C 68.26% (10.13%)* N/A
Advisor Class 69.90% (9.21%)* N/A
*Inception Dates: Class A - September 3, 1997
Class B - September 3, 1997
Class C - September 3, 1997
Advisor Class - September 3, 1997
Advertisements quoting performance rankings of the Fund
as measured by financial publications or by independent
organizations such as Lipper, Inc., and Morningstar, Inc. and
advertisements presenting the historical record of payments of
income dividends by the Fund may also from time to time be sent
to investors or placed in newspapers, magazines such as Barrons,
Business Week, Changing Times, Forbes, Investor's Daily, Money
Magazine, The New York Times and The Wall Street Journal or other
media on behalf of the Fund.
Additional Information
Any shareholder inquiries may be directed to the
shareholder's broker or to Alliance Fund Services, Inc. at the
address or telephone numbers shown on the front cover of this
Statement of Additional Information. This Statement of
Additional Information does not contain all the information set
63
<PAGE>
forth in the Registration Statement filed by the Fund with the
Securities and Exchange Commission under the Securities Act 1933.
Copies of the Registration Statement may be obtained at a
reasonable charge from the Securities and Exchange Commission or
may be examined, without charge, at the offices of the Securities
and Exchange Commission in Washington, D.C.
64
<PAGE>
____________________________________________________________
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT AUDITORS
____________________________________________________________
65
<PAGE>
ALLIANCE GREATER CHINA '97 FUND
ANNUAL REPORT
JULY 31, 1999
PORTFOLIO OF INVESTMENTS
JULY 31, 1999 ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-100.7%
HONG KONG-88.4%
ABC Communications
Holdings, Ltd. 100,000 $ 32,210
Bank of East Asia, Ltd. 25,000 60,555
Cable & Wireless HKT,
Ltd. 88,400 207,857
Cathay Pacific Airways 20,000 28,473
Cheung Kong Holdings,
Ltd. 32,000 279,324
Cheung Kong Infrastructure
Holdings, Ltd. 45,000 92,764
China National Aviation
Co., Ltd. 200,000 31,179
China Resources Enterprise,
Ltd. 80,000 124,717
China Telecom
(Hong Kong), Ltd. (a) 54,000 161,410
Cosco Pacific, Ltd. 40,000 36,075
Dah Sing Financial Group,
Ltd. 20,000 81,942
Dao Heng Bank Group,
Ltd. 30,000 152,675
Denway Investments,
Ltd. (a) 500,000 84,390
Guangdong Kelon
Electrical Holdings Co.,
Ltd. "H" Shares 62,000 69,895
Hang Seng Bank, Ltd. 7,000 77,110
Henderson Land
Development Co., Ltd. 13,000 73,529
Hengan International Group
Co., Ltd. (a) 110,000 47,123
HKCB Bank Holding Co.,
Ltd. 150,000 56,045
HKR International, Ltd. 44,800 36,075
HSBC Holdings Plc. 18,000 212,198
Hutchison Whampoa, Ltd. 24,000 228,046
Jardine Matheson Holdings,
Ltd. 6,800 35,020
Legend Holdings, Ltd. 100,000 94,053
New World Development
Co., Ltd. 40,000 105,648
Ng Fung Hong, Ltd. 80,000 58,235
Regal Hotels International
Holdings, Ltd. (a) 300,000 30,921
Shanghai Petrochemical
Co., Ltd. Cl. H 200,000 38,394
Sino Land Co., Ltd. 50,000 26,412
Swire Pacific, Ltd. Cl. A 7,000 32,468
Union Bank of Hong Kong,
Ltd. 70,000 53,662
Wharf Holdings, Ltd. 40,000 119,048
Wheelock & Co., Ltd. 45,000 61,166
Zhejiang Expressway Co.,
Ltd. Cl. H 180,000 31,772
------------
2,860,391
SINGAPORE-5.1%
Pacific Century Regional
Developments, Ltd. (a) 45,000 164,487
TAIWAN-7.2%
Asustek Computer, Inc. 2,800 29,789
Formosa Plastics Corp. 10,700 17,258
Hon Hai Precision Industry
Co., Ltd. 7,840 42,070
Siliconware Precision
Industries Co. (a) 11,070 17,340
Synnex Technology
International Corp. 5,200 22,903
Taiwan Semiconductor
Manufacturing Co.,
Ltd. (a) 19,680 68,978
United World Chinese
Commercial Bank 28,000 34,305
------------
232,643
------------
3,257,521
7
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
WARRANTS-0.0%
Hong Kong & China Gas
Warrants, expiring
9/30/99 (a) 1,000 $ 77
RIGHTS-0.0%
Asustek Computer, Inc.
Rts 8/21/99 (a) 2,800 13
TOTAL INVESTMENTS-100.7%
(cost $2,499,183) 3,257,611
Other assets less
liabilities-(0.7)% (22,216)
NET ASSETS-100% $ 3,235,395
(a) Non-income producing security.
See notes to financial statements.
8
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1999 ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $2,499,183) $ 3,257,611
Cash 53,974
Foreign cash, at value (cost $83,539) 83,782
Deferred organization expenses 207,614
Receivable for investment securities sold 46,333
Receivable from Adviser 34,093
Receivable for capital stock sold 13,651
Total assets 3,697,058
LIABILITIES
Payable to Adviser (reimbursement to Adviser for
organizational expenses) 326,500
Payable for capital stock redeemed 8,238
Distribution fee payable 2,197
Accrued expenses 124,728
Total liabilities 461,663
NET ASSETS $ 3,235,395
COMPOSITION OF NET ASSETS
Capital stock, at par $ 397
Additional paid-in capital 3,974,342
Undistributed net investment income 6,167
Accumulated net realized loss on investments and foreign
currency transactions (1,504,185)
Net unrealized appreciation of investments and foreign
currency denominated assets and liabilities 758,674
$ 3,235,395
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($1,010,648/123,202 shares of beneficial interest issued
and outstanding) $8.20
Sales Charge--4.25% of public offering price .36
Maximum offering price $8.56
CLASS B SHARES
Net asset value and offering price per share
($1,901,750/234,257 shares of beneficial interest issued
and outstanding) $8.12
CLASS C SHARES
Net asset value and offering price per share
($161,837/19,951 shares of beneficial interest issued
and outstanding) $8.11
ADVISOR CLASS SHARES
Net asset value, redemption, and offering price per share
($161,160/19,554 shares of beneficial interest issued
and outstanding) $8.24
See notes to financial statements.
9
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1999 ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
INVESTMENT INCOME
Dividends (net of foreign taxes withheld
of $1,667) $ 76,279
Interest 3,542 $ 79,821
EXPENSES
Advisory fee 27,234
Distribution fee - Class A 1,963
Distribution fee - Class B 18,368
Distribution fee - Class C 1,174
Custodian 151,464
Administrative 127,000
Audit and legal 64,531
Amortization of organizational expenses 62,325
Registration 41,145
Transfer agency 13,648
Printing 13,528
Director's fees 10,500
Miscellaneous 13,662
Total expenses 546,542
Less: expenses waived and reimbursed
(see Note B) (464,615)
Less: expense offset arrangement (see Note B) (506)
Net expenses 81,421
Net investment loss (1,600)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investment transactions (631,179)
Net realized gain on foreign currency
transactions 1,542
Net change in unrealized appreciation of:
Investments 1,987,160
Foreign currency denominated assets and
liabilities 242
Net gain on investments and foreign currency
transactions 1,357,765
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 1,356,165
See notes to financial statements.
10
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
SEPTEMBER 3,
YEAR ENDED 1997*
JULY 31, TO
1999 JULY 31, 1998
------------ -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (1,600) $ 18,810
Net realized loss on investments and foreign
currency transactions (629,637) (877,930)
Net change in unrealized appreciation
(depreciation) of investments and foreign
currency denominated assets and liabilities 1,987,402 (1,228,728)
Net increase (decrease) in net assets from
operations 1,356,165 (2,087,848)
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A -0- (5,303)
Class B -0- (10,749)
Class C -0- (619)
Advisor Class -0- (714)
Distributions in excess of net investment
income
Class B -0- (1,442)
Class C -0- (191)
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) (279,240) 4,165,036
Total increase 1,076,925 2,058,170
NET ASSETS
Beginning of period 2,158,470 100,300
End of period (including undistributed net
investment income of $6,167, at
July 31, 1999) $ 3,235,395 $ 2,158,470
* Commencement of operations.
See notes to financial statements.
11
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Greater China '97 Fund, Inc. (the "Fund") was organized as a Maryland
corporation on April 30, 1997 and is registered under the Investment Company
Act of 1940 as a non-diversified, open-end management investment company. The
Fund offers Class A, Class B, Class C and Advisor Class shares. Class A shares
are sold with an initial sales charge of up to 4.25% for purchases not
exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase may be subject to a contingent
deferred sales charge of 1%. Class B shares are sold with a contingent deferred
sales charge which declines from 4% to zero depending on the period of time the
shares are held. Class B shares will automatically convert to Class A shares
eight years after the end of the calendar month of purchase. Class C shares are
subject to a contingent deferred sales charge of 1% on redemptions made within
the first year after purchase. Advisor Class shares are sold without an initial
or contingent deferred sales charge and are not subject to ongoing distribution
expenses. Advisor Class shares are offered to investors participating in
fee-based programs and to certain retirement plan accounts. All four classes of
shares have identical voting, dividend, liquidation and other rights, except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan. The financial statements have
been prepared in conformity with generally accepted accounting principles which
require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities in the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. The following is a summary of significant
accounting policies followed by the Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are
generally valued at the last reported sales price or if no sale occurred, at
the mean of the closing bid and asked prices on that day. Readily marketable
securities traded in the over-the-counter market, securities listed on a
foreign securities exchange whose operations are similar to the U.S.
over-the-counter market, and securities listed on a national securities
exchange whose primary market is believed to be over-the-counter, are valued at
the mean of the current bid and asked prices. U.S. government and fixed income
securities which mature in 60 days or less are valued at amortized cost, unless
this method does not represent fair value. Securities for which current market
quotations are not readily available are valued at their fair value as
determined in good faith by, or in accordance with procedures adopted by, the
Board of Directors. Fixed income securities may be valued on the basis of
prices obtained from a pricing service when such prices are believed to reflect
the fair market value of such securities.
2. ORGANIZATION EXPENSES
Organization expenses of approximately $326,500 have been deferred and are
being amortized on a straight-line basis through August 2002.
3. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked price of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated at the rates
of exchange prevailing when such securities were acquired or sold. Income and
expenses are translated into U.S. dollars at rates of exchange prevailing when
accrued.
Net realized gain or loss on foreign currency transactions represents foreign
exchange gains and losses from sales and maturities of investments and foreign
currency contracts, the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on foreign security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes receivable recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized currency
gains and losses from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of net
change in unrealized appreciation (depreciation) of investments and foreign
currency denominated assets and liabilities.
12
ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
4. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
5. INCOME AND EXPENSES
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each outstanding class of shares, based on the proportionate interest
in the Fund represented by the shares of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees
than Class A shares and Advisor Class shares (Advisor Class shares also have no
distribution fees).
6. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date securities are
purchased or sold. Investment gains and losses are determined on the identified
cost basis. The Fund accretes discounts on short-term securities as adjustments
to interest income.
7. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Income dividends and capital gains distributions are determined in accordance
with federal tax regulations and may differ from those determined in accordance
with generally accepted accounting principles. To the extent these differences
are permanent, such amounts are reclassified within the capital accounts based
on their federal tax basis treatment; temporary differences do not require such
reclassification.
During the current fiscal year, permanent differences, primarily due to foreign
currency transactions and net operating losses resulted in a net increase in
accumulated net realized loss on investments and foreign currency transactions
and undistributed net investment income, and a corresponding decrease in
additional paid-in-capital. This reclassification had no effect on net assets.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P. ("the Adviser") a fee at an annual rate of 1% of the
Fund's average daily net assets. Such fee is accrued daily and paid monthly.
