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This is filed pursuant to Rule 497(c).
File Nos. 333-41375 and 811-08527.
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(LOGO) ALLIANCE INTERNATIONAL PREMIER
GROWTH 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
February 1, 2000 (as amended as of November 1, 2000)
____________________________________________________________
This Statement of Additional Information is not a prospectus
but supplements and should be read in conjunction with the
current Prospectus, dated November 1, 2000, for Alliance
International Premier Growth Fund, Inc. (the "Fund") that offers
the Class A, Class B and Class C shares of the Fund and the
current Prospectus, dated November 1, 2000, 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 the 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................................ 2
Management of the Fund................................. 4
Expenses of the Fund................................... 11
Purchase of Shares..................................... 15
Redemption and Repurchase of Shares.................... 34
Shareholder Services................................... 37
Net Asset Value........................................ 44
Dividends, Distributions and Taxes..................... 46
Portfolio Transactions................................. 54
General Information.................................... 56
Financial Statements and Report of Independent
Accountants ......................................... 61
Appendix A: Certain Investment Practices.............. A-1
Appendix B: Additional Information About Japan........ B-1
Appendix C: Additional Information About the
United Kingdom........................... 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
____________________________________________________________
Investment Policies and Practices
Alliance International Premier Growth Fund, Inc. (the
"Fund") is a diversified, open-end investment company. With
respect to currency swaps (which the Fund may only enter into for
hedging purposes), 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.
For additional information on the use, risks and costs
of options, futures contracts, stock index futures, options on
futures contracts and options on foreign currencies, see
Appendix A.
The Fund may invest up to 35% of its assets in each of
Japan and the United Kingdom. For additional information
concerning Japan and the United Kingdom, see Appendices B and C,
respectively.
Short Sales. A short sale is effected by selling a
security that the Fund does not own, or if the Fund does own such
security, it is not to be delivered upon consummation of the
sale. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain securities
identical to those sold short without payment. Pursuant to the
Taxpayer Relief Act of 1997, if the Fund has unrealized gain with
respect to a security and enters into a short sale with respect
to such security, the Fund generally will be deemed to have sold
the appreciated security and thus will recognize gain for tax
purposes. The Fund has adopted a non-fundamental investment
policy that it will not make a short sale if as a result more
than 5% of its net assets would be held as collateral for short
sales. If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the
price declines, the Fund will realize a gain.
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
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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.
Certain Fundamental Investment Policies. The following
restrictions, which supplement those set forth in the 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, except that this restriction does not apply to
U.S. Government securities;
(ii) borrow money or issue senior securities, except
that the Fund may borrow (a) from a bank if immediately after
such borrowing there is asset coverage of at least 300% as
defined in the Investment Company Act of 1940, as amended (the
"1940 Act") and (b) for temporary purposes in an amount not
exceeding 5% of the value of the total assets of the Fund;
(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
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;
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(vii) issue any senior security within the meaning of
the 1940 Act;
(viii) make short sales of securities or maintain a
short position, 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;* or
(ix) (a) purchase or sell real estate except that it may
purchase and sell securities of companies that deal in real
estate or interests therein; (b) 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); (c) purchase securities on
margin, except for such short-term credits as may be necessary
for the clearance of transactions; and (d) 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 of 1933, as amended (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 Company, their ages and their principal
occupations during the past five years are set forth below. Each
of the Directors and officers are trustees, directors and
officers of other registered investment companies sponsored by
Alliance Capital Management L.P. (the "Adviser" or "Alliance").
Unless otherwise specified, the address of each such person is
1345 Avenue of the Americas, New York, New York 10105.
____________________
* The Fund has adopted a non-fundamental investment policy
that it will not make a short sale of securities if as a
result more than 5% of its net assets would be held as
collateral for short sales.
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Directors
JOHN D. CARIFA,** 55, 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 1995.
RUTH BLOCK, 69, was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable; Chairman and
Chief Executive Officer of Evlico; a Director of Avon, Tandem
Financial Group and Donaldson, Lufkin & Jenrette Securities
Corporation. She is currently a Director of Ecolab Incorporated
(specialty chemicals) and BP Amoco Corporation (oil and gas).
Her address is P.O. Box 4623, Stamford, Connecticut 06903.
DAVID H. DIEVLER, 71, is an independent consultant.
Until December 1994 he was Senior Vice President of ACMC
responsible for mutual fund administration. Prior to joining
ACMC in 1984 he was Chief Financial Officer of Eberstadt Asset
Management since 1968. Prior to that he was a Senior Manager at
Price Waterhouse & Co. Member of American Institute of Certified
Public Accountants since 1953. His address is P.O. Box 167,
Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 58, Consultant. Formerly a Senior
Advisor from June 1999 - June 2000 and President from December
1989 - May 1999 of Historic Hudson Valley (historic
preservation). Previously, he was Director of the National
Academy of Design. During 1988-92, he was a Director and
Chairman of the Audit Committee of ACMC. His address is P.O. Box
12, Annandale, New York 12504.
WILLIAM H. FOULK, JR., 68, 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 1995. He was
formerly Deputy Comptroller of the State of New York and, prior
thereto, Chief Investment Officer of the New York Bank for
Savings. His address is Room 100, 2 Greenwich Plaza, Greenwich,
Connecticut 06830.
DR. JAMES M. HESTER, 76, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1995. He was formerly President of New York University
and the New York Botanical Garden, Rector of the United Nations
University and Vice Chairman of the Board of the Federal Reserve
____________________
** An "interested person" of the Fund as defined in the 1940
Act.
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Bank of New York. His address is 25 Cleveland Lane, Princeton,
New Jersey 08540.
CLIFFORD L. MICHEL, 61, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1995. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 66, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe LLP since January 1995.
He was formerly a senior partner and a member of the Executive
Committee of that firm. He was also a member of the Municipal
Securities Rulemaking Board and Trustee of the Museum of the City
of New York. His address is 98 Hell's Peak Road, Weston, Vermont
05161.
Officers
JOHN D. CARIFA, President, see biography above.
BRUCE W. CALVERT, Executive Vice President, 53, is the
Vice Chairman and Chief Executive Officer and a Director of ACMC,
with which he has been associated since prior to 1995.
ALFRED HARRISON, Executive Vice President, 62, is Vice
Chairman and a Director of ACMC, with which he has been
associated since prior to 1995.
KATHLEEN A. CORBET, Senior Vice President, 40, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1995.
EDWARD BAKER, Vice President, 49, is a Senior Vice
President and Chief Investment Officer - Emerging Markets of
ACMC, with which he has been associated since prior to May 1995.
THOMAS J. BARDONG, Vice President, 55, is a Senior Vice
President of ACMC, with which he has been associated since prior
to 1995.
RUSSELL BRODY, Vice President, 33, is a Vice President
of ACMC and Head Trader of the London desk of Alliance Capital
Limited ("ACL"), with which he has been associated since April
1997. Prior thereto, he was the head of European Equity Dealing
of Lombard Odier et Cie, London office, since prior to 1995.
THOMAS KAMP, Vice President, 39, is a Vice President of
ACMC, with which he has been associated since prior to 1995.
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DANIEL NORDBY, Vice President, 56, is a Senior Vice
President of ACMC, with which he has been associated since 1996.
Prior thereto he was in private practice as a consulting
psychologist since prior to 1995.
MARK D. GERSTEN, Treasurer and Chief Financial Officer,
49, is a Senior Vice President of Alliance Fund Services, Inc.
("AFS"), with which he has been associated since prior to 1995.
EDMUND P. BERGAN, JR., Secretary, 50, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and AFS, with which he has been associated since
prior to 1995.
VINCENT S. NOTO, Controller, 35, is a Vice President of
AFS, with which he has been associated since prior to 1995.
ANDREW L. GANGOLF, Assistant Secretary, 46, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since prior to 1995.
DOMENICK PUGLIESE, Assistant Secretary, 39, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since May 1995.
The Fund does not pay any fees to, or reimburse
expenses of, its Directors who are considered "interested
persons" of the Fund. The aggregate compensation paid by the
Fund to each of the Directors during the Fund's fiscal period
ending November 30, 1999, and the aggregate compensation paid to
each of the Directors during calendar year 1999 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 pension or retirement benefits to any
of its directors or trustees.
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Total Number Total Number
of Investment of Investment
Companies in Portfolios
Total the Alliance within the
Compensation Fund Complex, Alliance Fund
From the Including the Complex,
Alliance Fund, as to Including the
Aggregate Fund which the Fund, as to
Name of Compensation Complex, Trustee is a which the Trustee
Trustee From the Including Director or is a Director
of the Fund Fund the Fund Trustee or Trustee
___________ ____________ ____________ _____________ _________________
John D. Carifa $0 $0 49107
Ruth Block $3,617 $154,263 38 83
David H. Dievler $3,735 $210,188 44 90
John H. Dobkin $3,737 $206,488 41 87
William H. Foulk, Jr. $3,738 $246,413 45 102
Dr. James M. Hester $3,740 $164,138 39 84
Clifford L. Michel $3,740 $183,388 39 86
Donald J. Robinson $2,984 $154,313 41 96
As of October 6, 2000, 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. (the "Adviser" or
"Alliance"), a Delaware limited partnership with principal
offices at 1345 Avenue of the Americas, New York, New York 10105,
has been retained under an investment advisory agreement (the
"Advisory Agreement") to provide investment advice and, in
general, to conduct the management and investment program of the
Fund under the supervision of the Fund's Board of Directors (see
"Management of the Fund" in the Prospectus).
