<PAGE>
As filed with the Securities and Exchange
Commission on December 28, 1998
File No. 2-48227
811-2383
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF l933
Pre-Effective Amendment No.
Post-Effective Amendment No. 67 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 45 X
ALLIANCE BOND FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrants Telephone Number, including Area Code: (800) 221-5672
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York l0105
(Name and address of agent for service)
Copies of communications to:
Thomas G. MacDonald
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
It is proposed that this filing will become effective (check
appropriate box)
immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
X on March 1, 1999 pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
<PAGE>
on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
N-1A Item No. Location in Prospectuses
(Caption)
PART A
Item 1. Front and Back Cover Pages..........Cover Pages
Item 2. Risk/Return Summary:
Investments, Risks, and
Performance.........................Risk/Return
Summary
Item 3. Risk/Return Summary:
Fee Table...........................Risk/Return
Summary
Item 4. Investment Objectives,
Principal Investment Strategies,
And Related Risks...................Other
Information
About the
Fund's
Objectives,
Strategies, and
Risks
Item 5. Management's Discussion of
Fund Performance....................Not Applicable
Item 6. Management, Organization,
And Capital Structure...............Management of
the Fund
Item 7. Shareholder Information.............Purchase and
Sale of Shares
Item 8. Distribution Arrangements...........Distribution
Arrangements
Item 9. Financial Highlights
Information.........................Financial
Highlights
<PAGE>
PART B Location in Statements
Of Additional Information
(Caption)
Item 10. Cover Page and
Table of Contents...................Cover Page
Item 11. Fund History........................Description of
the Fund;
General
Information
Item 12. Description of the Fund And
Its Investments and Risks...........Description of
the Fund
Item 13. Management of the Fund..............Management of
the Fund
Item 14. Control Persons and Principal
Holders of Securities...............Management of
the Fund;
General
Information
Item 15. Investment Advisory and
Other Services......................Management of
the Fund
Item 16. Brokerage Allocation and
Other Practices.....................Portfolio
Transactions
Item 17. Capital Stock and Other
Securities..........................General
Information
Item 18. Purchase, Redemption and Pricing
of Shares...........................Purchase,
Redemption and
Repurchase of
Shares
Item 19. Taxation of the Fund................Dividends,
Distributions
and Taxes
Item 20. Underwriters........................General
Information
<PAGE>
Item 21. Calculation of Performance
Data................................General
Information
Item 22. Financial Statements................Financial
Statements;
Report of
Independent
Auditors
THE ALLIANCE
BOND FUNDS
PROSPECTUS
March 1, 1999
U.S. GOVERNMENT FUNDS
--Alliance Short-Term U.S. Government Fund
--U.S. Government Portfolio
--Alliance Limited Maturity Government Fund
MORTGAGE FUND
--Alliance Mortgage Securities Income Fund
MULTI-MARKET FUND
--Multi-Market Strategy Trust
GLOBAL BOND FUNDS
--Alliance North American Government Income Trust
--Alliance Global Dollar Government Fund
--Alliance Global Strategic Income Trust
CORPORATE BOND FUNDS
--Corporate Bond Portfolio
--Alliance High Yield Fund
The Alliance Bond Funds provide a broad selection of investment
alternatives to investors seeking high current income.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY
GLOSSARY
DESCRIPTION OF THE FUNDS
Investment Objectives and Policies
Description of Investment Practices
Additional Risk Considerations
MANAGEMENT OF THE FUNDS
PURCHASE AND SALE OF SHARES
How The Funds Value Their Shares
How To Buy Shares
How to Exchange Shares
How To Sell Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTION ARRANGEMENTS
GENERAL INFORMATION
FINANCIAL HIGHLIGHTS
2
The Funds' investment adviser is Alliance Capital Management
L.P., a global investment manager providing diversified services
to institutions and individuals through a broad line of
investments including more than 100 mutual funds. Since 1971,
Alliance has earned a reputation as a leader in the investment
world with over $___ billion in assets under management as of
December 31, 1998. Alliance provides investment management
services to employee benefit plans for ___ of the FORTUNE 100
companies.