The Adviser has agreed for the current fiscal year to waive its fee and bear
certain expenses so that total expenses do not exceed on an annual basis 2.50%,
3.20%, 3.20%, and 2.20% of average net assets, respectively, for the Class A,
Class B, Class C and Advisor Class shares. For the year ended July 31, 1999,
such waiver of management fees, amounted to $331,024 and the waiver of the cost
of certain legal and accounting services provided to the Fund by the Adviser
amounted to $127,000.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. For the year ended
July 31, 1999, the Transfer Agent voluntarily waived all of its fees under the
Agreement which amounted to $6,591.
In addition, for the year ended July 31, 1999, the Fund's expenses were reduced
by $506 under an expense offset arrangement with Alliance Fund Services.
Transfer agency fees reported in the statement of operations exclude these
credits.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $2,204 from the sale of Class A shares and $21,655
in contingent deferred sales charges imposed upon redemptions by shareholders
of Class B shares for the year ended July 31, 1999.
Brokerage commissions paid on investment transactions for the year ended July
31, 1999, amounted to $23,040, none of which was paid to brokers utilizing the
services of the Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corp. ("DLJ"), an affiliate of the Adviser, nor to DLJ directly.
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
NOTE C: DISTRIBUTION SERVICES AGREEMENT
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the Fund's average daily net assets attributable to
Class A shares and 1% of the average daily net assets attributable to both
Class B and Class C shares. There is no distribution fee on the Advisor Class
shares. The fees are accrued daily and paid monthly. The Agreement provides
that the Distributor will use such payments in their entirety for distribution
assistance and promotional activities. The Distributor advised the Fund that it
has incurred expenses in excess of the distribution costs reimbursed by the
Fund in the amounts of $31,995 for Class B shares. Such costs may be recovered
from the Fund in future periods so long as the Agreement is in effect. In
accordance with the Agreement, there is no provision for recovery of
unreimbursed distribution costs, incurred by the Distributor, beyond the
current fiscal year for Class A shares. The Agreement also provides that the
Adviser may use its own resources to finance the distribution of the Fund's
shares.
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term and U.S.
government obligations) aggregated $2,522,252 and $2,802,100, respectively, for
the year ended July 31, 1999. There were no purchases or sales of U.S.
government or government agency obligations for the year ended July 31, 1999.
At July 31, 1999, the cost of investments for federal income tax purposes was
$2,706,145. Accordingly, gross unrealized appreciation of investments was
$822,422 and gross unrealized depreciation of investments was $270,956
resulting in net unrealized appreciation of $551,466 (excluding foreign
currency transactions).
At July 31, 1999, the Fund had a net capital loss carryforward for federal
income tax purposes of $1,132,756, which expires in the year 2007.
FORWARD EXCHANGE CURRENCY CONTRACTS
The Fund enters into forward exchange currency contracts for investment
purposes and to hedge its exposure to changes in foreign currency exchange
rates on its foreign portfolio holdings and to hedge certain firm purchase and
sale commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated forward rate. The gain or loss arising from the difference
between the original contracts and the closing of such contracts is included in
net realized gains or losses on foreign currency transactions. Fluctuations in
the value of forward exchange currency contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Fund.
The Fund's custodian will place and maintain cash not available for investment
or other liquid assets in a separate account of the Fund having a value equal
to the aggregate amount of the Fund's commitments under forward exchange
currency contracts entered into with respect to position hedges. Risks may
arise from the potential inability of a counterparty to meet the terms of a
contract and from unanticipated movements in the value of foreign currencies
relative to the U.S. dollar. There were no forward exchange currency contracts
outstanding at July 31, 1999.
14
ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
NOTE E: CAPITAL STOCK
There are 12,000,000,000 shares of $.001 par value capital stock authorized,
divided into four classes, designated Class A, Class B, Class C and Advisor
Class. Each class consists of 3,000,000,000 authorized shares.
Transactions in capital stock were as follows:
SHARES AMOUNT
--------------------------- ------------------------------
SEPTEMBER 3, SEPTEMBER 3,
1997* 1997*
YEAR ENDED TO YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998 JULY 31, 1999 JULY 31, 1998
------------ ------------ -------------- --------------
CLASS A
Shares sold 107,452 112,520 $ 813,635 $ 971,684
Shares issued in
reinvestment of
dividends -0- 502 -0- 3,613
Shares redeemed (76,310) (20,972) (563,178) (132,177)
Net increase 31,142 92,050 $ 250,457 $ 843,120
CLASS B
Shares sold 327,834 398,593 $ 2,338,138 $ 3,556,766
Shares issued in
reinvestment of
dividends and
distributions -0- 1,205 -0- 8,686
Shares redeemed (415,218) (78,167) (2,923,975) (463,301)
Net increase
(decrease) (87,384) 321,631 $ (585,837) $ 3,102,151
CLASS C
Shares sold 13,684 21,183 $ 106,827 $ 201,955
Shares issued in
reinvestment of
dividends and
distributions -0- 84 -0- 604
Shares redeemed (14,842) (168) (107,177) (1,054)
Net increase
(decrease) (1,158) 21,099 $ (350) $ 201,505
ADVISOR CLASS
Shares sold 30,587 2,622 $ 250,877 $ 20,507
Shares issued in
reinvestment of
dividends -0- 9 -0- 64
Shares redeemed (23,385) (279) (194,387) (2,311)
Net increase 7,202 2,352 $ 56,490 $ 18,260
NOTE F: BANK BORROWING
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility")
intended to provide short-term financing if necessary, subject to certain
restrictions in connection with abnormal redemption activity. Commitment fees
related to the Facility are paid by the participating funds and are included in
the miscellaneous expenses in the statement of operations. The Fund did not
utilize the Facility during the year ended July 31, 1999.
* Commencement of operations.
15
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
NOTE G: CONCENTRATION OF RISK
Investing in securities of foreign companies involves special risks which
include the possibility of future political and economic developments which
could adversely affect the value of such securities. Moreover, securities of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of United States companies.
16
FINANCIAL HIGHLIGHTS ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
-----------------------------
SEPTEMBER 3,
1997(A)
YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998
------------- -------------
Net asset value, beginning of period $ 4.84 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)(c) .02 .08
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.34 (5.18)
Net increase (decrease) in net asset value
from operations 3.36 (5.10)
LESS: DIVIDENDS
Dividends from net investment income -0- (.06)
Net asset value, end of period $ 8.20 $ 4.84
TOTAL RETURN
Total investment return based on net asset
value (d) 69.42% (51.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $1,011 $445
Ratio to average net assets of:
Expenses, net of waivers/reimbursements (c)(e) 2.52% 2.52%(f)
Expenses, before waivers/reimbursements 19.68% 18.27%(f)
Net investment income .36% 1.20%(f)
Portfolio turnover rate 94% 58%
See footnote summary on page 20.
17
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS B
-----------------------------
SEPTEMBER 3,
1997(A)
YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998
------------- -------------
Net asset value, beginning of period $ 4.82 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (b)(c) (.01) .03
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.31 (5.17)
Net increase (decrease) in net asset value
from operations 3.30 (5.14)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -0- (.03)
Distributions in excess of net investment
income -0- (.01)
Total dividends and distributions -0- (.04)
Net asset value, end of period $ 8.12 $ 4.82
TOTAL RETURN
Total investment return based on net asset
value (d) 68.46% (51.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $1,902 $1,551
Ratio to average net assets of:
Expenses, net of waivers/reimbursements (c)(e) 3.22% 3.22%(f)
Expenses, before waivers/reimbursements 20.22% 19.18%(f)
Net investment income (.22)% .53%(f)
Portfolio turnover rate 94% 58%
See footnote summary on page 20.
18
ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
-----------------------------
SEPTEMBER 3,
1997(A)
YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998
------------- -------------
Net asset value, beginning of period $ 4.82 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (b)(c) (.03) .03
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.32 (5.17)
Net increase (decrease) in net asset value
from operations 3.29 (5.14)
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -0- (.03)
Distributions in excess of net investment
income -0- (.01)
Total dividends and distributions -0- (.04)
Net asset value, end of period $ 8.11 $ 4.82
TOTAL RETURN
Total investment return based on net asset
value (d) 68.26% (51.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $162 $102
Ratio to average net assets of:
Expenses, net of waivers/reimbursements (c)(e) 3.22% 3.22%(f)
Expenses, before waivers/reimbursements 20.41% 19.37%(f)
Net investment income (.49)% .50%(f)
Portfolio turnover rate 94% 58%
See footnote summary on page 20.
19
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
ADVISOR CLASS
-----------------------------
SEPTEMBER 3,
1997(A)
YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998
------------- -------------
Net asset value, beginning of period $ 4.85 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)(c) .04 .10
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.35 (5.18)
Net increase (decrease) in net asset value
from operations 3.39 (5.08)
LESS: DIVIDENDS
Dividends from net investment income -0- (.07)
Net asset value, end of period $ 8.24 $ 4.85
TOTAL RETURN
Total investment return based on net asset
value (d) 69.90% (51.06)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $161 $60
Ratio to average net assets of:
Expenses, net of waivers/reimbursements (c)(e) 2.22% 2.22%(f)
Expenses, before waivers/reimbursements 19.01% 18.13%(f)
Net investment income .58% 1.51%(f)
Portfolio turnover rate 94% 58%
(a) Commencement of operations.
(b) Based on average shares outstanding.
(c) Net of expenses waived/reimbursed by the Adviser.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charges or contingent
deferred sales charges are not reflected in the calculation of total investment
return. Total investment return calculated for a period of less than one year
is not annualized.
(e) Ratios reflect expenses grossed up for expense offset arrangement with the
Transfer Agent. For the periods shown below, the net expense ratios were as
follows:
SEPTEMBER 3,
1997
YEAR ENDED TO
JULY 31, 1999 JULY 31, 1998
------------- -------------
Class A 2.50% 2.50%
Class B 3.20% 3.20%
Class C 3.20% 3.20%
Advisor Class 2.20% 2.20%
(f) Annualized
20
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE GREATER CHINA '97 FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS ALLIANCE GREATER CHINA '97 FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Alliance Greater China '97 Fund, Inc. (the "Fund"), including the portfolio of
investments, as of July 31, 1999, and the related statements of operations for
the year then ended, and the statement of changes in net assets and financial
highlights for the year then ended and for the period from September 3, 1997
(commencement of operations) to July 31, 1998. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of July 31, 1999, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance Greater China '97 Fund, Inc. at July 31, 1999, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period from September
3, 1997 to July 31, 1998, in conformity with generally accepted accounting
principles.
New York, New York
September 8, 1999
21
<PAGE>
___________________________________________________________
APPENDIX A: INFORMATION CONCERNING
CHINA, HONG KONG AND TAIWAN
___________________________________________________________
The information in this Appendix is based on material
obtained by the Fund from various governmental and other sources
which is believed to be accurate but all of which has not been
independently verified by the Fund or the Adviser. Many of the
indicated numbers, including percentage information, is, whether
or not so specified, estimated or approximate. The information
provided is not intended to be a complete description of the
subject matter covered.
CHINA
With a population estimated at more than 1.2 billion
people, the People's Republic of China is home to approximately
21% of the world's population. It is the world's third largest
nation in terms of land area, next only to Russia and Canada,
with approximately 3.7 million square miles; it shares borders
with 16 nations, including Russia, India, North Korea and
Vietnam; its vast and diverse terrain includes the Himalayan
Mountains, the Gobi Desert and tropical areas in the southeast.
Politically, China is divided into 22 provinces, five autonomous
regions and four municipalities.