The Adviser is a leading international adviser managing
client accounts with assets as of June 30, 2000 totaling more
than $388 billion (of which more than $185 billion represented
assets of investment companies). As of June 30, 2000, the
Adviser managed retirement assets for many of the largest public
and private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies managed by the Adviser,
comprising 122 separate investment portfolios, currently have
approximately 6.1 million shareholder accounts.
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Alliance Capital Management Corporation ("ACMC") is the
general partner of Alliance and an indirect wholly-owned
subsidiary of AXA Financial, Inc. ("AXA Financial"), a Delaware
corporation whose shares are traded on the New York Stock
Exchange ("NYSE"). As of October 2, 2000, AXA Financial and
certain of its subsidiaries were the beneficial owners of
approximately 52% of the outstanding Alliance units. Alliance
Capital Management Holding L.P. ("Alliance Holding") owned
approximately 30% of the outstanding Alliance units.*** Equity
interests in Alliance Holding are traded on the NYSE in the form
of units. Approximately 98% of such units are owned by the
public and management or employees of Alliance and approximately
2% are owned by AXA Financial. As of June 30, 2000, AXA, a
French insurance holding company, owned approximately 60% of the
issued and outstanding shares of 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 November 30, 1999, the cost of such services,
amounting to $127,000, provided to the Fund by the Adviser was
waived.
____________________
*** Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material
business operations. One result of the organization was
that the Advisory Agreement, then between the Fund and
Alliance Holding, was transferred to the Adviser, and
ownership of Alliance Fund Distributors, Inc. and Alliance
Fund Services, Inc., the Fund's principal underwriter and
transfer agent, respectively, also was transferred to the
Adviser.
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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. 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 Class A, Class B, Class C
and Advisor Class shares. For the fiscal periods of the Fund
ended November 30, 1999 and 1998, the Adviser received from the
Fund $334,407 and $109,041, respectively, in advisory fees.
The Advisory Agreement became effective on February 2,
1998 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 1940 Act of any such party, at a meeting called
for that purpose and held on January 14, 1998, and by the Fund's
initial shareholder on January 14, 1998.
The Advisory Agreement remains in effect for successive
twelve-month periods, provided that such continuance is
specifically 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. Most recently, continuance of the Advisory
Agreement was approved for an additional period by the Board of
Directors, including a majority of the Directors who are not
"interested persons" as defined in the 1940 Act, at their Regular
Meetings held on January 18-20, 2000.
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.
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
Disciplined Value, Fund, Inc., Alliance Global Dollar Government
Fund, Inc., Alliance Global Small Cap Fund, Inc., Alliance Global
Strategic Income Trust, Inc., Alliance Government Reserves,
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Alliance Greater China '97 Fund, Inc., Alliance Growth and Income
Fund, Inc., Alliance Health Care Fund, Inc., Alliance High Yield
Fund, Inc., Alliance Institutional Funds, Inc., Alliance
Institutional Reserves, Inc., Alliance International Fund,
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 EQ Advisors Trust all registered open-
end investment companies; and to ACM Government Income Fund,
Inc., ACM Government Securities Fund, Inc., ACM Government
Spectrum Fund, Inc., ACM Government Opportunity Fund, Inc., ACM
Managed Dollar Income Fund, Inc., ACM Managed Income Fund, Inc.,
ACM Municipal Securities Income Fund, Inc., Alliance All-Market
Advantage Fund, Inc., Alliance 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.
___________________________________________________________
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 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 which 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 November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class A shares, in amounts
aggregating $31,313, which constituted .30%, annually, of the
Fund's aggregate average daily net assets attributable to Class A
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shares during the period, and the Adviser made payments from its
own resources as described above aggregating $405,977. Of the
$437,290 paid by the Fund and the Adviser under the Rule 12b-1
Plan with respect to the Class A shares, $37,103 was spent on
advertising, $425 on the printing and mailing of prospectuses for
persons other than current shareholders, $171,348 for
compensation to broker-dealers and other financial intermediaries
(including, $88,003 to the Fund's Principal Underwriter), $42,854
for compensation to sales personnel, $185,560 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Fund's fiscal year ended November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class B shares, in amounts
aggregating $162,807, which constituted approximately 1.0%,
annually, 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 $754,659. Of the $917,466 paid by the Fund and the
Adviser under the Rule 12b-1 with respect to the Class B shares,
$35,091 was spent on advertising, $7,977 on the printing and
mailing of prospectuses for persons other than current
shareholders, $571,588 for compensation to broker-dealers and
other financial intermediaries (including, $109,157 to the Fund's
Principal Underwriter), $39,435 for compensation to sales
personnel, $234,344 was spent on printing of sales literature,
travel, entertainment, due diligence and other promotional
expenses, and $29,031 was spent on interest on Class B shares
financing.
During the Fund's fiscal year ended November 30, 1999,
the Fund paid distribution services fees for expenditures under
the Agreement, with respect to Class C shares, in amounts
aggregating $49,942, which constituted approximately 1.0%,
annually, 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 $195,212. Of the $245,154 paid by the Fund and the
Adviser under the Rule 12b-1 Plan with respect to the Class C
shares, $14,918 was spent on advertising, $3,107 on the printing
and mailing of prospectuses for persons other than current
shareholders, $118,126 for compensation to broker-dealers and
other financial intermediaries (including, $44,304 to the Fund's
Principal Underwriter), $14,179 for compensation to sales
personnel, $93,036 was spent on printing of sales literature,
travel, entertainment, due diligence and other promotional
expenses and $1,788 was spent on interest on Class C shares
financing.
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Distribution services fees are accrued daily and paid
monthly and 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 charge and respective
distribution services fee 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
provides 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
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,
$1,464,101 (5.11% of the net assets of Class B) and $281,165
(3.04% of the net assets of Class C).
The Rule 12b-1 Plan is in compliance with rules of the
National Association of Securities Dealers, Inc. which
effectively limit the annual asset-based sales charges and
service fees that a mutual fund may pay on a class of shares to
.75% and .25%, respectively, of the average annual net assets
attributable to that class. The rules also limit the aggregate
of all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also
charges a service fee to 6.25% of cumulative gross sales of
shares of that class, plus interest at the prime rate plus 1% per
annum.
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In approving the Rule 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, 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 for an additional period was approved by a vote, cast
in person, of the Directors including a majority of the Directors
who are not "interested persons," as defined in the 1940 Act, at
their Regular Meetings held on January 18-20, 2000.
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.
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
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<PAGE>
transfer agency fee with respect to the Class A and Advisor Class
shares. For the fiscal period ended November 30, 1999, the Fund
paid AFS $68,809 pursuant to the Transfer Agency Agreement.
Codes of Ethics
The Fund, the Adviser and the Principal Underwriter
have each adopted codes of ethics pursuant to Rule 17j-1 of the
1940 Act. These codes of ethics permit personnel subject to the
codes to invest in securities, including securities that may be
purchased or held by the Fund.
_______________________________________________________________
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
("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
15
<PAGE>
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 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.
If you are a Fund 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 in the Prospectus. 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
Advisor Class shares made through such financial representative.
Such financial intermediaries may also impose requirements with
respect to the purchase, sale or exchange of shares that are
different from, or in addition to, those imposed by the Fund,
including requirements as to the minimum initial and subsequent
investment amounts.
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
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
16
<PAGE>
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 value 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 purchase of shares placed through
selected dealers, agents or financial representatives, as
applicable, the applicable public offering price will be the net
asset value as so determined, but only if the selected dealer,
agent or financial 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
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
17
<PAGE>
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 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.
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,
18
<PAGE>
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 shareholders and
Advisor Class shareholders and the Class A shareholders, the
Class B shareholders 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
accumulated distribution services fee on Class A shares purchased
at the same time, and to what extent such differential would be
____________________
**** Advisor Class shares are sold only to investors described
above in this section under "General."
19
<PAGE>
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 B 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 period ended November 30, 1999,
the aggregate amount of underwriting commission payable with
respect to shares of the Fund was $129,821. Of that amount, the
Principal Underwriter received the amount of $18,633,
representing that portion of the sales charges paid on shares of
the Fund sold during the year which was not reallowed to selected
dealers (and was, accordingly, retained by the Principal
Underwriter). During the Fund's fiscal period ended November 30,
1999, the Principal Underwriter received contingent deferred
sales charges of $1,158, on Class A shares, $65,997 on Class B
shares, and $3,099 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.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
21
<PAGE>
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
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
22
<PAGE>
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act.
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but be subject in most such cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which investors may pay a reduced initial
sales charge are described below.
Combined Purchase Privilege. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of 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
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
23
<PAGE>
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 Select Investor Series, Inc.
-Biotechnology Portfolio
-Premier Portfolio
-Technology Portfolio
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
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 any 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, sibling, direct ancestor
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<PAGE>
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
intermediaries, or its affiliates or
agents, for services in the nature of
investment advisory or administrative
services; and
(vi) employer-sponsored qualified pension or
profit-sharing plans (including Section
401(k) plans), custodial accounts
maintained pursuant to Section 403(b)(7),
retirement plans and individual
retirement accounts (including individual
retirement accounts to which simplified
employee pension ("SEP") contributions
are made), if such plans or accounts are
28
<PAGE>
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.