RISK/RETURN SUMMARY
The following is a summary of certain key information about the
Alliance Bond Funds. You will find additional information about
each Fund, including a detailed description of the risks of an
investment in each Fund, after this summary.
The Risk/Return Summary describes the Funds' objectives,
principal investment strategies, risks, and fees. More detailed
descriptions of the Funds can be found further back in the
Prospectus. Please be sure to read the more complete
descriptions of the Funds following this summary, including the
risks associated with investing in the Funds, BEFORE you invest.
Each of the Funds also may at times use certain types of
investment derivatives such as options, futures, forwards, and
swaps. The use of these techniques involves special risks that
are discussed in this Prospectus.
The Risk/Return Summary includes a table for each Fund showing
its average annual returns and a bar chart showing its annual
returns. The table and the bar chart provide an indication of
the historical risk of an investment in each Fund by showing:
-- how the Fund's average annual returns for one, five, and
10 years (or, if less, the life of the Fund) compare to
those of a broad based securities market index; and
-- changes in the Fund's performance from year to year over
10 years or, if less, the life of the Fund.
A Fund's past performance, of course, does not necessarily
indicate how it will perform in the future.
Other important things for you to note:
-- You may gain or lose money by investing in a Fund.
-- An investment in a Fund is not a deposit in a bank and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
3
U.S. GOVERNMENT FUNDS
The U.S. Government Funds offer investors high current income
consistent with the preservation of capital by investing
primarily in U.S. Government securities.
ALLIANCE SHORT-TERM U.S. GOVERNMENT FUND
-- OBJECTIVE: The Fund's investment objective is high
current income consistent with the preservation of
capital by investing primarily in a portfolio of U.S.
Government securities.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund invests at
least 65% of its total assets in U.S. Government
securities, including repurchase agreements and forward
commitments relating to U.S. Government securities. The
Fund also may invest a portion of its assets in
securities of non-governmental issuers. The Fund
normally maintains an average dollar-weighted maturity
of not more than three years
PERFORMANCE INFORMATION AND BAR CHART
PERFORMANCE TABLE
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
4
U.S. GOVERNMENT PORTFOLIO
-- OBJECTIVE: The Fund's investment objective is a high
level of current income that is consistent with prudent
investment risk.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund invests
primarily in U.S. Government securities, including
repurchase agreements and forward contracts relating to
U.S. Government securities. The Fund also may invest in
non-U.S. Government mortgage-related and asset-backed
securities. The average weighted maturity of the Fund's
investments varies between one year or less and 30
years.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
5
ALLIANCE LIMITED MATURITY GOVERNMENT FUND
-- OBJECTIVE: The Fund's investment objective is the
highest level of current income consistent with low
volatility of net asset value.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund invests
primarily in U.S. Government securities, including
mortgage-related securities and repurchase agreements
relating to U.S. Government securities. The Fund takes
advantage of a wide range of maturities of debt
securities and adjusts the dollar-weighted average
maturity of its portfolio from time to time, depending
on Alliance's assessment of relative yields on
securities of different maturities and the expected
effect of changes in interest rates on the market value
of the Fund's portfolio. At all times, however, each of
the Fund's securities has either a remaining maturity of
not more than 10 years or a duration not exceeding that
of a ten-year Treasury note.
The Fund also may invest up to 35% of its total assets
in:
- high-quality asset-backed securities, including
mortgage-related securities that are not U.S.
Government securities;
- treasury securities issued by private issuers;
- certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of banks with
assets of more than $1 billion;
- higher quality commercial paper or, if unrated,
commercial paper issued by companies that have high
quality debt issues outstanding; and
- high-quality debt securities of corporate issuers.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
6
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
7
MORTGAGE FUND
ALLIANCE MORTGAGE SECURITIES INCOME FUND
-- OBJECTIVE: The Fund's investment objective is a high
level of current income to the extent consistent with
prudent investment risk.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund invests
primarily in a diversified portfolio of mortgage-related
securities, including collateralized mortgage
obligations or CMO's. The Fund may invest up to 20% of
its total assets in lower-rated mortgage-related
securities. The average weighted maturity of the Fund's
portfolio of fixed-income securities is expected to vary
between two and ten years.