History and Politics
China claims to be the oldest continuous civilization,
first unified as a nation in 221 B.C. In this century, China's
political system has moved from its first republic (1911-1949) to
a one-party communist state, after a civil war which ended in
1949 with the victory of the communist revolutionaries led by Mao
Zedong. Under his rule, the Chinese Communist Party (the "CCP")
established China's present governmental structure under which
all aspects of the Chinese economy were centrally planned and
implemented by the CCP. After his death in 1976, China's
economic system began a process of reformation under the
leadership of Deng Xiaoping marked by a trend as described below
toward capitalism, private ownership and an easing of
restrictions on foreign investment.
Government
China is officially designated as a "people's republic",
defined by the Chinese government as a dictatorship of the
working classes. It has a one-party political system controlled
by the CCP, which currently consists of an estimated 58 million
members. The highest ranking legislative body in the State
A-1
<PAGE>
hierarchy is the National People's Congress ("NPC"), composed of
approximately 3,000 members indirectly elected from lower-level
People's Congresses held every five years. The NPC, which meets
once a year for two or three weeks, is empowered to amend the
Chinese Constitution, enact and amend laws, and examine and
approve national economic and social plans. Historically,
however, the NPC has been viewed as less of a law-making body
than as an organization structured solely to enact CCP policies.
When not in session, the powers of the NPC are vested in a
Central Committee, composed of approximately 200 members. The
highest organ of state administration is the State Council, whose
members are elected by the NPC, acting on recommendations from
the CCP and presided over by an executive board made up of
approximately 15 members.
The CCP structure parallels the governmental structure,
and often, the two systems overlap, with little distinction
between government and party positions. The CCP is governed by
an 188-member Central Committee, elected every five years. The
Central Committee normally convenes twice a year. When not in
session, the Politburo is vested with the Central Committee's
power. The power of the Politburo, which currently consists of
22 members, is further centralized in the Politburo Standing
Committee. This Standing Committee is seen as the real focus of
power in China, as it sets CCP policy and controls all
administrative, legal and executive appointments. The Standing
Committee currently consists of seven members, including Jiang
Zemin, who holds the positions of President, Party General
Secretary and Chairman of the Central Military Committee and Zhu
Rongji, the new Prime Minister.
Following the death of Deng Xiaoping in February 1997,
Jiang Zemin became the leader of the CCP. The transfer of
political power has progressed smoothly and Jiang's popularity
and credibility have continued to increase. He continues to
consolidate his power, but as of yet does not appear to have the
same degree of control as did Deng Xiaoping.
Economy
China's economy is centrally planned by the government
through the use of a series of economic and social development
plans, which set overall targets for different sectors of the
economy. China is now in its Ninth Five-Year Plan, which
establishes official economic targets through the year 2000.
Since market-oriented reforms were initiated under Deng, China's
economy has been in the process of transforming from a rural
agricultural economy into a modern manufacturing nation. China's
economy has seen rapid growth in recent years, with yearly double
digit percent increases in the growth of its gross domestic
product from 1990 to 1995, and a 9.7% increase during 1996. In
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1997 and 1998, gross domestic product ("GDP") growth slowed to
approximately 8.8% and 7.8%, respectively. During the first half
of 1999, GDP growth rate was an estimated 7.6% year-on-year. It
is estimated that GDP growth will be approximately 7% for the
year 1999.
Until recently, China's economy was dominated by State-
owned enterprises ("SOEs"). Increasingly, China's economy is
being transformed, in accordance with the government's economic
plans, from a state-controlled system to a system of private
ownership. With more than half of China's SOEs reporting losses,
a major economic challenge for China is to reform inefficient
SOEs without creating an unacceptable level of unemployment.
China made great progress in the reform of SOEs in 1997.
President Zemin announced plans to sell, merge, or close most
SOEs at the September 1997 meeting of the National Congress of
the CCP. As part of the government's plan for increased public
ownership (a euphemism for privatization), 675 SOEs were declared
bankrupt and closed, and an additional 1022 SOEs were merged.
Losses were curbed and net industrial profits for the remaining
SOEs increased by 11.9% in 1997. By the end of 1998, only one-
third of the large and medium sized SOEs, which make up
approximately 20% of all SOEs, were reporting losses. Overall,
net industrial profits for SOEs increased by 4.9% in 1998 and
8.3% in the first quarter of 1999. The reform of SOEs has slowed
since mid-1998 due to an effort to stimulate production and
prevent a rapid rise in unemployment, but in July 1999 President
Zemin reconfirmed his commitment to intensifying efforts to
restructure China's SOEs. The official urban unemployment rate
was 3.1% in 1997 and 1998 (with higher rates reported locally),
and is expected to continue to rise due to the lay-offs resulting
from SOE reform. China is combating the effects of unemployment
with a newly established national "social public pension fund"
and accelerated reform of its social security system.
Additionally, a minimum-income security system has been
established in more than 300 cities. The income gap between
urban and rural residents, as well as between the wealthier
coastal provinces and the interior, has begun to widen and is
expected to persist. After decades of double digit inflation,
the consumer price index rose by only 2.8% in 1997. During 1998,
the consumer price index fell by 0.8%. As a result of this
deflation, the government has placed a floor on the price of
several products in an attempt to thwart competition between
domestic companies and imports.
The collective and private sectors have played an
increasingly important role in China's economic development. The
collective sector includes township and village enterprises often
combined with some measure of foreign investment or privately
owned enterprises. The private sector showed the strongest
growth in 1997, with a 14% increase in value-added industrial
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output, as compared to an 11.7% increase for the collective
sector and a 5.4% increase for SOEs. In 1998, the private sector
increased 11.9% in value-added industrial output, compared to an
8.7% increase for the collective sector and a 4.9% increase for
SOEs. Growth in the collective and private sectors is expected
to continue. Manufacturing in China has been rapidly moving into
private hands, particularly in the five Special Economic Zones
where tax incentives, among other factors, have encouraged
investment by both local and foreign investors. Foreign direct
investment in China totaled approximately US$20.5 billion during
the first half of 1998, a decline of 1.3% from the first half of
1997. During the first half of 1999, foreign investment in China
totaled approximately US$18.6 billion, a decline of 9.2% from the
first half of 1998. Manufacturing jobs have been moving into
China from other Asian nations as a result of, among other
factors, China's low wages and large pool of comparatively cheap
labor.
Another aspect of China's continued plan of economic
development is the government's continued investment in
infrastructure development programs, which are seen as necessary
to sustain China's current level of economic performance. In
early 1998 the government decided to accelerate the construction
of certain infrastructure projects and formulated policies to
support these priority projects, chosen to increase investment in
key fixed assets. However, only one-third of a bond issue for
infrastructure and flood rebuilding had been invested as the end
of September 1998. The environmental impact of the Three Gorges
Dam project, which is among the largest of the projects in
progress, is currently being criticized because of the issue of
silt levels. This criticism comes on the wake of severe flooding
that occurred during mid-1998. The severity of the flooding,
which caused 4,610 deaths and an estimated US$36.4 billion in
damage, was dramatically increased by the effects of silting
caused by man-made activities. Other infrastructure projects
include road-building, low-cost housing, rural power power and
urban facilities projects. The government also intends to reduce
its use of coal and rely more on natural gas and nuclear powers.
In this regard China has embarked on the construction of a large-
scale liquefied natural gas import complex and expects to have 11
nuclear power plants in operation by 2005.
China's foreign trade grew by 12.1% in 1997, to
US$325.06 billion, making China the world's tenth largest trading
nation. China accrued an estimated trade surplus of
approximately US$46.3 billion in 1997. Foreign trade volume
remained about the same in 1998. Exports grew by 0.4% and
imports fell by 1.3%, leaving an estimated trade surplus of
US$48.8 billion for 1998. In the first half of 1999, exports
fell by 4.6% and imports rose by 16.6%, leaving a trade surplus
of US$7.7 billion, compared to a surplus of US$22.6 billion in
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the first half of 1998. During the same period, SOE exports fell
by 13% and their imports rose by 30.4%. Although China's exports
to other Asian countries have been affected by the recent
financial crises in that region, signs of recovery have been
reported.
China has been negotiating for admission to the World
Trade Organization ("WTO") for more than ten years, although it
is not clear when, if ever, China will gain entry. Recent
negotiations regarding China's admission have focused on what
commitments China would make to provide market access and whether
China would be accorded developing member status. While China's
export market is expected to expand upon WTO entry, its share of
sales in its domestic markets may decline as these markets would
be open to increased foreign competition because China would be
forced to lower tariffs under WTO regulations. In preparation
for entry into the WTO, China which had recently reduced its
average tariff rate to 23%, furthered reduced tariffs to an
average of 17% effective October 1, 1997. In June 1999, the
government announced that whether China becomes a WTO member or
not, tariffs will be lowered to an average of 15% in 2000. China
plans to lower its average tariff rate on industrial imports to
10% by the year 2005.
Banking and Finance
Banking in China is controlled by the wholly state-owned
People's Bank of China ("PBC"), the central bank of China. The
PBC has the same status under Chinese law as a department of the
government under the direct control of the State Council. In
addition to its central bank functions, which include
international settlements in connection with foreign trade and
non-trade transactions, international interbank deposits and
remittances, the buying and selling of foreign exchange and
issuing bonds and other securities in foreign currencies, the PBC
enjoys considerable autonomy in management and in operating as a
full-fledged commercial bank. In the summer of 1998, the PBC
announced that it would set up six major regional branches while
at the same time cutting the number of existing branches. The
move is aimed at improving central monitoring and reducing local
interference.
As a State owned unit, the PBC has been instrumental in
the implementation of China's planned economy, particularly
through lending in furtherance of government policies. In the
past, the State has mandated that more than half of the PBC's
lending be in the form of policy loans, many of which are in
essence government expenditures. The practice of using loans to
subsidize unprofitable SOEs was decreasing in accordance with the
move to reform SOEs. However, in an attempt to bolster SOE
productivity and boost the economy, state-owned banks were
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recently ordered to increase lending to SOEs. Historically, SOEs
have defaulted on repayment of these loans. In March 1999, the
PBC announced that 10% of Chinese banks' loans were
"unrecoverable," much higher than the official figure of 2.9%
that had been reported for the end of 1998. Foreign analysts
however, estimate an even higher figure. In May 1999 the Bank of
China, one of China's four major commercial banks, announced
plans to establish an asset management company to take over its
bad loans. The other three major banks are expected to follow
suit. Debt-for-equity swaps are being used, at least initially,
to dispose of the bad debt. Currently there is no deposit
insurance system to protect depositors.
China expected to reduce its budget deficit 17% to
US$5.5 billion for 1998, but has since reported an actual budget
deficit of US$11.6 billion for 1998. The actual deficit may be
much larger than this official amount however, as non-performing
loans to SOEs are not reflected in the official numbers. The
World Bank suggests that China's consolidated government deficit
("CGD"), which includes the fiscal deficit plus lending to
financial systems which in turn finance the expenditures to the
SOEs, is a more accurate reflection of China's deficit. The
World Bank has estimated that China's CGD amounts to 5%-6% of
China's GDP. Nevertheless, China's external payment position is
believed by observers to be sound as China boasts one of the
world's largest foreign exchange reserves. China's foreign
exchange reserves increased by 33.3% during 1997 to US$142.8
billion, and by 4.5% in 1998 to reach US$149.2 billion.
China is attempting to reform its banking system, with
the goal of making the financial system a more effective means of
macroeconomic control. The ceiling on bank loans by commercial
banks was revoked in January 1998, and the deposit reserve ratio
was decreased from 13% to 8% in March 1998. Since May 1996, the
PBC has cut interest rates seven times, most recently in June
1999, when time deposit rates were cut by 1.53% taking the
interest rate on one-year deposits to 2.2%. The PBC instructed
commercial banks to cut dollar interest rates by 50 basis points
in October 1998. Additionally, the PBC has permitted more
foreign banks to do RMB based business. These reforms have
helped in maintaining the stability of China's financial markets.