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
29
<PAGE>
redemption proceeds will be charged at a rate of 3.0% (the
applicable rate in the second year after purchase as set forth
below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales Charge as a
Years Since Purchase % of Dollar Amount Subject to Charge
____________________ ____________________________________
First 4.0%
Second 3.0%
Third 2.0%
Fourth 1.0%
Fifth and thereafter 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
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
30
<PAGE>
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
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.
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<PAGE>
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.
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
relative, (iv) pursuant to a systematic withdrawal plan (see
"Shareholder Services - Systematic Withdrawal Plan" below), or
(v) sold through programs offered by financial intermediaries and
approved by AFD where such programs offer only shares which are
not subject to a contingent deferred sales charge and where the
32
<PAGE>
financial intermediary establishes a single omnibus account for
each Fund.
Conversion of Advisor Class Shares to Class A Shares
Advisor Class shares may be held solely through the fee-
based program accounts and employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with, the Adviser and its affiliates or the Fund. If
(i) a holder of Advisor Class shares ceases to participate in the
fee-based program or plan, or to be associated with the
investment adviser or financial intermediary, 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.
33
<PAGE>
_______________________________________________________________
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.
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
34
<PAGE>
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 stock
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.
To redeem shares of the Fund represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the 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. Telephone
redemption requests by electronic funds transfer may not exceed
$100,000 per day (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
35
<PAGE>
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
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
36
<PAGE>
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
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
37
<PAGE>
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 transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (at least $25)
are used to purchase shares through the selected dealer or
selected agent designated by the investor at the public offering
price next determined after the Principal Underwriter receives
the proceeds from the investor's bank. In electronic form,
drafts can be made on or about a date each month selected by the
shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
Exchange Privilege
You may exchange your investment in the Fund for shares
of the same class of other Alliance Mutual Funds (including AFD
Exchange Reserves, a money market fund managed by the Adviser).
In addition, (i) present officers and full-time employees of the
Adviser, (ii) present Directors or Trustees of any Alliance
Mutual Fund and (iii) certain employee benefit plans for
employees of the Adviser, the Principal Underwriter, Alliance
Fund Services, Inc. and their affiliates may on a tax-free basis,
exchange Class A shares of the Fund for Advisor Class shares of
the Fund. Exchanges of shares are made at the net asset value
next determined and without sales or service charges. Exchanges
may be made by telephone or written request. Telephone exchange
requests must be received by Alliance Fund Services, Inc. by
4:00 p.m. Eastern time on a Fund business day, as defined above,
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.
38
<PAGE>
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
(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 a 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
39
<PAGE>
difficulty was apparent at any time in connection with the 1987
market break). If a shareholder were to experience such
difficulty, the shareholder should issue written instructions to
Alliance Fund Services, Inc. at the address shown on the cover of
this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the following
Fund business day prior thereto.
None of the Alliance Mutual Funds, the Adviser, the
Principal Underwriter or Alliance Fund Services, Inc. will be
responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or
fraudulent telephone instructions. Selected dealers, agents or
financial representatives, as applicable, may charge a commission
for handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual 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
40
<PAGE>
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
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 $1 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.
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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 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 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 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.
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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
form by contacting Alliance Fund Services, Inc. at the address or
the "For Literature" telephone number shown on the cover of this
Statement of Additional Information.
CDSC Waiver for Class B and Class C Shares. Under a
systematic withdrawal plan, up to 1% monthly, 2% bi-monthly or 3%
quarterly of the value at the time of redemption of the Class B
or Class C shares in a 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
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report of the Fund's independent auditors, PricewaterhouseCoopers
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 a copy 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 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, 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
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 but listed on other United States National
Securities exchanges or traded on The Nasdaq Stock Market, Inc.
are valued in like manner. Portfolio securities traded on the
Exchange and on one or more 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
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reference to the principal exchange on which the securities are
traded.
Readily marketable securities traded 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 U.S.
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
another comparable sources.
Listed put or call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of 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 development 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 exchange 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,
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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 believed that these prices do not
reflect current market value, in which case the securities will
be valued in good faith by, or in accordance with procedures
established by, the Board of Directors at fair value.
The Board of Directors may suspend the determination of
the Fund's net asset value (and the offering and sale of shares),
subject to the rules of the Commission and other governmental
rules and regulations, at a time when: (1) the Exchange is
closed, other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the Commission by order permits a
suspension of the right of redemption or a postponement of the
date of payment on redemption.
For purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in a
foreign currency will be converted into U.S. dollars at the mean
of the current bid and asked prices of such currency against the
U.S. dollar last quoted by a major bank that is a regular
participant in the relevant foreign exchange market or on the
basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If such quotations are
not available as of the close of the Exchange, the rate of
exchange will be determined in good faith by, or under the
direction of, the Board of 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
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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. The summary is based upon the advice of
counsel for the Fund and upon current law and interpretations
thereof. No confirmation has been obtained from the relevant tax
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 for each taxable year 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, 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
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determined to be engaged in the same or similar trades or
businesses or related trades or businesses.
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 investment company taxable
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.
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 the
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
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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 calendar year, the Fund will notify
shareholders of the federal income tax status of any
distributions made by the Fund to shareholders during such year.
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
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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. Income received by the Fund may also 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 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 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
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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.
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.
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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
transaction, or otherwise to treat the hedging transaction in a
manner that is consistent with the hedged investment. The
regulations issued under this authority 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
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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
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.
Other Taxation
The Fund may be subject to other state and local 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.
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_______________________________________________________________
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
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.
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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 fiscal period ended November 30, 1999, the
Fund incurred brokerage commissions amounting in the aggregate to
$183,668. During the fiscal period ended November 30, 1999,
brokerage commissions amounting in the aggregate to $0 were paid
to DLJ and brokerage commissions amounting in the aggregate to $0
were paid to brokers utilizing the Pershing Division of DLJ.
During the fiscal period ended November 30, 1999, the brokerage
commissions paid to DLJ constituted 0% of the Fund's aggregate
brokerage commissions and the brokerage commissions paid to
brokers utilizing the Pershing Division of DLJ constituted 0% of
the Fund's aggregate brokerage commissions. During the fiscal
period ended November 30, 1999, of the Fund's aggregate dollar
amount of brokerage transactions involving the payment of
commissions, 0% were effected through DLJ and 0% were effected
through brokers utilizing the Pershing Division of DLJ. During
the fiscal period ended November 30, 1999, transactions in
portfolio securities of the Fund aggregating $85,956,660 with
associated brokerage commissions of approximately $168,115 were
allocated to persons or firms supplying research services to the
Fund or the Adviser.
55
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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 was organized as corporation in Maryland 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 any
unissued shares to any number of additional series and classes
without shareholder approval. Accordingly, the Directors in the
future, for reasons such as the desire to establish one or more
additional portfolios with different investment objectives,
policies or restrictions, may create additional 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
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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 Directors and, in liquidation of the Fund, are entitled to
receive the net assets of the Fund.
The outstanding voting shares of the Fund as of
October 6, 2000 consisted of 23,081,805 shares of common stock.
Of this amount 5,518,292 shares were Class A, 11,449,162 shares
were Class B, 4,405,469 were Class C and 1,708,882 shares were
Advisor Class. To the knowledge of the Fund, the following
persons owned of record or beneficially 5% or more of a class of
the outstanding shares of the Fund as of October 6, 2000:
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No. of % of
Shares % of % of % of Advisor
Name and Address of Class Class A Class B Class C Class
MLPF&S 686,55512.45%
For the Sole Benefit 3,128,276 27.47%
of Its Customers 1,298,727 29.60%
4800 Deer Lake Dr. 408,023 23.85%
East 2nd Floor
Jacksonville, Fl. 32246-6484
Alliance Capital Management
L.P.
Attn: Sarah Powell
1345 Avenue of the Americas
New York, NY 10105-0302 110,000 6.43%
Munson Health Care
1105 Sixth Street
Traverse City, MI 1,069,972 62.55%
49684-2345
Custodian
Brown Brothers Harriman & Co. ("Brown Brothers"), 40
Water Street, Boston, Massachusetts 02109, 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 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 Alliance 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.
Counsel
Legal matters in connection with the issuance of the
common stock 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.
58
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Independent Auditors
PricewaterhouseCoopers 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.
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 its 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 average annual total return based on net asset value
for each class of shares for the one-, five- and ten-year periods
ended May 31, 2000 (or inception through that date, as noted) was
as follows:
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12 Months 5 Years 10 Years
Ended Ended Ended
5/31/00 5/31/00 5/31/00
_________ ________ ________
Class A 33.12% 14.86%* N/A
Class B 32.32% 14.11%* N/A
Class C 32.36% 14.07%* N/A
Advisor Class 33.75% 15.20%* N/A
* Inception Dates: Class A, B, C, Advisor - March 3, 1998
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
forth in the Registration Statement filed by the Fund with the
Commission under the Securities Act. Copies of the Registration
Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the offices of
the Commission in Washington, D.C.