The Fund also may invest up to 35% of its total assets
in:
- U.S. Government securities;
- qualifying bank deposits;
- prime commercial paper or, if unrated, commercial
paper issued by companies that have high-quality
debt issues outstanding;
- high-grade debt securities secured by mortgages on
commercial real estate or residential rental
properties; and
- high-grade asset-backed securities.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
8
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
9
MULTI-MARKET FUND
ALLIANCE MULTI-MARKET STRATEGY TRUST
-- OBJECTIVE: The Fund's investment objective is the
highest level of current income that is available
consistent with what Alliance considers to be prudent
investment risk, from a portfolio of high-quality debt
securities.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund invests in
high-quality debt securities having remaining maturities
of not more than five years, with a high proportion of
investments in money market instruments. The Fund seeks
investment opportunities in foreign, as well as
domestic, securities markets. Normally, at least 70% of
the Fund's debt securities will be denominated in
foreign currencies.
The Fund concentrates at least 25% of its total assets
in debt instruments issued by domestic and foreign
banking companies. The Fund may use significant
borrowings for leverage. The Fund also may:
- use derivatives strategies;
- invest in prime commercial paper or unrated paper
of equivalent quality;
- enter into repurchase agreements; and
- invest in variable, floating, and inverse floating
rate securities.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
10
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
11
GLOBAL BOND FUNDS
The Global Bond Funds offer investors a high level of current
income through investments primarily in foreign government
securities.
ALLIANCE NORTH AMERICAN GOVERNMENT INCOME TRUST
-- OBJECTIVE: The Fund's investment objective is the
highest level of current income, consistent with what
Alliance considers to be prudent investment risk, that
is available from a portfolio of debt securities issued
or guaranteed by the United States, Canada, or Mexico.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund primarily
invests in debt securities issued or guaranteed by; (i)
the federal governments of the United States, Canada,
and Mexico; (ii) government-related entities in the
United States, Canada and Mexico; and (iii) the
provincial governments of Canada and Mexico. The Fund
also invests significantly in comparable Argentine debt
securities. The Fund also may invest in debt securities
of other Central and South American countries. These
investments are investment grade securities generally
denominated in each countries' currency, but at least
25% of the Fund's investments are in U.S.
Dollar-denominated securities. The average weighted
maturity of the Fund's portfolio is expected to vary
between one year or less and 30 years.
The Fund may use significant borrowings for leverage.
The Fund also may:
- use derivative strategies; and
- invest in variable, floating, and inverse floating
rate instruments.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
12
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
13
ALLIANCE GLOBAL DOLLAR GOVERNMENT FUND
-- OBJECTIVE: The Fund's investment objective is a high
level of current income and, secondarily, capital
appreciation.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund primarily
invests in sovereign debt obligations. The Fund invests
substantially all of its assets in lower-rated
securities or unrated securities of equivalent quality.
The Fund limits its investments in sovereign debt
obligations of any one country to no more than 25% of
its total assets.
The Fund may invest up to 35% of its total assets in
U.S. and non-U.S. corporate fixed income securities.
All of the Fund's investments will be in U.S.
Dollar-denominated sovereign debt obligations and fixed
income securities. The Fund also may invest up to 30%
of its assets in emerging markets or developing
countries, including Argentina, Brazil, Mexico, Morocco,
the Philippines, Russia, and Venezuela.
The average weighted maturity of the Fund's investments
is:
- for U.S. fixed-income securities, nine to 15 years;
- for non-U.S. fixed-income securities, 15 to 25
years; and
- for sovereign debt obligations, longer than 25
years.
The Fund may use significant borrowings and reverse
repurchase agreements and dollar rolls for leverage.
The Fund also may:
- use derivatives strategies;
- invest in structured securities;
- invest in fixed and floating rate loans to
sovereign debt issuers;
- enter into repurchase agreements; and
- invest in variable, floating, and inverse floating
rate securities.