Deposits at all of China's financial institutions at the end of
1998 were up 16.1% year on year, and lending was up 15.5% year on
year. The M2 (broad money supply) grew 17.7% year on year in the
first six months of 1999; while the M1 (narrow money supply)
increased 15.0% for the same period. The M0 (cash in
circulation) rose 9.1% year on year during the first five months
of 1999. The monetary unit of China is the Renminbi ("RMB"), and
the rate of exchange has averaged 8.3 RMB per U.S. dollar since
1995, and was exchanged at 8.28 RMB per U.S. dollar as of October
15, 1999. In 1986, to help solve the foreign exchange problems
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of foreign investors, China established Foreign Exchange
Adjustment Centers, commonly referred to as "swap centers," in
various cities. These centers provide an official forum where
foreign invested enterprises ("FIEs") may, under the supervision
and control of the State Administration of Foreign Exchange
("SAFE") engage in mutual adjustment of their foreign exchange
surpluses and shortfalls. The RMB is not yet fully convertible,
however, as only "current account" items, as described below, may
be converted freely. Under the rules implemented by SAFE, the
Fund, as a FIE has to establish a "current account" and a
"capital account" with a bank authorized to conduct foreign
exchange business. SAFE has the authority to determine the
maximum amount of foreign exchange a FIE may maintain in its
current account in accordance with the paid-up capital of the FIE
and its need for foreign exchange working funds. Any foreign
currency income in the current account exceeding such maximum
limit is required to be sold either to a bank authorized to
conduct foreign exchange business or traded through a swap
center. Since November 1996, FIEs have been allowed to exchange
Renminbi into foreign currencies without prior approval from SAFE
if such funds are in respect of "current account items."
However, prior approval from SAFE is needed if "capital account
items" are to be converted into foreign currencies. "Current
account items" include dividends or profits in other forms paid
to foreign investors in FIEs. After the payment of applicable
taxes, FIEs may distribute dividends in foreign currencies either
by applying the balance in their foreign exchange accounts to
such distribution in RMB or through a foreign exchange swap
center.
Since 1994, the foreign exchange rate has not been set
by the Chinese government. Trading of RMB and foreign currencies
is conducted at a rate within a range set daily by the Chinese
government determined by reference to supply and demand. Such
market exchange rates can be highly volatile and are subject to
sharp fluctuations depending on market conditions. The initial
effect of the abolition of the government's official exchange
rate was a 50% devaluation of the RMB against the U.S. dollar by
January 1994. Since then, however, the RMB has remained
relatively stable against the dollar. On November 21, 1998
Premier Zhu Rongi promised not to devalue the RMB in 1999 as a
result of the Asian financial crisis. By mid-1999, however, in
light of the stability of China's external debt situation, the
need to stimulate domestic demand and the apparent beginnings of
economic recovery in the region, it was expected by some
economists that the currency would be devalued early in 2000,
probably by 10% or less.
China has numerous international trust and investment
corporations ("ITICs"), which are sponsored by government
agencies and state banks. ITICs take corporate deposits and make
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commercial investments. During October 1998, the PBC closed the
Guangdong ITIC ("GITIC") because it could not make required
interest and principal payments on its US$2 billion foreign debt.
The closure was seen by the foreign lending community as
indicative of the over-indebted state of ITICs and the illiquid
condition of their investments generally. As a result of the
closure, many fear that problems with ITICs could threaten the
economy, even though regulators stress that ITICs hold only a
small percentage of total deposits. In response to such fears,
new rules were drafted, and became effective in March 1999, to
curb speculative securities investment practices by ITICs, to
prohibit banks from providing loans or guarantees for such
transactions and to strengthen PBC's regulatory authority over
ITICs. In the meantime, formal bankruptcy proceedings have been
initiated to settle the affairs of the GITIC. All domestic
depositors have been paid off but creditors have been advised
that registered debt (which represents about one-half of all its
debt) will be paid off first. GITIC's assets are currently
valued at US$2.7 billion and its liabilities are put at US$4.3
billion. As anticipated, other Chinese financial institutions
have experienced financial difficulties as well.
Securities Markets
China has two officially recognized securities
exchanges, the Shanghai Stock Exchange opened in December 1990
and the Shenzhen Stock Exchange opened in July 1991 (the
"Exchanges") which developed out of securities exchanges set up
to trade State treasury bonds. Trading on the Exchanges has been
very volatile since their inception, and the Exchanges continue
to be very volatile and prone to wide fluctuations, although the
listing of four securities investment funds during the first half
of 1998 has helped to stabilize the market. In order to ensure
stability and protect investor's interests the Shanghai Stock
Exchange is demanding greater financial disclosure from listed
companies. The exchange issued new guidelines regulating annual
reports of listed companies in January 1998. Additionally, both
Exchanges have issued new rules pertaining to listed companies.
The rules give the Exchanges the right to suspend trading if: a
company reports a loss for two consecutive years; a company's net
asset value falls below par value; or if there is any unusual and
potential misleading trading.
In addition, the new Securities Law, which took effect
in July 1999, has established more stringent reporting
requirements for listed companies and minimum capital
requirements for securities firms. Further, the State Economic
and Trade Commission issued a notice recently confirming the
independence of Chinese companies listed overseas from their
mainland parents, which is designed to prevent subsidiaries from
being used to fund mainland parents in difficulty.
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The Exchanges allow for the trading of only two types of
shares: A-shares, which may only be held and traded in Renminbi
by mainland Chinese investors; and B-shares, officially open,
with narrow exceptions, only to foreign investors, also
denominated in Renminbi, but traded in U.S. and Hong Kong
dollars. During 1997, 215 A-share companies were listed on the
Exchanges. An additional 65 companies were listed on the
Exchanges during the first half of 1998, bringing the total
number of listed companies up to 810. Currently, there are
approximately 900 listed companies. The market for B-shares is
much smaller and less liquid, but it is growing. Approximately
106 companies list B-shares. While full merger of "A" and "B"
share markets is not likely in the near future, joint ventures
comprised of foreign financial houses and mainland Chinese
investors are allowed to purchase "A" shares, and Chinese
investors have been given official access to the "B" market. The
Chinese government has also allowed certain Chinese companies to
list shares on the Hong Kong Stock Exchange, such shares
designated as H-shares, and permitted certain companies to list
on other foreign exchanges, including nine companies listed on
the New York Stock Exchange and two on the London Stock Exchange.
As of May 1999, H-shares of 41 Chinese issuers were listed on the
Hong Kong Stock Exchange, and while there were plans to add more,
the Hong Kong Stock Exchange's strict listing requirements have
prevented many Chinese companies, which do not follow
internationally accepted accounting standards, from being listed
(see "--Additional Information About Hong Kong--Securities
Markets" for additional information on H-shares). These
companies, together with an additional 59 China-related
companies, contributed 17% of the market capitalization and 32%
of the turnover value of the Hong Kong securities market.
In July 1999, the government announced an agenda whereby
it will eventually relinquish control in most of the
approximately 900 listed companies. The government currently
holds 60-70% of all shares, either directly or indirectly.
The stock trading turnover on the Exchanges hit a record
US$361 billion during 1997. The key index for the Shanghai Stock
Exchange, the Shanghai Stock Exchange Composite Index, closed at
1,194.1 on December 31, 1997, and increased to 1,339 at the end
of June 1998. The Shanghai Stock Exchange-30 index, which is
based on 30 representative blue chips stocks, closed at 3772,36
on December 31, 1997. The Shenzhen Stock Exchange All-Share
Index closed at 381.29 on December 30, 1997, and finished at 403
on June 30, 1998. The market has since turned bearish,
reflecting the general economy, and the total value of Class A
shares had fallen by approximately 7% as of early October 1998.
B-share trading has also been bearish due to the uncertain Asian
financial situation and new restrictions on foreign exchange.
The Shanghai B-share index closed at 55.88 on December 31, 1997,
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a drop of 25.59 points since June 30, 1997. The Shenzhen B-share
index fell 45.75 points during the same period to 98.96 points.
Both B-share indexes continued to fall during the first half of
1998. The B-share markets had dropped by approximately 40% by
mid-October 1998. The Shanghai Stock Exchange's B-share index
closed at 33.2 and 28.71 on October 30, 1998 and December 31,
1998, respectively. The Shenzhen Stock Exchange's B-share closed
at 500.88 and 436.11 on October 30, 1998 and December 31, 1998,
respectively.
China also has an active bond market, as the government
issues Treasury bonds to help fund consistent budget deficits.
During 1997, China issued 241.2 billion RMB in treasury bonds and
repaid all mature treasury bonds. The issuance of Treasury bond
issues increased in 1998 and 1999, including a special 100
billion RMB long-term issue in the second half of 1998, targeted
to pay for infrastructure construction for economic and social
development, and a 60 billion RMB special bond issue in August
1999 to finance the latest stimulus package. It is expected that
the government will undertake additional special bond issues in
2000 to finance increased expenditures. The number of short-term
bonds has also increased to ensure a lively secondary market.
China's sovereign foreign currency debt is currently rated
investment grade by both S&P and Moody's. Citing continued
progress in carrying out economic reforms, recent stability of
government issued debt, economic growth and manageable inflation,
S&P raised the rating of government issued long-term debt to BBB+
from BBB on May 14, 1997. S&P reaffirmed the BBB+ rating on July
16, 1998, but changed the outlook from stable to negative. The
outlook was revised to reflect smaller economic growth, increased
unemployment resulting from the restructuring of SOEs and
worsening economic conditions throughout Asia. In July 1999, S&P
lowered the BBB+ rating to BBB, citing a projected slowing of
economic growth. The Moody's correspondence rating is A3.
China also allows commodity futures trading although the
government is wary of the speculation futures markets can foster.
The government intends to reduce the number of commodities
exchanges from fourteen to three by early 1999 as part of its
attempt to overhaul the industry and reduce risk and volatility
in the markets. The number of different commodities traded will
also be sharply reduced, from twenty-five to twelve.
HONG KONG
Hong Kong, officially called the Hong Kong Special
Administrative Region of the People's Republic of China, is
located contiguous to China on its southeastern coast and
consists of an area on the mainland and more than 200 surrounding
islands. Hong Kong has an area of approximately 240 square miles
and a population estimated at 6.8 million people, the vast
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majority of whom are ethnic Chinese. The territory is divided
into four regions, Hong Kong Island, the New Territories (less
populated suburbs), Kowloon and the Outlying Islands. Hong Kong
Island and Kowloon lie across Victoria Harbor from each other and
are densely populated.
History and Politics
Great Britain took control of Hong Kong Island during
the First Opium War in 1841, with the hope of using the island as
a colony from which it could open up the markets of mainland
China. In 1860, Britain extended its dominion to include
Kowloon, and in 1898 Britain forced China to turn over to it the
New Territories and 235 islands under a 99 year lease, which
expired June 30, 1997. In 1984, Britain and China signed the
Joint Declaration which provided that sovereignty over all of
Hong Kong was to be turned over to China on July 1, 1997. In
this Joint Declaration, China agreed that Hong Kong would become
a Special Administrative Region of China and retain its present
capitalist structure for the next 50 years. With the transfer of
sovereignty to China, Hong Kong is now governed under a "Basic
Law", essentially a constitution which, among other things, sets
forth the economic, markets and social protections governing Hong
Kong and its people.
Government
Until July 1, 1997, Hong Kong was a colony of the
British crown, with Queen Elizabeth II as the Head of State and
an appointed governor as her representative. The Hong Kong
Legislative Council (the Legco), had 60 members, 30 of whom were
indirectly elected by functional constituencies (such as
professionals), 20 of whom were directly elected by the people
and 10 of whom were appointed by the Election Committee. The
Executive Council (the Exco), was appointed by the governor.
They advised the governor concerning legislation to be debated in
the Legco.
Hong Kong is now headed by a chief executive, Tung Chee-
hwa, who reports directly to Beijing. The chief executive is
appointed for a five year term by the central government of China
after being selected by the Election Committee, which is
nominated by corporate bodies. The policy making and executive
powers of the chief executive are checked by both the central
government of China above and the Legco below. The fourteen
member Exco advises the chief executive.