60
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____________________________________________________________
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT AUDITORS
____________________________________________________________
The financial statements and the report of PricewaterhouseCoopers
LLP for Alliance International Premier Growth Fund, Inc. are
incorporated herein by reference to its annual and semi-annual
report filings made with the SEC pursuant to Section 30(b) of the
1940 Act and Rule 30b-2 thereunder. The annual report is dated
November 30, 1999 and the semi-annual report is dated May 31,
2000 and they were filed on February 7, 2000 and August 2, 2000,
respectively. They are available without charge upon request by
calling Alliance Fund Services, Inc. at (800) 227-4618.
61
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____________________________________________________________
APPENDIX A:
CERTAIN INVESTMENT PRACTICES
____________________________________________________________
The information in this Appendix concerns investment
practices in which the Fund is authorized to engage, but in which
the Fund is not required to engage and which may not currently be
permitted under applicable laws or regulations or may otherwise
be unavailable in certain countries. The Fund's investment
policies and restrictions authorize it 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 its
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 B: ADDITIONAL INFORMATION ABOUT JAPAN
________________________________________________________________
The information in this section is based on material obtained
by the Fund from various Japanese governmental and other sources
believed to be accurate but has not been independently verified
by the Fund or the Adviser. It is not intended to be a complete
description of Japan, its economy or the consequences of
investing in Japanese securities.
Japan, located in eastern Asia, consists of four main
islands: Hokkaido, Honshu, Kyushu and Shikoku, and many small
islands. Its population is approximately 126 million.
GOVERNMENT
The government of Japan is a representative democracy
whose principal executive is the Prime Minister. Japan's
legislature (known as the Diet) consists of two houses, the House
of Representatives (the lower house) and the House of Councillors
(the upper house).
POLITICS
From 1955 to 1993, Japan's government was controlled by
the Liberal Democratic Party (the "LDP"), the major conservative
party. In August 1993, after a main faction left the LDP over
the issue of political reform, a non-LDP coalition government was
formed consisting of centrist and leftist parties and was headed
by Prime Minister Morihiro Hosokawa. In April 1994, Mr. Hosokawa
resigned due to allegations of personal financial irregularities.
The coalition members thereafter agreed to choose as prime
minister the foreign minister, Tsutomu Hata. As a result of the
formation of a center-right voting bloc, however, the Japan
Socialist Party (the "JSP"), a leftist party, withdrew from the
coalition. Consequently, Mr. Hata's government was a minority
coalition, the first since 1955, and was therefore unstable. In
June 1994, Mr. Hata and his coalition were replaced by a new
coalition made up of the JSP (since renamed the "Social
Democratic Party (the "SDP")), the LDP and the small New Party
Sakigake (the "Sakigake"). This coalition, which surprised many
because of the historic rivalries between the LDP and the SDP,
was led by Tomiichi Murayama, the first Socialist prime minister
in 47 years. Mr. Murayama stepped down in January 1996 and was
succeeded as Prime Minister by Liberal Democrat Ryutaro
Hashimoto. By September 1996, when Prime Minister Hashimoto
called for a general election on October 20, 1996, the stability
of the SDP-LDP-Sakigake coalition had become threatened. Both
the SDP and the Sakigake had lost more than half their seats in
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the lower house of the Diet when a faction of the Sakigake split
off to form the Democratic Party of Japan. Their strength was
further diminished as a result of the October 20, 1996 House of
Representatives election. Although the LDP was 12 seats short of
winning a majority in that election, it was able to reduce the
margin to three seats and to achieve enough support from its two
former coalition parties, the SDP and the Sakigake, as well as
independents and other conservatives, to return Japan to a
single-party government for the first time since 1993. Mr.
Hashimoto was reappointed as Prime Minister on November 7, 1996.
Subsequent to the 1996 elections, the LDP established and has
continued to maintain a majority in the House of Representatives
as individual members have joined the ruling party. By 1998,
however, the popularity of the LDP had declined, due to
dissatisfaction with Mr. Hashimoto's leadership, and in the July
12, 1998 House of Councillors election, the LDP's representation
fell to 103 seats from 120 seats. As a result of the LDP's
defeat, on July 13, 1998, Mr. Hashimoto announced his resignation
as Prime Minister and was replaced by Keizo Obuchi on July 24,
1998. On January 14, 1999, the LDP formed a coalition government
with a major opposition party. As a result, Mr. Obuchi's
administration strengthened its position in the Diet, where it
increased its majority in the House of Representatives and
reduced its shortfall in the House of Councillors. A new three-
party coalition government was formed on October 5, 1999 that
further strengthened the position of Mr. Obuchi's administration
in the Diet. On April 5, 2000, following an ultimately fatal
stroke suffered by Mr. Obuchi on April 2, 2000, the Parliament
elected Yoshiro Mori to replace Mr. Obuchi as Prime Minister.
Although the LDP held on to its power in the House of
Representatives elections in June 2000, its margin of victory was
less than predicted. The coalition now holds 271 of 480 seats in
the House of Representatives and 141 of 252 seats in the House of
Councillors. The opposition is dominated by the new Minshuto
(Democratic Party of Japan), which was established in April 1998
by various opposition groups and parties. The next general
election (House of Councillors) is required by law to occur no
later than July 2001.
ECONOMY
The Japanese economy maintained an average annual growth
rate of 2.1% in real GDP terms from 1990 through 1994, compared
with 2.4% for the United States during the same period. In 1995
and 1996, Japan's real GDP growth was 1.4% and 5.2%,
respectively. In 1997 and 1998, Japan's real GDP growth rate fell
to 1.6% and -2.5%, respectively. In 1999 real GDP growth rate
was 0.3%. In the first two quarters of 2000, real GDP growth
rate was 0.7% and 0.8%, respectively, compared to the first two
quarters of 1999. Inflation has remained low, 1.3% in 1993, 0.7%
in 1994, -0.1% in 1995, 0.1% in 1996, 1.7% in 1997, 0.7% in 1998
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and -0.3% in 1999. Although private consumer demand showed a
modest increase in the first quarter of 1999, after slowing down
for several years due to uncertainty about the economy and higher
consumer taxes that went into effect in April 1997, consumer
demand dropped again in the third quarter of 1999. Consumer
demand has shown modest signs of improvement in the first half of
2000, however. Unemployment is at its highest level since the
end of World War II, rising to 4.6% in August 2000, and is not
expected to fall appreciably in the foreseeable future.
Japan's post World War II reliance on heavy industries
has shifted to higher technology products assembly and, most
recently, to automobile, electrical and electronic production.
Japan's success in exporting its products has generated sizable
trade surpluses. Since the early 1980's, Japan's relations with
its trading partners have been difficult, partly due to the
concentration of Japanese exports in products such as
automobiles, machine tools and semiconductors and the large trade
surpluses resulting therefrom, and an overall trade imbalance as
indicated by Japan's balance of payments. Japan's overall trade
surplus for 1994 was the largest in its history, amounting to
almost $145 billion. Exports totaled $386 billion, up 9.3% from
1993, and imports were $242 billion, up 13.6% from 1993. The
current account surplus in 1994 was $130 billion, down 1.5% from
a record high in 1993. By 1996, Japan's overall trade surplus
had decreased to $83 billion. Exports had increased to a total
of $400 billion, up 3.6% from 1994, and imports had increased to
a total of $317 billion, up 31.0% from 1994. During 1997, the
overall trade surplus increased approximately 22% from 1996.
Exports increased to a total of $409 billion, up 2% from 1996,
and imports decreased to $308 billion, down 3% from 1996. During
1998, the overall trade surplus increased approximately 20% from
1997. Exports decreased to a total of $374.0 billion, down 8.6%
from 1997, and imports decreased to $251.7 billion, down 18.2%
from 1997. During 1999, the overall trade surplus was almost
unchanged from 1998, with exports showing an increase of 7.9% and
imports showing an increase of 11.1%. Japan remains the largest
creditor nation and a significant donor of foreign aid.
On October 1, 1994, the U.S. and Japan reached an
agreement with respect to trade in insurance, glass and medical
and telecommunications equipment. In June 1995, the two
countries agreed in principal to increase Japanese imports of
American automobiles and automotive parts. These and other
agreements, however, have not been successful in addressing
Japan's trade surplus with the U.S. Other current sources of
tension between the two countries are disputes in connection with
trade in steel, semiconductors and photographic supplies,
deregulation of the Japanese insurance market, a dispute over
aviation rights and access to Japanese ports. It is expected
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that the friction between the United States and Japan with
respect to trade issues will continue for the foreseeable future.
In response to pressures caused by the slumping Japanese
economy, the fragile financial markets and the appreciating Yen,
the Japanese government, in April and June 1995, announced
emergency economic packages that focused on higher and
accelerated public works spending and increased aid for post-
earthquake reconstruction in the Kobe area. These measures
helped to increase public investment and lead to faster GDP
growth, but failed to produce fundamental changes. In 1997 and
again in 1998, the government announced additional stimulus
packages that included increased public works spending and tax
cuts. These measures have also been unsuccessful in stimulating
Japan's economy. In October 1998, Prime Minister Obuchi
instructed his cabinet to prepare another emergency economic
stimulus plan calling for even more public spending and further
tax cuts. The plan was finalized in November 1998.