14
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
15
ALLIANCE GLOBAL STRATEGIC INCOME TRUST
-- OBJECTIVE: The Fund's investment objective is primarily
a high level of current income and, secondarily, capital
appreciation.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund primarily
invests in fixed-income securities of U.S. and non-U.S.
companies, U.S. Government and foreign government
securities, and supranational entities. The Fund's
foreign investments are generally denominated in foreign
currencies. The Fund, however, generally seeks to hedge
currency risk. The Fund normally invests at least 65%
of its total assets in fixed-income securities of
companies located in at least three countries, one of
which may be the United States. The Fund limits its
investments in any one foreign country to 25% of its
total assets.
The Fund invests at least 65% of its total assets in
investment grade securities, but also may invest up to
35% of its assets in lower-rated securities. The
average weighted maturity of the Fund's investments
varies between five and 30 years.
The Fund may use significant borrowings and reverse
repurchase agreements and dollar rolls for leverage.
The Fund also may:
- use derivatives strategies;
- invest in structured securities;
- invest in Eurodollar instruments and foreign
currencies;
- invest in asset-backed and mortgage-related
securities;
- enter into repurchase agreements; and
- invest in floating, variable, and inverse floating
rate securities.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
16
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
17
CORPORATE BOND FUNDS
CORPORATE BOND PORTFOLIO
-- OBJECTIVE: The Fund's investment objective is primarily
to maximize income over the long term consistent with
providing reasonable safety in the value of each
shareholder's investment and secondarily to increase its
capital through appreciation of its investments in order
to preserve and, if possible, increase the purchasing
power of each shareholder's investment.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund primarily
invests in investment grade corporate bonds. The Fund
may invest up to 50% of its total assets in U.S. Dollar-
denominated foreign debt securities, primarily corporate
fixed-income securities and sovereign debt obligations.
The Fund also may invest in income-producing equity
securities. The average weighted maturity of the Fund's
investments varies between one year or less and 30
years.
The Fund pursues a more aggressive investment strategy
than other corporate bond funds. The Fund's investments
tend to have a relatively long average weighted maturity
and duration. The Fund emphasizes both foreign
corporate and sovereign debt obligations, as well as
corporate bonds that are expected to benefit from
improvements in their issuers' credit fundamentals.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
18
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
19
ALLIANCE HIGH YIELD PORTFOLIO
-- OBJECTIVE: The Fund's investment objective is to
achieve a high total return by maximizing current income
and, to the extent consistent with that objective,
capital appreciation.
-- PRINCIPAL INVESTMENT STRATEGIES: The Fund primarily
invests in high yield, below investment grade fixed-
income securities, commonly known as "junk bonds." The
Fund seeks to maximize current income by taking
advantage of market developments, yield disparities, and
variations in the creditworthiness of issuers.
PERFORMANCE INFORMATION AND BAR CHART
Performance Table
1 Year 5 Years 10 Years
Class A
Class B
Class C
[Relevant Index]
Bar Chart
The annual returns in the bar chart are for the Fund's Class A
shares and do not reflect sales loads. If sales loads were
reflected, returns would be less than those shown.
[INSERT CHART]
You should consider an investment in the Fund as a long-term
investment. The Fund's returns will, however, fluctuate over
shorter periods. For example, during the period shown in the bar
chart, the Fund's:
BEST QUARTER was up ___%, ________ quarter, 19__; and
WORST QUARTER was down ___%, _________ quarter, 19__.
20
SUMMARY OF PRINCIPAL RISKS
The value of an investment in a Fund changes with the values of
that Fund's investments. Many factors can affect those values.
In this summary, we describe the principal risks that may affect
a particular Fund's investments as a whole. These risks and the
Funds subject to the risks appear in a chart at the end of this
section. All of the Funds could be subject to additional
principal risks because the types of investments made by each
Fund can change over time. This prospectus has additional
descriptions of investments that appear in bold type in the
discussions under "Description of Investment Practices" or
"Additional Risk Considerations." Those sections also include
more information about the Funds, their investments, and related
risks.
-- INTEREST RATE RISK This is the risk that changes in
interest rates will affect the value of a Fund's
investments in fixed-income debt securities, such as
bonds, notes, and asset-backed securities, or other
income-producing securities. All of the Funds have
interest rate risk. Increases in interest rates may
cause the value of a Fund's investments to decline.