On July 1, 1997, the Legco was dissolved and replaced by
a Provisional Legislative Council (PLC), which had been appointed
by the Election Committee. A new Legco, whose members were
chosen in the same manner as the old Legco, has since replaced
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the PLC. Hong Kong voters overwhelmingly supported pro-democracy
candidates in the May 24, 1998 election for the 20 directly
elected members of the Legco. However, because two-thirds of the
Legco is elected by the Election Committee and the functional
constituencies whose election rules favor pro-business
candidates, pro-democracy candidates failed to win a majority of
the overall seats in the Legco, capturing only 20 of the 60
seats. Nevertheless, the Democratic Party, after having been the
largest party in the pre-turnover Legco but being unrepresented
in the PLC, is once again the largest party in the Legco. The
next Legco election is required by law to occur in 2000.
The Legco is presided over by a president who is elected
by the members. The current president is Rita Fann who
previously presided over the PLC.
Economy
Hong Kong's economy is highly cyclical and, compared to
the U.S. economy, quite volatile as the government does not
normally endeavor to restrain economic fluctuations. As Hong
Kong does not have a strong natural resource base, it is heavily
dependent on international services and foreign trade. Hong
Kong's economic growth began with the manufacturing of low-cost
consumer goods, particularly textiles (still Hong Kong's most
important export industry) and electronics. As Hong Kong's
standard of living increased, production costs also rose. While
other developing Asian nations, such as South Korea, moved to
high-tech industry from consumer goods, Hong Kong transformed
itself into a financial and trade center. Official statistics
show that the number of foreign companies operating in Hong Kong
has been rising steadily. It is estimated that of about 11,819
foreign companies operating in Hong Kong, approximately 924
multinational corporations doing business in Asia have regional
headquarters in Hong Kong.
Hong Kong's economy had been growing for the last few
years, the growth rate not dropping below 3.9% from 1992 through
1997. In 1998, however, the GDP contracted by 5.1%. The GDP
contracted by 3.4% in the first quarter of 1999, year-on-year,
but was expected to begin growing thereafter for an overall
contraction of 1% for 1999. This shrinking of the economy has
been attributed to substantially lower consumer spending. Retail
sales fell by 14% in volume and 16.9% in value in December 1998,
year-on-year; however, by April 1999, retail sales were down 4%
and 10% in volume and value, respectively, year-on-year.
Consumer price inflation, which averaged 5.7% during 1997,
averaged 2.6% during 1998. In May 1999, the consumer price index
fell by 3.5%, year-on-year. During the first three months of
1999, unemployment averaged 6.2%, a record high, as compared with
an average of 2.2% during the year 1997. Unemployment has since
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stabilized at 6.3%, due in part to a decrease in business
insolvencies.
With the movement of manufacturing jobs to China, Hong
Kong has shifted its manufacturing base to the re-exporting of
goods manufactured in China. As much of Hong Kong's industry is
now involved in packaging, presenting, selling and shipping goods
produced in China, the measure of Hong Kong's continued
industrial growth is tied to China. From 1990 to 1995, re-
exports rose by over 150%, compared to a 4.2% drop in exports of
goods produced in Hong Kong. The growth in re-exports slowed to
7.5% in 1996, down from 14.3% in 1995, while domestic exports
decreased 8.4% after a 2% increase in 1995. Re-exports rose by
5.0% during 1997, but fell by 6.9% during 1998. Domestic exports
fell 0.4% and 11.0% respectively during the same periods. The
fall in domestic exports is attributed to the Asian financial
crisis. Hong Kong's role as a re-exporter is expected to
decrease, while its role in transshipment is expected to
increase, as China continues to modernize its own port facilities
and direct shipping with Taiwan, which has recently been
authorized by both China and Taiwan on a limited basis, expands.
Transshipments do not show up in Hong Kong's trade statistics,
however, in 1996 it was estimated that transshipments were worth
approximately 70% of Hong Kong's re-exports. Hong Kong boasts
the world's largest container port. After several years of
double-digit growth, Hong Kong's container throughput grew by
only 8% in 1997, and is expected to grow by only 3% to 4% in
1998. Growth has been slowed by the Asian financial crisis as
well as by a diversion to Chinese ports. Nonetheless, a new
container terminal was approved to handle the expansion in
throughput that is expected once the financial crisis over. In
line with Hong Kong's strength as an exporter and re-exporter,
its foreign exchange reserves are the fifth largest in the world,
behind Japan, China, Taiwan and Germany, despite a recent drop
caused by the government's intervention in the stock market. At
the end of June 1999, foreign exchange reserves were estimated at
US$88.6 billion.
In contrast to Hong Kong's large seaport, its airport
was considered inadequate, and after two delays, a new airport
opened in July 1998. Chinese authorities pushed to keep the
opening on its delayed schedule and as a result the new airport
was unable to handle 80% of its cargo when it opened. Chaos
resulted and some businesses were forced to close due to
increased costs from very long waits and lost cargo.
Property prices in Hong Kong have dropped precipitously,
falling by approximately 50% between October 1997 and the end of
1998. In an effort to ward off a recession, all public land was
withdrawn from the market on June 22, 1998. The moratorium,
which expired on March 31, 1999, was aimed at preventing further
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drops in property prices which could threaten the stability of
the banking system. Taxes were cut at the same time and as a
result, a HK$23.3 billion deficit was recorded for the 1998-1999
fiscal year. Since the end of the moratorium, there have been
several public land auctions and sales have been above market
expectations.
S&P downgraded Hong Kong's local and foreign sovereign
debt ratings notch on August 31, 1998 to A+/Negative/A-1, and
A/Negative/A-1, respectively. Moody's, which had changed the
outlook on Hong Kong's long-term foreign currency debt and bank
deposits from stable to negative in February 1998, placed Hong
Kong's debt rating on review for a possible downgrade on
September 4, 1998. Since then, however, Hong Kong's debt rating
was removed from review by Moody's, and was not downgraded.
Banking and Finance
Hong Kong has established itself as one of the most
important financial centers in the world. Together with real
estate and insurance, the financial sector accounted for 24.9% of
Hong Kong's GDP in 1996 and 26.5% in 1997, as opposed to 15.6% in
1984. Unlike many Asian economies, Hong Kong does not actively
attract or dissuade foreign investment. Given Hong Kong's low
taxes and quality infrastructure, many businesses looking to set
up regional headquarters or a foothold to do business in China
have set up offices in Hong Kong. Hong Kong followed a policy of
"positive non-interventionism" for approximately twenty years,
but in August 1998 the government broke with this policy and
intervened in the stock market to defend the Hong Kong dollar
("HK$"). (See "Securities Markets")
While Hong Kong does not have a central bank, in 1993
the Hong Kong Monetary Authority ("HKMA") was established to
assume certain central bank type responsibilities, including
monetary management and supervision of the banking industry.
Hong Kong had more than 330 authorized banking institutions
(including 172 licensed banks, 60 restricted-license banks and
101 "deposit-taking companies") at the end of 1998. While
government regulation is not extensive, all banks are required to
be members of the Hong Kong Association of Banks which supervises
banking standards and regulates charge and deposit interest
rates. The HKMA does not, however, set interest rates. Since
1983, the Hong Kong dollar has been linked to the U.S. dollar at
a rate of HK$7.80:$1.00. The free market exchange rate of the
Hong Kong dollar against the U.S. dollar for the non-bank public
is determined by supply and demand. The exchange rate had not
deviated significantly from the fixed exchange rate until August
1998, when it reached HK$7.75:$1.00. The HKMA converted banks'
clearing account funds at the 7.75 rate but announced plans to
reduce this rate to 7.8, causing a sharp increase in interest
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rates. Normally Hong Kong interest rates closely follow U.S.
rates because of the tie between the U.S. dollar and the Hong
Kong dollar. This has effectively taken monetary policy control
away from the Hong Kong government, leaving Hong Kong somewhat
ill equipped to deal with inflationary pressures which has
contributed to periodic surges of money into the stock and
property markets. According to the Basic Law, for 50 years from
July 1, 1997 the Hong Kong dollar is to remain linked to the U.S.
dollar, the Hong Kong dollar is to be freely convertible into
other currencies, and there are to be no exchange controls or
government consents to raise debt or equity capital. The
currency link appears justifiable only if Hong Kong's citizens
keep their savings in Hong Kong dollars. Currently, 57.4% of
deposits are kept in local currency.
International bank lending in Hong Kong fell from US$463
billion during the first eight months of 1997 to US$400.9 billion
during the first eight months of 1998. New debt will be issued
by the government only when there is an inflow of funds.
Additionally, the government, in a reversal of position, now
discourages the issuance of Hong Kong dollar debt, which
historically has been issued by supranational organizations such
as the World Bank. These government moves, designed to protect
the Hong Kong dollar, have made it increasingly difficult for
banks to find funding. Problems for banks have been further
compounded by the increasing number of mortgage defaults caused
by falling real estate prices.
Securities Markets
Foreign investment into Hong Kong is restricted only in
a few regulated sectors which are under direct government
control, including the postal system, harbor and airport
facilities, public utilities and broadcasting. No government
approvals are required for foreigners to invest in other sectors.
Funds invested in Hong Kong as well as gains and dividends and
interest may likewise be freely remitted abroad. Like its other
financial markets, the Stock Exchange of Hong Kong (SEHK) is
completely open to foreign investors with minimal regulations.
The regulatory powers of Hong Kong's Securities and Futures
Commission ("SFC") are essentially limited to either a verbal
reprimand or an outright ban on trading with little power in
between. At present, the SFC does not have the power to levy
fines. The SFC has recently complained that the SEHK
inadequately enforces exchange rules. In June of 1998, the SFC
proposed an amendment to the Disclosure of Interests Ordinance
which would make purchasers disclose their holdings when they
reach 5% of the total issued shares, rather than the current 10%
threshold. Another proposed amendment would require substantial
shareholders to disclose their share purchases and sales.
Currently, only directors must make such disclosure. Meanwhile,
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the chief executive officer of the SEHK also announced in June of
1998 that it will seek greater regulatory power.
In 1986, four Hong Kong stock exchanges ceased trading
and merged into the SEHK. The SEHK expanded from 310 listed
companies with a market capitalization of HK$805 billion in 1991
to 674 listed companies with a market capitalization of HK$3,600
billion as of June 30, 1999. The Hang Seng Index, which tracks
33 blue chip companies listed on the SEHK, rose from 4,297 in
1991 to 15,196 as of June 27, 1997, the last day of the SEHK was
open prior to the transfer of sovereignty to China. After
hitting a low of 6,660 on August 13, 1998, the Hang Seng Index
rebounded to 10,049 on December 31, 1998 after the government
intervened by spending HK$118.1 billion on stock to support
prices. The Hang Seng Index closed at 12,299 on October 15,
1999. Because the government became a significant owner of many
of the companies it regulates, it set up an independent entity,
Exchange Fund Investment Ltd., to manage its shares. In October
1999 the portfolio was valued at about $27 billion, up 66% from
August 1998. On October 25, 1999 the government began selling
off its portfolio to the public via the Tracker Fund of Hong
Kong, a fund that tracks the Hang Seng Index. It is unclear how
successful the offering, which was priced at $1.3 billion, will
be and what effect it will have on Hong Kong's market.
The market has recently seen a number of listed
companies move their domicile to other tax-friendly
jurisdictions, such as Bermuda, while other companies have
obtained secondary listings on the London and Shanghai exchanges,
or have de-listed altogether, as a reflection of concern as to
the effect of the Chinese takeover. These departures have been
replaced in part by Chinese companies listing H-shares on the
SEHK. Companies listing H-shares must receive prior approval by
the Chinese government and meet minimum capital and financial
disclosure standards imposed by China and Hong Kong prior to
listing their shares. However, many Chinese companies have been
unable to meet the SEHK's strict listing requirements.