In addition to the government's emergency economic
packages announced in 1995, the Bank of Japan attempted to assist
the financial markets by lowering its official discount rate to a
record low in 1995. However, large amounts of bad debt have
prevented banks from expanding their loan portfolios despite low
discount rates. Japanese banks have suffered several years of
declining profits and many banks have required public funds to
avert insolvency. In June 1995, the Finance Ministry announced
an expansion of deposit insurance and restrictions on rescuing
insolvent banks. In June 1996, six bills designed to address the
large amount of bad debt in the banking system were passed by the
Diet, but the difficulties worsened. By the end of the 1997/98
fiscal year, the government estimated that the banking system's
bad loans totaled 87.5 trillion Yen (approximately $600 billion),
or 11% of outstanding bank loans.
On December 17, 1997, in the wake of the collapse in the
previous month of one of Japan's 20 largest banks, the government
announced a proposal to strengthen the banks by means of an
infusion of public funds and other measures. In addition, the
imposition of stricter capital requirements and other supervisory
reforms scheduled to go into effect in April 1998 were postponed.
Subsequent to the December 1997 proposals, the government
proposed a series of additional proposals, culminating, after
vigorous political debate, in a set of laws that was approved by
the Diet in October 1998. The new laws made $508 billion in
public funds available to increase the capital of Japan's banks,
to guarantee depositors'' accounts and to nationalize the weakest
banks. On October 23, 1998, the Long-Term Credit Bank of Japan,
Ltd., one of Japan's 19 largest banks, became the first Japanese
bank to be nationalized pursuant to the new laws. On December
11, 1998, the Nippon Credit Bank, Ltd. became the second Japanese
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bank to be nationalized pursuant to the new laws. Since then,
four additional banks have been nationalized. It is unclear
whether these laws will achieve their intended effect. While the
risk of collapse among Japan's largest banks has diminished as a
result of the infusion of public funds, concerns remain about the
asset quality and core profitability of the major banks and
there remains a high level of bad debt throughout Japan's banks
(estimated at $188 billion at the largest banks as of March
2000). In this regard, the government has established the
Resolution and Collection Bank to purchase bad loans from
insolvent and solvent banks and also has established a legal
framework for the securitization of bad loans. The government
has also announced a delay from April 2001 to April 2002 in the
implementation of a plan announced in 1996 to scale back the
amount of deposit insurance available to depositors from its
current unlimited amount to $97,700 per depositor. The delay is
designed to give smaller institutions more time to get back on
their feet before the protection of unlimited deposit insurance
is removed. In addition to bad domestic loans, Japanese banks
also had significant exposure to the recent financial turmoil in
other Asian markets. Furthermore, the Japanese banking system
continues to be buffeted by factors beyond its control, including
a new wave of bankruptcies and falling stock prices. The
financial system's fragility is expected to continue for the
foreseeable future.
In November 1996, then Prime Minister Hashimoto
announced a set of initiatives to deregulate the financial sector
by the year 2001. Known as "Tokyo's Big Bang," the reforms
include changes in tax laws to favor investors, the lowering of
barriers between banking, securities and insurance, abolition of
foreign exchange restrictions and other measures designed to
revive Tokyo's status in the international capital markets and to
stimulate the economy. The Big Bang was formally launched in
April 1998. Some of the measures that have already been
implemented include a liberalization of foreign exchange
restrictions, a repeal of the ban on holding companies, allowing
banks to sell mutual funds and to issue bonds, the elimination of
restrictions on the range of activities permitted for securities
subsidiaries and trust banking subsidiaries and the elimination
of fixed brokerage commissions on all stock trades. The
remaining reform measures, which include the entry of banks and
trust banks into the insurance business through subsidiaries, are
expected to be implemented by March 2001. While in the long term
the Big Bang is viewed as a positive step for Japan, in the
current economic climate it is viewed as putting additional
stress on weaker institutions.
In the mid 1990s, a growing budget deficit and the
threat of a budget crisis resulted in a tightening of fiscal
policy. In March 1997, Prime Minister Hashimoto announced the
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first detailed plan for fiscal reform. The plan called for the
lowering of the budget deficit to below 3% of GDP by Fiscal Year
2003/2004. In June 1997, specific proposals for spending cuts
were approved by the cabinet and a Fiscal Reform Law,
incorporating the proposals into binding targets, were to have
been presented to the Diet late in 1997. In November 1997,
however, Prime Minister Hashimoto, facing growing pressure to
take steps to revitalize Japan's stagnant economy, announced a
new economic plan, the "Urgent Economic Policy Package Reforming
Japan for the 21st Century," which included tax cuts and public
spending. Thereafter, in April 1998, Japan announced its then
largest ever package of public spending and tax cuts. In
November 1999, Japan announced its ninth major economic stimulus
plan of the 1990s, calling for $171.4 billion in public spending.
Another fiscal stimulus package was announced in October 2000,
calling for an additional $101.8 billion in public spending.
The government's recent spending programs have further
undermined Japan's fiscal condition, as evidenced by the
government's balance sheet made public by the Ministry of Finance
on October 10, 2000 (the first time a balance sheet has been made
public). If all of Japan's future pension liabilities are taken
into account, the balance sheet reflects a total public debt of
$7.3 trillion.
After becoming Prime Minister in July 1998 Mr. Obuchi
established several advisory bodies to devise a plan to improve
Japan's economy. One of these, the Economic Strategy Council,
which was comprised mostly of private experts, issued a report in
February 1999 that contained 234 recommendations. Less than 40
of these recommendations, those least likely to produce
fundamental changes, were accepted by Japan's various government
ministries. Subsequently, Mr. Obuchi formed another advisory
group, the Competitiveness Commission, which resulted in the
passage of the "industrial revitalization law," which became
effective in October 1999. The objective of this law is to
encourage new enterprises and technologies and to write off
excess capacity in the industrial sector.
Between 1985 and 1995, the Japanese Yen generally
appreciated against the U.S. Dollar. Between 1990 and 1994 the
Yen's real effective exchange rate appreciated by approximately
36%. On April 19, 1995, the Japanese Yen reached an all time
high of 79.75 against the U.S. Dollar. After its peak of April
19, 1995, the Yen generally decreased in value against the U.S.
Dollar YD until mid-1998, when the Japanese Yen began to
appreciate again against the U.S. Dollar, reaching a 43-month
high against the U.S. Dollar in September 1999. This
precipitated a series of interventions in the currency market by
the Bank of Japan that have slowed the appreciation of the
Japanese Yen against the U.S. Dollar. The average Yen-Dollar
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exchange rates in 1996, 1997, 1998, and 1999 were 108.8, 121.0,
130.99 and 113.73, respectively. In August 2000, the average
Yen-Dollar exchange rate was 108.08.
JAPANESE STOCK EXCHANGES. Currently, there are eight
stock exchanges in Japan. The Tokyo Stock Exchange (the "TSE"),
the Osaka Securities Exchange and the Nagoya Stock Exchange are
the largest, together accounting for approximately 99.8% of the
share trading volume and for about 99.9% of the overall trading
value of all shares traded on Japanese stock exchanges during
1999. The other stock exchanges are located in Kyoto, Hiroshima,
Fukuoka, Niigata and Sapporo. The chart below presents annual
share trading volume (in millions of shares) and annual trading
value (in billions of Yen) information with respect to each of
the three major Japanese stock exchanges for the years 1989
through 2000 (August). Trading volume and the value of foreign
stocks are not included.
<TABLE>
<CAPTION>
All Exchanges TOKYO OSAKA NAGOYA
VOLUME VALUE VOLUME VALUE VOLUME VALUE VOLUME VALUE
_______ ______ ______ _____ _______ ______ _______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20001 140,543 216,121 123,482 183,854 13,108 26,365 3,881 5,797
1999 175,445 210,236 155,163 185,541 14,972 22,105 4,934 2,371
1998 139,757 124,102 123,198 97,392 12,836 20,532 3,367 5,986
1997 130,657 151,445 107,566 108,500 15,407 27,024 6,098 12,758
1996 126,496 136,170 101,170 101,893 20,783 27,280 4,104 5,391
1995 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1994 105,937 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1993 101,173 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1992 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1991 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1990 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1989 256,296 386,395 222,599 332,617 25,096 41,679 7,263 10,395
1 Through August.
Source: The Tokyo Stock Exchange Fact Books (1994-1999); monthly data sheets (2000).
</TABLE>
THE TOKYO STOCK EXCHANGE
OVERVIEW OF THE TOKYO STOCK EXCHANGE. The TSE is the
largest of the Japanese stock exchanges and as such is widely
regarded as the principal securities exchange for all of Japan.
During 8 months of 2000, the TSE accounted for 85.0% of the
market value and 87.9% of the share trading volume on all
Japanese stock exchanges. A foreign stock section on the TSE,
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consisting of shares of non-Japanese companies, listed 42 (out of
1,990 total companies listed on the TSE) non-Japanese companies
at the end of August 2000. The market for stock of Japanese
issuers on the TSE is divided into a First Section and a Second
Section. The First Section is generally for larger, established
companies (in existence for five years or more) that meet listing
criteria relating to the size and business condition of the
issuing company, the liquidity of its securities and other
factors pertinent to investor protection. The TSE's Second
Section is for smaller companies and newly listed issuers.
The TSE has recently undertaken several new initiatives.
In November 1999, for example, the TSE established MOTHERS
(Market for the High-Growth and Emerging Stocks), a new market
designed to foster the growth of emerging companies. In
addition, on October 17, 2000, the TSE announced plans to form an
alliance with the Chicago Mercantile Exchange, the TSE's most
concrete global alliance to date. Although the TSE has entered
into agreements with other exchanges, they are for the most part
limited to information sharing arrangements.
SECTOR ANALYSIS OF THE FIRST AND SECOND SECTIONS. The
TSE's domestic stocks include a broad cross-section of companies
involved in many different areas of the Japanese economy. At the
end of August 2000, the three largest industry sectors, based on
market value, listed on the first section of the TSE were
electric appliances, with 146 companies representing 21.57% of
all domestic stocks so listed; communications, with 7 companies
representing 10.16% of all domestic stocks listed on the TSE; and
banking with 94 companies representing 9.94% of all domestic
stocks so listed.
MARKET GROWTH OF THE TSE. The First and Second Sections
of the TSE grew in terms of both average daily trading value and
aggregate year-end market value from 1982, when they were l28,320
million Yen and 98,090 billion Yen, respectively, through the end
of 1989, when they were 1,335,810 million Yen and 611,152 billion
Yen, respectively. Following the peak in 1989, both average
daily trading value and aggregate year-end market value declined
through 1992 when they were 243,362 million Yen and 289,483
billion Yen, respectively. In 1993 and 1994, both average daily
trading value and aggregate year-end market value increased and
were 353,208 and 353,666 million Yen, respectively, and 324,357
and 358,392 billion Yen, respectively. In 1995, average daily
trading value decreased to 335,598 million Yen and aggregate
year-end market value increased to 365,716 billion Yen. In 1996,
average daily trading value increased to 412,521 million Yen and
aggregate year-end market value decreased to 347,578 billion Yen.
In 1997, average daily trading value increased to 442,858 million
Yen and aggregate year-end market value decreased to 280,930
billion Yen. In 1998, average daily trading value decreased to
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394,297 million Yen and aggregate year-end market value decreased
to 275,181 billion Yen. In 1999, the average daily trading value
was 757,313 million Yen and aggregate year-end market value in
1999 was 456,840 billion Yen.
MARKET PERFORMANCE OF THE FIRST SECTION. As measured by
the TOPIX, a capitalization-weighted composite index of all
common stocks listed in the First Section, the performance of the
First Section reached a peak of 2,884.80 on December 18, 1989.
Thereafter, the TOPIX declined approximately 45% through
December 29, 1995. On December 30, 1996 the TOPIX closed at
1,470.94, down approximately 7% from the end of 1995. On
December 30, 1997, the TOPIX closed at 1,175.03, down
approximately 20% from the end of 1996. On December 30, 1998 the
TOPIX closed at 1086.99, down approximately 7% from the end of
1997. On December 31, 1999 the TOPIX closed at 1722.20, up
approximately 58% from the end of 1998.
JAPANESE FOREIGN EXCHANGE CONTROLS
Under Japan's Foreign Exchange and Foreign Trade Control
Law and cabinet orders and ministerial ordinances thereunder (the
"Foreign Exchange Controls"), prior notification to the Minister
of Finance of Japan (the "Minister of Finance") of the
acquisition of shares in a Japanese company from a resident of
Japan (including a corporation) by a non-resident of Japan
(including a corporation) is required unless the acquisition is
made from or through a securities company designated by the
Minister of Finance or if the Yen equivalent of the aggregate
purchase price of shares is not more than 100 million Yen. Even
in these situations, if a foreign investor intends to acquire
shares of a Japanese corporation listed on a Japanese stock
exchange or traded on a Japanese over-the-counter market
(regardless of the person from or through whom the foreign
investor acquires such shares) and as a result of the acquisition
the foreign investor would directly or indirectly hold 10% or
more of the total outstanding shares of that corporation, the
foreign investor must file a report within 15 days from the day
of such acquisition with the Minister of Finance and any other
minister with proper jurisdiction. In instances where the
acquisition concerns national security or meets certain other
conditions specified in the Foreign Exchange Controls, the
foreign investor must file a prior notification with respect to
the proposed acquisition with the Minister of Finance and any
other minister with proper jurisdiction. The ministers may make
a recommendation to modify or prohibit the proposed acquisition
if they consider that the acquisition would impair the safety and
maintenance of public order in Japan or harmfully influence the
smooth operation of the Japanese economy. If the foreign
investor does not accept the recommendation, the ministers may
issue an order modifying or prohibiting the acquisition. In
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certain limited and exceptional circumstances, the Foreign
Exchange Controls give the Minister of Finance the power to
require prior approval for any acquisition of shares in a
Japanese company by a non-resident of Japan.
In general, the acquisition of shares by non-resident
shareholders by way of stock splits, as well as the acquisition
of shares of a Japanese company listed on a Japanese stock
exchange by non-residents upon exercise of warrants or conversion
of convertible bonds, are not subject to any of the foregoing
notification or reporting requirements. Under the Foreign
Exchange Controls, dividends paid on shares, held by non-
residents of Japan and the proceeds of any sales of shares within
Japan may, in general, be converted into any foreign currency and
remitted abroad.
Certain provisions of the Foreign Exchange Controls were
repealed or liberalized beginning in April 1998, pursuant to the
revised Foreign Exchange and Foreign Trade Law, which was
approved in May 1997 as part of the plan to implement the Big
Bang. Under the new law, Japanese citizens are permitted to open
bank accounts abroad and companies are now permitted to trade
foreign currencies without prior government approval.
Additionally, the foreign exchange bank system, which required
that all foreign exchange transactions be conducted through
specially designated institutions, has been eliminated.
REGULATION OF THE JAPANESE EQUITIES MARKETS
The principal securities law in Japan is the Securities
and Exchange Law ("SEL") which provides overall regulation for
the issuance of securities in public offerings and private
placements and for secondary market trading. The SEL was amended
in 1988 in order to liberalize the securities market; to regulate
the securities futures, index, and option trade; to add
disclosure regulations; and to reinforce the prevention of
insider trading. Insider trading provisions are applicable to
debt and equity securities listed on a Japanese stock exchange
and to unlisted debt and equity securities issued by a Japanese
corporation that has securities listed on a Japanese stock
exchange or registered with the Securities Dealers Association
(the "SDA"). In addition, each of the eight stock exchanges in
Japan has its own constitution, regulations governing the sale
and purchase of securities and standing rules for exchange
contracts for the purchase and sale of securities on the
exchange, as well as detailed rules and regulations covering a
variety of matters, including rules and standards for listing and
delisting of securities.
The loss compensation incidents involving preferential
treatment of certain customers by certain Japanese securities
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companies, which came to light in 1991, provided the impetus for
amendments to the SEL, which took effect in 1992, as well as two
reform bills passed by the Diet in 1992. The amended SEL now
prohibits securities companies from operating discretionary
accounts, compensating losses or providing artificial gains in
securities transactions, directly or indirectly, to their
customers and making offers or agreements with respect thereto.
Despite these amendments, there have been certain incidents
involving loss compensation. To ensure that securities are
traded at their fair value, the SDA and the TSE have promulgated
certain rules, effective in 1992, which, among other things,
explicitly prohibit any transaction undertaken with the intent to
provide loss compensation of illegal gains regardless of whether
the transaction otherwise technically complies with the rules.
The reform bill passed by the Diet, which took effect in 1992 and
1993, provides for the establishment of a new Japanese securities
regulator and for a variety of reforms designed to revitalize the
Japanese financial and capital markets by permitting banks and
securities companies to compete in each other's field of
business, subject to various regulations and restrictions.
Further reforms in the regulation of the securities
markets are anticipated over the next several years as the Big
Bang is implemented.
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________________________________________________________________
APPENDIX C: ADDITIONAL INFORMATION ABOUT THE UNITED KINGDOM
_______________________________________________________________
The information in this section is based on material
obtained by the Fund from various United Kingdom government and
other sources believed to be accurate but has not been
independently verified by the Fund or the Adviser. It is not
intended to be a complete description of The United Kingdom, its
economy or the consequences of investing in United Kingdom
securities.
The United Kingdom of Great Britain and Northern Ireland
is located off the continent of Europe in the Atlantic Ocean.
Its population is approximately 59 million.
GOVERNMENT
The United Kingdom is a constitutional monarchy. Queen
Elizabeth II has been the head of state since she acceded to the
throne in 1952. The monarchy was established in 1066. The
monarch's power has eroded over the centuries, but the monarch
retains the power to call and dissolve Parliament, to give assent
to bills passed by Parliament, to appoint the Prime Minister and
to sign treaties or declare war. In practice, most of these acts
are performed by government ministers, and supreme legislative
authority now resides in the Parliament. Parliament, the
bicameral legislature, consists of the House of Commons and the
House of Lords. Acts of Parliament passed in 1911 and 1949 limit
the powers of the House of Lords to prevent bills passed by the
House of Commons from becoming law. The main purpose of the
House of Lords is now to revise and amend laws passed by the
House of Commons. The future role and composition of the House of
Lords is the subject of a December 1999 report of the Royal
Commission on House of Lords Reform, whose recommendations are to
be considered by a joint committee of the House of Commons and
the House of Lords. An initial step in the reform effort was
taken in November 1999, when hereditary peers lost their right to
sit and vote in the House of Lords. No further steps have been
taken in this regard. The national government is headed by the
Prime Minister who is appointed by the monarch on the basis of
ability to form a government with the support of the House of
Commons.