Additionally, many investors have lost confidence in H-shares
because of poor disclosure requirements in China and have turned
instead to the "Red Chips", mainland Chinese state-controlled
companies, incorporated in Hong Kong and listed on both the Hong
Kong and Chinese stock exchanges, which are believed to be better
managed than the H-share listed companies and also provide better
company disclosure. Investor confidence in Red Chips has waned
as well, due in part to the financial difficulties of several
prominent Chinese companies.
Both H-shares and Red Chips have also been affected by
the financial turmoil in Asia. While other shares have shown
signs of sustained recovery, the H-Shares and Red Chips have not
fared as well. The performance of the Hang Seng China
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Enterprises index, comprising the H-shares listed on the SEHK,
rose 22% in the second half of 1996 to close the year at 980. As
of June 27, 1997, this index stood at 1,015, but it fell to 398
by December 31, 1998. On October 1, 1999 this index closed at
543. Companies considered to have strong ties with the mainland
have performed particularly well. The Hang Seng China-Affiliated
Corporations Index, an index which tracks the "Red-Chip"
companies, including companies incorporated in Hong Kong at least
35% of whose assets are owned by Mainland China entities, has
also increased substantially. The index rose 7.28% on June 16,
1997, the first day securities on the index were measured to
close at 2,867. This index fell from 3,469 on June 27, 1997 to
914 on December 31, 1998. On October 1, 1999 this index closed
at 1,042, approximately 75% below its all-time high of 4,111
recorded in August 1997. In contrast, the Hang Seng Index, whose
constituent stocks account for 70% of the total market
capitalization of the SEHK, closed at 12,733 on October 1, 1999,
only 24% below its all-time high of 16,673 recorded in August
1997.
In 1999, the SEHK launched the Growth Enterprise Market
("GEM") a new market to provide capital to emerging companies to
facilitate their development and/or expansion. Due to the
increased investment risks of the GEM, it is open only to
sophisticated investors.
While Hong Kong has not needed to issue debt to raise
funds, as it does not run a budget deficit, the HKMA issues
Exchange Fund bills and notes in an effort to stimulate growth in
the local debt market. By the end of June 1999, the HKMA had
HK$99 billion of outstanding Exchange Fund bills and notes. An
Exchange Fund debt investment is one which evidences the deposit
of money in Hong Kong dollars with the HKMA and is a direct
obligation of the Hong Kong government. Beginning in 1996, the
HKMA began issuing Exchange Fund debt with a maturity of seven
years, up from the previous maximum of five years and in October
1996 began issuing ten year notes.
The Hong Kong Futures Exchange ("HKFE") operates both
futures and options markets on the Hang Seng index, interest rate
and foreign exchange products, as well as a limited number of
commodities and a stock futures market. On July 30, 1999 the
SEHK and the HKFE announced the successful conclusion of merger
negotiations; the proposals are subject to shareholder approval.
The SEHK also has a fairly successful stock options market.
TAIWAN
Taiwan, officially called the Republic of China, is an
island located off the southeastern coast of China with a land
mass of approximately 14,000 square miles and a population
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estimated at 21.6 million, of which 98% are ethnic Chinese.
Politically, Taiwan is subdivided into 16 counties and seven
municipalities. Half of the island is covered by forests and the
terrain is mountainous, especially inland.
History and Politics
In 1949, after the Chinese Civil War when the
Nationalist leader Chiang-Kai-Shek and the remnants of his
Nationalist forces fled to Taiwan, then a province of China, and
set up a provisional government which was declared by the
provisional government to be the official government of mainland
China. The initial focus of the Nationalist or Kuomintang Party
(KMT) was to assume control of mainland China rather than
concentrating on Taiwan. An impetus for internal development was
slow in arising. The KMT imposed marital law from 1949 until
1987, when political scandals, among other factors, weakened the
KMT government to the point where elections and the formation of
opposition parties were allowed. The trend toward democracy has
continued since 1987. Opposition parties have been allowed to
participate in the political process and currently there are 84
political parties. In the legislative elections of 1995, the
once-dominant KMT party failed to attain a majority of the vote
although it still held a majority in the legislature, and sources
predict the KMT will be unable to hold on to its majority in the
upcoming December 1998 election. On March 23, 1996 Taiwan
elected its President by direct popular vote for the first time.
China's official position regarding Taiwan is that
Taiwan is not an independent country but remains a province of
China, while Taiwan's official position remains the same as in
1949, that its government is the rightful government of Mainland
China. Most countries, including the United States, recognize
the government of China as the only official government
representing China while only 31 nations recognize the government
of Taiwan as the official government of China. China has
recently offered to resume political talks with Taiwan and has
proposed a formula for reunification called One China. According
to Beijing, One China would be neither the PROC or the ROC but a
new China built together. An increasing number of Taiwanese
people support political talks with China, with 70.5% of the
Taiwanese investors in China supporting such talks according to a
New Party survey. A trip by China's chief Cross-Strait
negotiator to Taiwan toward the end of 1999 has been planned,
following a 1998 trip to China by Taiwan's chief negotiator.
However, it is not certain whether the trip will go forward given
the confusion that has resulted from recent remarks by the
President of Taiwan that seemed to endorse the independence of
Taiwan.
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Government
Taiwan continues in the process of moving from a mostly
one party system to a representative democracy. There are three
significant political parties: the KMT, the Democratic
Progressive Party (DDP) and the New Party (NP) which favors
reunification. Taiwan's national level of government consists of
the Presidency, the National Assembly, and five Yuans. The
President and the Vice President are now directly elected by the
people and the offices are currently held by Lee Teng-hui and
Lien Chan of the KMT, respectively. The popularly elected
National Assembly, whose main role is to amend the Constitution
and also has the power to impeach the President or Vice
President, remains under the control of the KMT who hold 54.8% of
the 334 seats. The National Assembly has amended the ROC
Constitution four times in recent years which has contributed to
Taiwan's progress toward democracy. First, the terms for the
President and members of the National Assembly were shortened
from six to four years, and the Legislative Yuan and the National
Assembly switched to a system of proportional representation; a
second amendment provided for direct popular elections of the
President and Vice President; a third amendment transformed the
Control Yuan from a parliamentary body to a semi-judicial body;
and the most recent amendment streamlined the provincial
government. In addition to the Presidency and National Assembly,
there are five governing branches called Yuans: the Executive
Yuan; the Legislative Yuan; the Judicial Yuan; the Examination
Yuan and the Control Yuan. Of the five Yuans, only the 164-
member Legislative Yuan, Taiwan's highest legislative body, is
popularly elected. The next elections (Presidential and National
Assembly) are scheduled to occur in March 2000.
Economy
Taiwan enjoyed substantial economic growth in the 1960s
and 1970s when cheap labor and government tax breaks resulted in
large increases in Taiwanese consumer goods exports. Similar to
the experience of certain other emerging Asian economies in the
1980s and 1990s, however, prosperity brought higher labor costs
and a loss of competitiveness in the low-end consumer goods
market. As a result of these increased costs, Taiwan's
manufacturing base has moved towards the production of high-end
consumer goods, particularly into the chemical and computer
sectors. Taiwan's GDP has risen at a steady rate over recent
years, as its GDP grew a reported 6.8% in 1992, 6.3% in 1993,
6.5% in 1994, 6.0% in 1995, 5.7% in 1996 and 6.8% in 1997.
During 1998, the growth rate of Taiwan's GDP slowed to 4.8% due
to a fall-off in exports, investment and government consumption
caused by the Asian financial crisis. The government has
forecast a growth rate of 5.5% during 1999. Taiwan's inflation
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rate dropped from 3.1% in 1996, to 0.9% in 1997, the lowest in a
decade. The consumer price index increased by 1.7% during 1998.
For the first seven months of 1999, the consumer price index rose
0.1% year-on-year; the government forecasts that the consumer
price index will increase by less than 1% during 1999.
In 1998, manufacturing continued as Taiwan's most
important sector, accounting for 27.0% of its GDP, with an
emphasis on electronics and computers. The financial, insurance
and real estate sectors, which continue to grow, represented
20.9% of Taiwan's GDP. While the manufacturing sector continues
to be most important, Taiwan has been reducing its economic
reliance on this sector, with the services sector, including the
financial, insurance and real estate sectors, at present
accounting for over 60% of Taiwan's GDP.
Taiwan reached a record foreign trade volume of
US$236.51 billion in 1997, up 7.26% from 1996, and making Taiwan
the fourteenth largest trading economy in the world. In 1998,
trade volume decreased 8.9% to US$215.38 billion. In the past,
Taiwan has consistently maintained a trade surplus, reaching a
nine year high of US$14.7 billion in 1996. Due to the Asian
financial crisis, the Asian demand for Taiwan's exports has
fallen. Approximately 40% to 50% of Taiwan's exports are to
other Asian countries. As a result, the trade surplus fell to
US$14.3 billion for 1997, and US$10.6 billion for 1998. During
the first half of 1999, the trade surplus was US$6.6 billion,
five times the trade surplus during the first half of 1998.
Taiwan's foreign exchange reserves have remained relatively
steady and totaled US$90.3 billion on December 31, 1998. It has
been predicted that Hong Kong will replace the U.S. as Taiwan's
number one export market within the next few years, in part
because Hong Kong is used as a transshipment port for goods
destined for China. Taiwan's Ministry of Finance estimates that
60% of all exports to Hong Kong end up in China. Taiwan and
China have come to an agreement allowing Taiwan continued access
to China's markets through Hong Kong.
Generous tax breaks for businesses, nearly universal
health coverage and heavy government investment in infrastructure
have resulted in a large government budget deficits in recent
years. Debt expenditures for the 1998-99 fiscal year represented
16.2% of government expenditures. In 1998, the deficit rose to
6.8% of GDP, although it is expected to fall to 6.3% of GDP in
1999 and 5.9% of GDP in 2000.
Economic Relations with China
Taiwan and China, while separated geographically and
politically, are coming closer together economically despite
Taiwanese government warnings that Taiwan is becoming over
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dependent on China, while at the same time losing its
manufacturing base to the mainland. Inexpensive labor is the
main draw for Taiwanese companies shifting their manufacturing to
China. Taiwan is the second largest source of foreign investment
in China. In the first quarter of 1999, US$1.5 billion had been
approved by the Taiwanese government, down 6% from the first
quarter of 1998. This is a misleading figure, as most of
Taiwanese investment in China avoids the approval process. The
Taiwanese government attempts to restrict investments in Chinaby
capping the value of a single investment in China at $US50
million; in October 1998 the Premier stated that this cap will
stay in place indefinitely. Taiwan has also banned investments
in the property sector as well as certain infrastructure projects
and petrochemical related industries. China is now a
significantly larger export market for Taiwan than is the
Southeast Asian export market. During the first five months of
1999, Taiwan's trade surplus with China grew by 13.5%, compared
to the first five months of 1998, to US$6.5 billion, with exports
totaling US$8.2 billion and imports totaling US$1.7 billion.
The Taiwanese government has continued to encourage
Taiwanese investors to invest in countries other than China. As
a result, Taiwan has become the largest source of direct
investment in Vietnam, and one of the largest sources in
Indonesia and Malaysia. But the governments policy has only been
successful in terms of diversifying the countries in which
Taiwanese firms invest. Investment in China continues and
Taiwan currently accounts for an estimated 8.3% of all foreign
investment in China, second only to Hong Kong, although this
percentage of investment has declined from recent years.
Banking and Finance
Unlike Hong Kong, the Taiwanese financial markets,
including both the banking and securities markets, have
historically been highly regulated by the Taiwanese government.