POLITICS
Since World War II the national government has been
formed by either the Conservative Party or the Labour Party. The
Conservative Party under the leadership of Margaret Thatcher
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achieved a parliamentary majority and formed a new government in
May 1979. In June 1983 and again in June 1987, the Conservative
Party under her leadership was reelected. The Party pursued
policies of reducing state intervention in the economy, reducing
taxes, de-regulating business and industry and privatizing state-
owned enterprises. It also displayed an antipathy toward the
European Union. In November 1990, Mrs. Thatcher faced a
challenge for the leadership of the party from Michael Heseltine,
one of her former cabinet ministers. The opposition proposed
changes in policy, including increased government intervention in
the economy and a less confrontational approach toward the
European Union. The two wings of the Conservative Party looked
for someone who could unite the Party and elected John Major as
its leader and, by virtue of the Conservative Party majority, to
the post of Prime Minister.
Mr. Major led the Conservative Party to its fourth
successive general election victory in April 1992, after which
time, the popularity of both Mr. Major and the Conservative Party
declined. In April 1995, the Conservative Party won only 11% of
the vote in Scotland local elections, which resulted in
Conservative Party control of only 81 council seats out of 1,161.
It won only 25% of the vote in local council elections in England
and Wales in May 1995. In July 1995, Mr. Major won a vote of
confidence with his reelection as leader of the Conservative
Party. Despite Mr. Major's strengthened position within the
Conservative Party, the Party continued to suffer setbacks.
Within two weeks of Mr. Major's victory, the Conservative Party
lost its fifth by-election since the general election of 1992.
By 1996, his overall majority was reduced to one. In the next
general election, on May 1, 1997, Mr. Major and the Conservative
Party were defeated by the Labour Party led by Tony Blair, who
subsequently was appointed Prime Minister. The Labour Party now
holds 415 of the 659 seats in the House of Commons. The next
general election is required by law to occur no later than May
2002.
ECONOMY
The United Kingdom's economy is the fifth largest in the
Organization for Economic Cooperation and Development, behind the
United States, Japan, Germany and France. Its economy maintained
an average annual growth rate of 3.6% in real growth domestic
product ("GDP") terms from 1982 through 1988; and from 1989
through 1993, the United Kingdom's real GDP annual growth rate
was 1.0%. The economy has continued to experience the moderate
growth that began in 1993, after the 1990-1992 recession, with
real GDP having grown by 4.4% in 1994, 2.8% in 1995, 2.6% in
1996, 3.5% in 1997, 2.6% in 1998 and 2.1% in 1999. In the first
quarter of 2000, the United Kingdom's real GDP growth rate was
3.0% compared to the first quarter of 1999. The government has
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forecast a GDP growth rate of 2.75% to 3.25% for 2000 and 2.25%
to 3.75% for 2001.
Since the early 1990s, the United Kingdom's economy has
had moderate inflation, averaging 2.8% (as measured by the RPIX,
which excludes mortgage interest payments). The inflation rate
during 1999 was 2.3%.
The sluggish growth in the United Kingdom's
manufacturing sector since the 1990-1992 recession continued the
trend toward the decreased importance of manufacturing in the
economy. Manufacturing accounted for just 19.9% of GDP in 1999
compared with 36.5% in 1960. As the United Kingdom's
manufacturing industry has declined in importance, the service
industry, including financial services, has increased in
importance. The service industries' share of GDP has increased
to almost two-thirds from 45% in 1960.
Employment has been shifting from manufacturing to the
service industry, a trend expected to continue for the
foreseeable future. Overall, unemployment has continued to fall
from a post-recession high of 10.6% in January 1993 to an average
of 6.2% in 1999.
Foreign trade remains an important part of the United
Kingdom's economy. In 1999, exports of goods and services
represented 25.7% of GDP. The United Kingdom has historically
been an exporter of manufactured products and an importer of food
and raw materials, but there is a growing trend toward
manufactured goods forming a larger proportion of imports.
Machinery and transport equipment accounted for 46.0% of imports
in 1999 compared to 20.4% in 1975 and for 47.5% of exports in
1999 compared to 42.3% in 1975. For every year since 1982, the
United Kingdom has been a net importer of goods. The relative
importance of the United Kingdom's trading partners has also
shifted. In 1999, the other members of the European Union
accounted for 58.7% of all exports and 53.8% of its imports, as
compared to 43.3% and 41.3%, respectively, in 1980. In 1999, the
United Kingdom's largest trading partners with respect to exports
and imports were the United States and Germany, respectively.
Historically, the United Kingdom's current account
consisted of relatively small trade deficits, sometimes
outweighed by surpluses on invisibles (services, interest,
dividends, profits and transfers). Since 1980, several important
changes have taken place with regard to the United Kingdom's
trading position. Those include the increased importance to the
economy of oil exports from the North Sea, the change from being
a net exporter to a net importer of goods and the diminishing
surpluses from invisibles. These developments led to a balance
of payments deficit, which continued through 1999, with the
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exception of 1997, when the balance of payments moved into
surplus.
With regard to the public sector of the economy, the
national government publishes forecasts for the economy and the
public sector net cash requirement (PSNCR), previously known as
the public sector borrowing requirement ("PSBR"). The PSNCR is a
mandated measure of the amount of borrowing required to balance
the national government's budget. Figures for the fiscal year
ended March 31, 1998, show a PSNCR equal to 0.2% of GDP (or a
general government financial deficit of 0.8%). As a result, the
general government budget balance for the 1997/1998 fiscal year
was well below the permitted level for countries permitted to
participate in the Economic and Monetary Union ("EMU") beginning
in January 1999. Although the United Kingdom has met the EMU's
eligibility criteria, the government chose not to participate in
the EMU when it was launched in January 1999. Further, the
government announced that it would not take any action before a
referendum is held after the next general election. Nonetheless,
the government submitted a report to the European Commission
detailing the steps the government is taking to prepare the
United Kingdom for joining the EMU at a later date in the event
it decides to do so. The issue of the United Kingdom's
membership in the EMU has become very contentious and faces
growing public opposition.
MONETARY AND BANKING SYSTEM
The central bank of the United Kingdom is the Bank of
England. Its main functions are to advise on the formulation and
execution of monetary policy, to supervise banking operations in
the United Kingdom, to manage the domestic currency, and, as
agent for the Government, the country's foreign exchange
reserves. Additionally, shortly after taking office in 1997,
Prime Minister Blair vested responsibility for setting interest
rates in a new Monetary Policy Committee headed by the Bank of
England, as opposed to the Treasury.
The City of London is one of the world's major financial
centers. It has the greatest concentration of banks and the
largest insurance market in the world. It is estimated that
United Kingdom insurers handle approximately 20% of the general
insurance business placed in the international market. Financial
services currently form approximately 20% of the country's GDP.
The currency unit of the United Kingdom is the Pound
Sterling. In June 1972, the Pound was allowed to float against
other currencies. The general trend since then has been a
depreciation against most major currencies, including the U.S.
Dollar, Japanese Yen, German Deutsche Mark ("DM"), French Franc
and the European Currency Unit ("ECU"). On October 8, 1990,
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Pound Sterling became part of the Exchange Rate Mechanism ("ERM")
of the European Monetary System at a central rate of L1:DM2.95.
Membership in the ERM requires that each currency remain within a
certain fluctuation range against other currencies. If this
range is not maintained, the currency must be revalued.
Initially, the Pound remained competitive within the DM range of
2.80 to 2.98, but the pressures exerted by ERM membership made it
increasingly difficult for the United Kingdom to allow the Pound
to remain in the ERM. While the government continued to defend
the relative value of the Pound by raising interest rates, it
became clear that the Pound was not competitive against the
Deutsche Mark. On September 16, 1992, the Pound's membership in
the ERM was suspended. The value of the Pound continued to fall
rapidly after the exit from the ERM, reaching a low of DM2.335 at
the end of February 1993. It has since recovered against the
Deutsche Mark and other currencies. In addition to the United
Kingdom's former membership in the ERM, the growing importance of
trade with the European Union has made the Deutsche Mark exchange
rate more important to the United Kingdom than the U.S. Dollar
exchange rate. From 1988 through 1993, the Pound declined at an
average annual rate of approximately 15% against the U.S. Dollar
and approximately 20% against the Deutsche Mark. Since 1993, the
exchange rate between the Pound and the U.S. Dollar has remained
fairly constant, while the exchange rate between the Pound and
the Deutsche Mark has risen significantly, by over 35% between
January 1996 and July 1997. In 1996, the average annual exchange
rates of the Pound against the U.S. Dollar and the Deutsche Mark
were $1.59 and DM2.41, respectively. In 1997, the average
exchange rates of the Pound against the U.S. Dollar and the
Deutsche Mark were $1.64 and DM2.84, respectively. In 1998, the
average exchange rates of the Pound against the U.S. Dollar and
the Deutsche Mark were $1.66 and DM2.91, respectively. In 1999,
the average exchange rates of the Pound against the U.S. Dollar
and the Deutsche Mark were $1.62 and DM2.97, respectively.