Monetary policy in Taiwan is controlled by the Central Bank of
China ("CBC"). Beginning in 1989, Taiwanese financial markets
began to be liberalized. Initially, interest rate restrictions
were lifted followed by removal of certain restrictions on bank
branches which has allowed foreign banks to open more than one
branch in Taiwan. However, significant restrictions still limit
foreign capital investments, and reporting rules for non-delivery
forward currency were recently tightened in an effort to reduce
speculation. Restrictions are gradually being lifted and the CBC
has repeatedly stated that all capital controls will be lifted by
the year 2000.
Taiwan's currency is the New Taiwan dollar ("NT$"). The
currency was allowed to float on October 17, 1997. Taiwan's
currency depreciated by 17% in 1997 and continues to drop, but
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this drop was minor when compared to that of other Asian
currencies. The exchange rate averaged NT$28.70:US$1 during
1997, and NT$33.46:US$1 during 1998. On October 15, 1999 the
exchange rate stood at NT$31.74:US$1. Foreign investment
increased dramatically during 1997, hitting a record US$4.3
billion, up 73% from 1996; in 1998, foreign investment amounted
to US$3.3 billion, down 23% from 1997. Many major investment
projects have been launched recently, including the privatization
of the telecommunications network, transportation vehicles and
constructions, the opening of offshore shipping centers, and the
construction of a high-speed rail link between Taiwan's two
largest cities, Taipei and Kaosiung.
In an effort to ensure adequate liquidity in the banking
system, the CBC cut bank reserve ratio requirements by 25 basis
points in August 1998. The requirements were cut again, by 20 to
50 basis points depending on the type of deposit, in September
1998, bringing the average reserve requirement down to 7.7%, and
in the first quarter of 1999, reserve requirements were cut to an
average 6.4%. These cuts have not caused any downward pressure
on the New Taiwan dollar thus far. Additionally, the Ministry of
Finance reduced the banking tax from 5% to 2% and eliminated
several transaction taxes. The increased liquidity has helped
banks to reduce their bad loan ratios, but they still remain
high. The Ministry of Finance further required that all banks
reduce their bad loan ratios by September 1999 or they will be
forced to merge or shut down.
Securities Markets
The Taiwan Stock Exchange ("TSE"), Taiwan's primary
securities exchange, is the sixth largest exchange in the world
in terms of average trading volume and the fourteenth in terms of
overall market capitalization. Unlike exchanges in the U.S., the
TSE is used far more for speculation with excess liquidity than
as a means to raise funds. Historically, the market has been
extremely volatile. Beginning in 1989, the market rose from
approximately 5,000, to just below 12,500 by February 1990 and
thereafter fell to 2,500 by September 1990. Since this collapse,
the market has been less erratic. The TSE Capitalization
Weighted Stock Index TAIEX, the most widely quoted TSE index,
posted an increase of 18% for all of 1997. The TSE opened the
year at 6,820.35, the low for the year, reached a high of
10,116.84 in August of 1997, and closed for the year at 8,187.27.
In 1998, the TAIEX posted a 21.6% loss from 1997, closing at
6,418.43 at the end of 1998. The loss is attributed to
government efforts to boost the stock market. The TAIEX is based
on 397 components stocks from the TSEs 437 listed companies, and
covers all stocks accept for preferred stocks, full-delivery
stocks, and stocks which have been listed for less than one
month. The ROC Over-the-Counter Securities Exchange, which is
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set up similarly to the NASDAQ system in the U.S., has grown
rapidly since its inception in 1994. At the end of September
1999 there were 233 companies listed on the over-the-counter
market, a significant number of which are technology
companies.
While Taiwan is in the process of opening up its
financial markets to foreign investors, significant restrictions
still exist, including foreign investment restrictions on the
TSE. Although recently raised from 10%, there is still a limit
on total foreign investment in an exchange listed security of 50%
of the market capitalization of the security. Along with the 50%
limitation, no single CBC and Securities and Futures Commission
qualified foreign institutional investor ("QFII"), such as
Alliance acting on behalf of the Fund and Alliance's other
clients, can acquire more than 15% of a listed security's market
capitalization. Additionally, there is a 50% cap on aggregate
ownership of shares, which was recently raised from 30%. The
liberalization of foreign investment restrictions sparked a sharp
increase in foreign portfolio investment in the first quarter of
1999 and contributed to significant gains on the TSE. Foreign
naturals are currently subject to a US$5 million each way annual
inward and outward remittance quota and a per person investment
cap of US$50 million, while non QFII foreign corporations are
subject to a US$20 million remittance quota on an investment cap
of US$50 million. Taiwan further restricts purchases by foreign
investors of securities of certain companies to prescribed limits
or forbids foreign investment completely in certain industries.
Because of the above limitations, and in part, because
of burdensome procedures that must be followed prior to investing
in Taiwanese securities, foreign investment has never reached the
maximum limits. The procedures which have dissuaded foreign
investment include requirements that a QFII receive approvals
from the CBC and Securities and Futures Commission prior to
purchasing listed and OTC securities. Further procedures include
the need for a QFII to obtain, on a case by case basis,
government approval to purchase non-listed and non-OTC
securities, and the restriction that only a pre-approved maximum
amount for all of a QFII's accounts may be invested in TSE listed
securities. The maximum at present is US$600 million. The TSE
closely monitors trading by QFIIs. If the full pre-approved
amount is not remitted in and converted into NT dollars within
one year of initial approval, the approval to the extent of the
unremitted amount is revoked. and a new application for permitted
investment, not exceeding the US$600 million limit, must be
submitted. The approval and reapproval increases can take
several weeks, resulting in the possible loss of investment
opportunities by the Fund during such times. The quotas also
involve somewhat onerous reporting requirements. The Fund will
endeavor to have an appropriate amount approved for investment on
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the TSE at all times, but given the Fund's status as an open-end
investment company and changing market conditions, there may be
times when the requisite approval has not yet been received. The
Taiwanese government is aware that these bureaucratic
restrictions are limiting foreign investment, but there is no
indication of any near-term change.
The Taiwanese bond market has been expanding rapidly in
recent years, increasing from an estimated NT$41 billion of
corporate debt instruments issued in 1995 to an estimated NT$108
billion in 1996. In 1998, the Taiwanese government issued bonds
totaling an estimated NT$146 billion. The government's first 20-
year bond issue, which should total at least NT$120 billion, is
expected during the 1998-99 fiscal year. On May 28, 1997, the
Taiwan Rating Corporation, which is half owned by S&P, began to
rate debt issued by Taiwanese corporations. It is expected that
foreign investors will become increasingly active in the local
bond market as rating information becomes available for Taiwanese
firms issuing corporate debt. This new local rating agency does
not rate government-issued debt. S&P and Moody's rate Taiwanese
sovereign government debt at AA+ and Aa3, respectively.
Margin trading in common stocks and beneficiary
certificates of companies that do not have a concentrated
ownership or overly volatile activity and have been listed for
more than six months is permitted for individuals who meet
certain qualifications. Maintenance ratios are regulated by the
CBC and the Competent Authority and margin account customers must
buy and sell securities based on the margin requirements. Both
securities bought on margin and the value received for short
sales are held as collateral which is marked to market everyday.
All accounts must remain above the maintenance ratio and margin
calls are issued for accounts which dip below the ratio.
Taiwan's futures exchange, the Taiwan Futures Exchange
(TAIFEX), originally named the Taiwan International Mercantile
Exchange (TAIMEX), was established on September 9, 1997, and
launched its first product on July 21, 1998. TAIFEX, which
trades financial derivatives and probably will not trade
commodities futures for several years, is currently closed to
foreign investors.
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____________________________________________________________
APPENDIX B:
CERTAIN INVESTMENT PRACTICES
____________________________________________________________
The information in this Appendix concerning investment
practices in which the Fund is authorized to engage may not be
currently permitted under applicable laws or regulations or to
engage in various of these practices and they may otherwise be
unavailable in certain countries. The Fund intends to engage in
these practices to the extent such practices become available and
permissible in the future.
Options
The Fund may write covered put and call options and
purchase put and call options on securities of the types in which
it is permitted to invest that are traded on U.S. and foreign
securities exchanges and over-the-counter, including options on
market indices. The Fund will only write "covered" put and call
options unless such options are written for cross-hedging
purposes. There are no specific limitations on the Fund's
writing and purchasing of options.
The Fund may purchase put options to hedge against a
decline in the value of its portfolio. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs. The Fund may
purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future.
The premium paid for the call option plus any transaction costs
will reduce the benefit, if any, realized by the Fund upon
exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to
the Fund.
A put option gives the purchaser of such option, upon
payment of a premium, the right to deliver a specified amount of
a security to the writer of the option on or before a fixed date
at a predetermined price. A call option gives the purchaser of
the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a
fixed date at a predetermined price. A call option written by
the Fund is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or
for additional cash consideration held in a segregated account by
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its custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash and
liquid high-grade debt securities in a segregated account with
its custodian. A put option written by the Fund is "covered" if
the Fund maintains cash or high-grade liquid assets with a value
equal to the exercise price in a segregated account with its
custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price
of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the purchaser of an option
will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and
demand and interest rates.
A call option is for cross-hedging purposes if the Fund
does not own the underlying security but seeks to provide a hedge
against a decline in value in another security which the Fund
owns or has the right to acquire. In such circumstances, the
Fund collateralizes its obligation under the option by
maintaining in a segregated account with the Fund's custodian
cash or liquid securities in an amount not less than the market
value of the underlying security, marked to market daily. The
Fund would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option, while at
the same time achieving the desired hedge.
In purchasing a call option, the Fund 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 Fund 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 the Fund were
permitted to expire without being sold or exercised, its premium
would be lost by the Fund.
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If a put option written by the Fund were exercised, the
Fund would be obligated to purchase the underlying security at
the exercise price. If a call option written by the Fund were
exercised, the Fund would be obligated to sell the underlying
security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value
of the underlying security caused by rising interest rates or
other factors. If this occurred, the option could be exercised
and the underlying security would then be sold by the option
holder to the Fund at a higher price than its current market
value. The risk involved in writing a call option is that there
could be an increase in the market value of the underlying
security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying
security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering
into a closing transaction prior to the option expiration dates
if a liquid market is available. The Fund retains the premium
received from writing a put or call option whether or not the
option is exercised.
The Fund may purchase or write options on securities of
the types in which it is permitted to invest in privately
negotiated (i.e., over-the-counter) transactions. The Fund 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
by the Fund in negotiated transactions are illiquid and it may
not be possible for the Fund to effect a closing transaction at a
time when the Adviser believes it would be advantageous to do so.
An option on a securities index is similar to an option
on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercises 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. There are no specific limitations on the Fund's
purchasing and selling of options on securities indices.
The writer of an option may have no control over when
the underlying securities must be sold, in the case of a call
option, or purchased, in the case of a put option, since with
regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount, of course, may, in the
case of a covered call option, be offset by a decline in the
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market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option
is exercised, the writer must fulfill the obligation to purchase
the underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of a listed option that wishes to terminate
its obligation may effect a "closing purchase transaction." This
is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of a listed option may
liquidate its position by effecting a "closing sale transaction."
This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be
effected in any particular situation.
Effecting a closing transaction in the case of a written
call option will permit the Fund to write another call option on
the underlying security with either a different exercise price or
expiration date or both, or in the case of a written put option
will permit the Fund to write another put option to the extent
that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing
transaction if the price of the transaction is less than the
premium received from writing the option or is more than the
premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases
in the market price of a call option will generally reflect
increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
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effect closing transactions in particular options with the result
that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following:
(i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national
securities exchange ("National Exchange") on opening transactions
or closing transactions or both, (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances may interrupt normal
operations on a National Exchange, (v) the facilities of a
National Exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume, or
(vi) one or more National Exchanges could, for economic or other
reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
National Exchange (or in that class or series of options) would
cease to exist, although outstanding options on that National
Exchange that had been issued by the Options Clearing Corporation
as a result of trades on that National Exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-
write transactions; that is, the Fund may purchase a security and
then write a call option against that security. The exercise
price of the call the Fund determines to write will depend upon
the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option
is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during
the option period. Buy-and-write transactions using at-the-money
call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-
of-the-money call options may be used when it is expected that
the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be
the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's
purchase price of the security and the exercise price. If the
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options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Fund's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price
and the Fund's return will be the premium received from the put
option minus the amount by which the market price of the security
is below the exercise price. Out-of-the-money, at-the-money, and
in-the-money put options may be used by the Fund in the same
market environments that call options are used in equivalent buy-
and-write transactions.