On January 1, 1999 eleven member countries of the
European Union (Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain)
adopted the Euro as their common currency. In the transition
period of January 1, 1999 to January 1, 2002, the national
currencies of these eleven countries (e.g., the Deutsche Mark and
the French Franc) will be subdivisions of the Euro. After
January 1, 2002, it is anticipated that the national currencies
will no longer be valid, except to exchange old banknotes. The
ECU, which was not a true currency in its own right, but rather a
unit of account whose value was tied to its underlying
constituent currencies, ceased to exist as of January 1, 1999, at
which time all ECU obligations were converted into Euro
obligations at a 1:1 conversion rate.
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THE LONDON STOCK EXCHANGE
The London Stock Exchange ("LSE") is both the national
stock exchange for the United Kingdom and the world's leading
marketplace for the trading of international equities. The LSE
provides a secondary market for trading in more than 10,000
securities. It offers markets for domestic securities
(securities issued by companies in the United Kingdom or
Ireland), foreign equities, United Kingdom gilts (securities
issued by the national government), bonds or fixed interest
stocks (usually issued by companies or local authorities) and
options. As of August 31, 2000, foreign equities constituted
approximately 66% and United Kingdom equities constituted
approximately 34% of the market value of all LSE listed and
quoted equity securities. At the end of 1999, the LSE was the
world's third largest stock exchange in terms of market value,
the New York Stock Exchange being the largest and the Tokyo Stock
Exchange being the second largest.
The LSE comprises different markets. In addition to the
market for officially-listed securities, the LSE includes a
market created in 1995 for smaller and newer companies known as
AIM. As of August 31, 2000, 460 companies with an aggregate
market value of 17.3 billion Pounds were traded on AIM. As of
December 31, 1999, the market value of the securities traded on
AIM was less than 1% of the market value of the securities
officially listed on the LSE. Another new market, known as
techMARK, was launched by the LSE on November 4, 1999 for
innovative technology companies. As of December 31, 1999, 190
companies with an aggregate market value of 626.1 billion Pounds
were traded on techMARK.
The LSE runs markets for trading securities by providing
a market structure, regulating the operation of the markets,
supervising the conduct of member firms dealing in the markets,
publishing company news and providing trade confirmation and
settlement services. The domestic market is based on the
competing marketmaker system. The bid and offer prices are
distributed digitally via the Exchange's automated price
information system, SEAQ (Stock Exchange Automated Quotations),
which provides widespread dissemination of the securities prices
for the United Kingdom equity market. Throughout the trading
day, marketmakers display their bid (buying) and offer (selling)
prices and the maximum transaction size to which these prices
relate. These prices are firm to other LSE member firms, except
that the prices for larger transactions are negotiable.
Marketmakers in the international equity market display
their quotes on SEAQ International. The system operates in a
manner similar to the domestic SEAQ, but is divided into 40
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separate country sectors, of which 15 are developing markets
sectors.
On October 20, 1997 the LSE launched the new Stock
Exchange Electronic Trading Service, an initiative that will
improve efficiency and lower share trading costs, and is expected
to attract more volume and thus increase liquidity.
On July 7, 1998 the LSE and its German counterpart, the
Deutsche Borse, unexpectedly announced their intention to form a
strategic alliance under which members of one exchange will be
members of the other. While the first phase of the proposed
alliance began in January 1999, the LSE and the Deutsche Borse
still faced numerous issues, including agreement on common
regulations and promulgation by their respective governments of a
common tax regime for share trading. In September 2000, just
prior to a vote of shareholders and amid growing concerns about
regulatory matters and national and cultural differences,
opposition from retail traders and a hostile bid by a rival
exchange, the planned merger was called off. It is unclear
whether there will be efforts in the future to establish a pan-
European equity market.
On November 23, 1999 the LSE, together with the Bank of
England and CREST (the paperless share settlement system through
which trades executed on the LSE's markets can be settled),
announced proposals for the United Kingdom's equity and corporate
debt markets to move from T+5 to T+3 settlement starting in
February 2001.
Sector Analysis of the LSE. The LSE's domestic and
foreign securities include a broad cross-section of companies
involved in many different industries. In the first eight months
of 2000, the five largest industry sectors by turnover among
domestic securities were telecommunications with 16.7%, banks
with 14.8%, media/photography with 31.3%, oil with 7.4% and
pharmaceuticals with 6.5%. In the first eight months of 2000,
the five largest country sectors by market value among listed and
SEAQ International quoted securities were France with 14.0% of
the aggregate market value of listed and SEAQ International
quoted securities, The Netherlands with 12.8%, Germany with
12.7%, the USA with 11.1% and Japan with 9.6%.
Market Growth of the LSE. LSE market value and the
trading volume have increased dramatically since the end of 1990.
In 1999, 335.5 billion domestic shares and 725.9 billion foreign
shares were traded as compared with 155.4 billion and 34.8
billion, respectively in 1991. At the end of 1999, the market
value of listed domestic companies and foreign companies
increased to 1,410.6 billion Pounds and 2,420.1 billion Pounds
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from 450.5 billion Pounds and 1,124.1 billion Pounds,
respectively, at the end of 1990.
Market Performance of the LSE. The FT-SE 100 is an
index that consists of the 100 largest United Kingdom companies.
The FT-SE 100 was introduced by the LSE in cooperation with The
Financial Times and the Institute and Faculty of Actuaries in
1984. As measured by the FT-SE 100, the performance of the 100
largest companies reached a record high of 6663.8 on May 4, 1999.
On December 31, 1999, the FT-SE 100 closed at 6930.2 and on
October 16, 2000, the FT-SE 100 closed at 6285.7.
REGULATION OF THE UNITED KINGDOM FINANCIAL SERVICES INDUSTRY
The principal securities law in the United Kingdom is
the Financial Services Act. The Financial Services Act, which
became law in November 1986, established a new regulatory system
for the conduct of investment businesses in the United Kingdom.
Most of the statutory powers under the Act were transferred to
the Securities and Investments Board ("SIB"), a designated agency
created for this purpose. The SIB was given wide-ranging
enforcement powers and was made accountable to Parliament through
the Treasury. A system of self regulating organizations
("SROs"), which regulate their members, was made accountable to
the SIB. There are three SROs covering the financial market,
including the Securities and Futures Authority which is
responsible for overseeing activities on the Exchange. The other
SROs are the Investment Management Regulatory Organization and
the Personal Investment Authority. In 1988, it became illegal for
any firm to conduct business without authorization from the SRO
responsible for overseeing its activities. In addition,
Recognized Investment Exchanges ("RIEs"), which include the
London Stock Exchange of London, the London International
Financial Futures and Options Exchange, the London Commodities
Exchange, the International Petroleum Exchange of London, the
London Metal Exchange and the London Securities and Derivatives
Exchange were made accountable to the SIB. Recognition as an
RIE exempts the exchange (but not its members) from obtaining
authorization for actions taken in its capacity as an RIE. To
become an RIE, an exchange must satisfy the SIB that it meets
various prerequisites set out in the Act, including having
effective arrangements for monitoring and enforcing compliance
with its rules. Recognized Professional Bodies ("RPBs")
supervise the conduct of lawyers, actuaries, accountants and some
insurance brokers. Together the SROs, RIEs and RPBs provide the
framework for protection for investors and integrity of the
markets.
On May 20, 1997 the newly installed Labour government
announced a proposed major restructuring of the regulation and
supervision of the financial services industry in the United
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Kingdom. The main feature of the restructuring plan is to
transfer regulatory authority over banks from the Bank of England
to an expanded SIB, which has been named the Financial Services
Authority (FSA). In addition, the plan calls for the merger of
the three SROs into the FSA. The transfer of banking supervision
from the Bank of England to the FSA was formally implemented on
June 1, 1998. The Financial Services and Markets Act,
legislation implementing the proposed consolidation of the SROs
into the FSA, which is more complex and more controversial, was
introduced in the House of Commons on June 17, 1999 and was
enacted on June 14, 2000. On July 18, 2000, the Economic
Secretary announced that the Act would be fully implemented in
about a year's time. Among other things, new FSA rules and
systems, secondary legislation and industry preparations will be
required.
The European Union's Investment Services Directive
("ISD") will, with the various banking directives, provide the
framework for a single market in financial services in Europe.
Authorized firms will be able to operate on the basis of one
authorization throughout Europe. Member states were given until
January 1, 1996 to implement the ISD. As of September 2000, all
member states, including the United Kingdom, had implemented the
ISD, with the exception of Luxembourg.
Basic restrictions on insider dealing in securities are
contained in the Company Securities Act of 1985. The Financial
Services Act provides guidelines for investigations into insider
dealing under the Criminal Justice Act of 1993 and penalties for
any person who fails to cooperate with such an investigation. In
addition, the Financial Services Act introduced new listing and
disclosure requirements for companies.
UNITED KINGDOM FOREIGN EXCHANGE AND INVESTMENT CONTROLS
The United Kingdom has no exchange or investment
controls, and funds and capital may be moved freely in and out of
the country. Exchange controls were abolished in 1979. As a
member of the European Union, the United Kingdom applies the
European Union's common external tariff.
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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
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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."
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