Futures Contracts
The Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on financial indices including any
index of U.S. Government Securities, securities issued by foreign
government entities or common stocks. U.S. futures contracts
have been designed by exchanges which have been designated
"contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing
members of the exchange.
At the same time a futures contract is purchased or
sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1 1/2% to 5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different price or
interest rate from that specified in the contract. In some (but
not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
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Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
Stock Index Futures
The Fund may purchase and sell stock index futures as a
hedge against movements in the equity markets. There are several
risks in connection with the use of stock index futures by the
Fund as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the stock
index futures and movements in the price of the securities which
are the subject of the hedge. The price of the stock index
futures may move more than or less than the price of the
securities being hedged. If the price of the stock index futures
moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had
not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage will be
partially offset by the loss on the index future. If the price
of the future moves more than the price of the stock, the Fund
will experience either a loss or gain on the future which will
not be completely offset by movements in the price of the
securities which are subject to the hedge. To compensate for the
imperfect correlation of movements in the price of securities
being hedged and movements in the price of the stock index
futures, the Fund may buy or sell stock index futures contracts
in a greater dollar amount than the dollar amount of securities
being hedged if the volatility over a particular time period of
the prices of such securities has been greater than the
volatility over such time period of the index, or if otherwise
deemed to be appropriate by the Adviser. Conversely, the Fund
may buy or sell fewer stock index futures contracts if the
volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such
time period of the stock index, or it is otherwise deemed to be
appropriate by the Adviser. It is also possible that, when the
Fund has sold futures to hedge its portfolio against a decline in
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the market, the market may advance and the value of securities
held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value
in its portfolio securities. However, over time the value of a
diversified portfolio should tend to move in the same direction
as the market indices upon which the futures are based, although
there may be deviations arising from differences between the
composition of the Fund and the stocks comprising the index.
Where futures are purchased to hedge against a possible
increase in the price of stock before the Fund is able to invest
its cash (or cash equivalents) in stocks (or options) in an
orderly fashion, it is possible that the market may decline
instead. If the Fund then concludes not to invest in stock or
options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss
on the futures contract that is not offset by a reduction in the
price of securities purchased.
In addition to the possibility that there may be an
imperfect correlation, or no correlation at all, between
movements in the stock index futures and the portion of the
portfolio being hedged, the price of stock index futures may not
correlate perfectly with movement in the stock index due to
certain market distortions. Rather than meeting additional
margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the
normal relationship between the index and futures markets.
Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect
correlation between the movements in the stock index and
movements in the price of stock index futures, a correct forecast
of general market trends by the investment adviser may still not
result in a successful hedging transaction over a short time
frame.
Positions in stock index futures may be closed out only
on an exchange or board of trade which provides a secondary
market for such futures. Although the Fund intends to purchase
or sell futures only on exchanges or boards of trade where there
appear to be active secondary markets, there is no assurance that
a liquid secondary market on any exchange or board of trade will
exist for any particular contract or at any particular time. In
such event, it may not be possible to close a futures investment
position, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have
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been used to hedge portfolio securities, such securities will not
be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if
any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee
that the price of the securities will in fact correlate with the
price movements in the futures contract and thus provide an
offset on a futures contract.
Options on Futures Contracts
The Fund intends to purchase and write options on
futures contracts for hedging purposes. The Fund is not a
commodity pool and all transactions in futures contracts and
options on futures contracts engaged in by the Fund must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when the Fund is not fully invested it may
purchase a call option on a futures contract to hedge against
adverse market conditions.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security or foreign currency which is deliverable upon exercise
of the futures contract or securities comprising an index. If
the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline
that may have occurred in the Fund's portfolio holdings. The
writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or
foreign currency which is deliverable upon exercise of the
futures contract or securities comprising an index. If the
futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any
increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree
of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent
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be reduced or increased by changes in the value of portfolio
securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Fund may
purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an
option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
Options on Foreign Currencies
The Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities,
even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the
Fund will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have
resulted. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the
Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to
be written or purchased by the Fund are traded on U.S. and
foreign exchanges or over-the-counter.
Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, the
Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from
purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would
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require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution
in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will
expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If
this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at
a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund
also may be required to forego all or a portion of the benefits
which might otherwise have been obtained from favorable movements
in exchange rates.
The Fund intends to write covered call options on
foreign currencies. A call option written on a foreign currency
by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a
segregated account by its Custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option
is also covered if the Fund has a call on the same foreign
currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government Securities and
other high-grade liquid debt securities in a segregated account
with its Custodian.
The Fund also intends to write call options on foreign
currencies for cross-hedging purposes. An option that is cross-
hedged is not covered, but is designed to provide a hedge against
a decline in the U.S. dollar value of a security which the Fund
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owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the
exchange rate. In such circumstances, the Fund collateralizes
the option by maintaining in a segregated account with the Fund's
Custodian, cash or other high-grade liquid debt securities in an
amount not less than the value of the underlying foreign currency
in U.S. dollars marked to market daily.
Additional Risks of Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies
Unlike transactions entered into by the Fund in futures
contracts, options on foreign currencies and forward contracts
are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To
the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options
on securities may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. Although
the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount
could be lost. Moreover, the option writer and a trader of
forward contracts could lose amounts substantially in excess of
their initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation ("OCC"), thereby reducing the risk
of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
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of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option exercise, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies
may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in
or the prices of foreign currencies or securities. The value of
such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during nonbusiness
hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading
volume.
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_________________________________________________________________
APPENDIX C:
DEBT SECURITIES RATINGS
_________________________________________________________________
The ratings of securities by S&P, Moody's, Duff & Phelps
and Fitch are a generally accepted barometer of credit risk.
They are, however, subject to certain limitations from an
investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between
the time a rating is assigned and the time it is updated. In
addition, there may be varying degrees of difference in credit
risk of securities within each rating category.
Securities rated Aaa by Moody's and AAA by S&P, Duff &
Phelps and Fitch are considered to be of the highest quality;
capacity to pay interest and repay principal is extremely strong.
Securities rated Aa by Moody's and AA by S&P, Duff & Phelps and
Fitch are considered to be high quality; capacity to repay
principal is considered very strong, although elements may exist
that make risks appear somewhat larger than exist with securities
rated Aaa or AAA. Securities rated A are considered by Moody's
to possess adequate factors giving security to principal and
interest. S&P, Duff & Phelps and Fitch consider such securities
to have a strong capacity to pay interest and repay principal.
Such securities are more susceptible to adverse changes in
economic conditions and circumstances than higher-rated
securities.
Securities rated Baa by Moody's and BBB by S&P, Duff &
Phelps and Fitch are considered to have an adequate capacity to
pay interest and repay principal. Such securities are considered
to have speculative characteristics and share some of the same
characteristics as lower-rated securities. Sustained periods of
deteriorating economic conditions or of rising interest rates are
more likely to lead to a weakening in the issuer's capacity to
pay interest and repay principal than in the case of higher-rated
securities. Securities rated Ba by Moody's and BB by S&P, Duff &
Phelps and Fitch are considered to have speculative
characteristics with respect to capacity to pay interest and
repay principal over time; their future cannot be considered as
well-assured. Securities rated B by Moody's, S&P, Duff & Phelps
and Fitch are considered to have highly speculative
characteristics with respect to capacity to pay interest and
repay principal. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
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Securities rated Caa by Moody's and CCC by S&P, Duff &
Phelps and Fitch are of poor standing and there is a present
danger with respect to payment of principal or interest.
Securities rated Ca by Moody's and CC by S&P and Fitch are
minimally protected, and default in payment of principal or
interest is probable. Securities rated C by Moody's, S&P and
Fitch are in imminent default in payment of principal or interest
and have extremely poor prospects of ever attaining any real
investment standing. Securities rated D by S&P and Fitch are in
default. The issuer of securities rated DD by Duff & Phelps is
under and order of liquidation.
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____________________________________________________________
APPENDIX D:
CERTAIN EMPLOYEE BENEFIT PLANS
____________________________________________________________
Employee benefit plans described below which are
intended to be tax-qualified under section 401(a) of the Internal
Revenue Code of 1986, as amended ("Tax Qualified Plans"), for
which Merrill Lynch, Pierce, Fenner & Smith Incorporated or an
affiliate thereof ("Merrill Lynch") is recordkeeper (or with
respect to which recordkeeping services are provided pursuant to
certain arrangements as described in paragraph (ii) below)
("Merrill Lynch Plans") are subject to specific requirements as
to the Fund shares which they may purchase. Notwithstanding
anything to the contrary contained elsewhere in this Statement of
Additional Information, the following Merrill Lynch Plans are not
eligible to purchase Class A shares and are eligible to purchase
Class B shares of the Fund at net asset value without being
subject to a contingent deferred sales charge:
(i) Plans for which Merrill Lynch is the recordkeeper on a
daily valuation basis, if when the plan is established
as an active plan on Merrill Lynch's recordkeeping
system:
(a) the plan is one which is not already
investing in shares of mutual funds or
interests in other commingled investment
vehicles of which Merrill Lynch Asset
Management, L.P. is investment adviser or
manager ("MLAM Funds"), and either (A) the
aggregate assets of the plan are less than
$3 million or (B) the total of the sum of
(x) the employees eligible to participate in
the plan and (y) those persons, not
including any such employees, for whom a
plan account having a balance therein is
maintained, is less than 500, each of (A)
and (B) to be determined by Merrill Lynch in
the normal course prior to the date the plan
is established as an active plan on Merrill
Lynch's recordkeeping system (an "Active
Plan"); or
(b) the plan is one which is already investing
in shares of or interests in MLAM Funds and
the assets of the plan have an aggregate
value of less than $5 million, as determined
D-1
<PAGE>
by Merrill Lynch as of the date the plan
becomes an Active Plan.
For purposes of applying (a) and (b), there
are to be aggregated all assets of any Tax-
Qualified Plan maintained by the sponsor of
the Merrill Lynch Plan (or any of the
sponsor's affiliates) (determined to be such
by Merrill Lynch) which are being invested
in shares of or interests in MLAM Funds,
Alliance Mutual Funds or other mutual funds
made available pursuant to an agreement
between Merrill Lynch and the principal
underwriter thereof (or one of its
affiliates) and which are being held in a
Merrill Lynch account.
(ii) Plans for which the recordkeeper is not Merrill Lynch,
but which are recordkept on a daily valuation basis by
a recordkeeper with which Merrill Lynch has a
subcontracting or other alliance arrangement for the
performance of recordkeeping services, if the plan is
determined by Merrill Lynch to be so eligible and the
assets of the plan are less than $3 million.
Class B shares of the Fund held by any of the above-
described Merrill Lynch Plans are to be replaced at Merrill
Lynch's direction through conversion, exchange or otherwise by
Class A shares of the Fund on the earlier of the date that the
value of the plan's aggregate assets first equals or exceeds $5
million or the date on which any Class B share of the Fund held
by the plan would convert to a Class A share of the Fund as
described under "Purchase of Shares" and "Redemption and
Repurchase of Shares."
Any Tax Qualified Plan, including any Merrill Lynch
Plan, which does not purchase Class B shares of the Fund without
being subject to a contingent deferred sales charge under the
above criteria is eligible to purchase Class B shares subject to
a contingent deferred sales charge as well as other classes of
shares of the Fund as set forth above under "Purchase of Shares"
and "Redemption and Repurchase of Shares."
D-2
00250235.AR6