Even Funds, such as the SHORT-TERM U.S. GOVERNMENT, U.S.
GOVERNMENT, and LIMITED MATURITY GOVERNMENT, that invest
a substantial portion of their assets in the highest
quality debt securities, including U.S. GOVERNMENT
SECURITIES, are subject to interest rate risk. Interest
rate risk generally is greater for those Funds that
invest a significant portion of their assets in LOWER-
RATED SECURITIES or comparable UNRATED SECURITIES such
as GLOBAL DOLLAR GOVERNMENT, GLOBAL STRATEGIC INCOME,
CORPORATE BOND, and HIGH YIELD.
Interest rate risk is generally greater for Funds that
invest in debt securities with longer maturities, such
as NORTH AMERICAN GOVERNMENT INCOME, GLOBAL DOLLAR
GOVERNMENT, GLOBAL STRATEGIC INCOME, and CORPORATE BOND.
This risk is compounded for the Funds that invest a
substantial portion of their assets in MORTGAGE-RELATED
or OTHER ASSET-BACKED SECURITIES, such as SHORT-TERM
U.S. GOVERNMENT and MORTGAGE SECURITIES INCOME. The
value of these securities is affected more by changes in
interest rates because when interest rates rise, the
maturities of these type of securities tend to lengthen
and the value of the securities decreases more
significantly. In addition, these types of securities
are subject to prepayment when interest rates fall,
which generally results in lower returns because the
21
Funds must reinvest their assets in debt securities with
lower interest rates. Increased interest rate risk also
is likely for GLOBAL DOLLAR GOVERNMENT, GLOBAL STRATEGIC
INCOME, and CORPORATE BOND, which invest in debt
securities paying no current interest, such as ZERO
COUPON, PRINCIPAL-ONLY, and INTEREST-ONLY SECURITIES, or
paying non-cash interest in the form of other debt
securities (PAYMENT-IN-KIND SECURITIES).
-- CREDIT RISK This is the risk that the issuer or the
guarantor of a debt security, or the counterparty to a
DERIVATIVES contract, will be unable or unwilling to
make timely payments of interest or principal, or to
otherwise honor its obligations. The degree of risk for
a particular security may be reflected in its credit
rating. Credit risk is greater for the Funds such as
MORTGAGE SECURITIES INCOME, GLOBAL DOLLAR GOVERNMENT,
GLOBAL STRATEGIC INCOME, CORPORATE BOND, and HIGH YIELD
that invest in LOWER-RATED SECURITIES. These debt
securities and similar UNRATED SECURITIES (commonly
known as "junk bonds") have speculative elements or are
predominantly speculative credit risks.
Funds such as GLOBAL DOLLAR GOVERNMENT and HIGH YIELD
may be subject to greater credit risk because they
invest in debt securities issued in connection with
corporate restructurings by highly leveraged issuers and
in debt securities not current in the payment of
interest or principal or are in default. Funds such as
MULTI-MARKET STRATEGY, NORTH AMERICAN GOVERNMENT INCOME,
and GLOBAL DOLLAR GOVERNMENT that invest in FOREIGN
SECURITIES also are subject to increased credit risk
because of the difficulties of requiring foreign
entities, including issuers of SOVEREIGN DEBT, to honor
their contractual commitments, and because a number of
foreign governments and other issuers are already in
default.
-- MARKET RISK This is the risk that the value of a Fund's
investments will fluctuate as the bond markets fluctuate
and that prices overall will decline over shorter or
longer-term periods. All of the Funds are subject to
this risk.
-- FOREIGN RISK This is the risk of investments in issuers
located in foreign countries. All Alliance Funds that
invest in FOREIGN SECURITIES are subject to this risk,
including LIMITED MATURITY GOVERNMENT, MULTI-MARKET
STRATEGY, NORTH AMERICAN GOVERNMENT INCOME, GLOBAL
DOLLAR GOVERNMENT, GLOBAL STRATEGIC INCOME, CORPORATE
BOND, and HIGH YIELD. These Funds' investments in
22
FOREIGN SECURITIES may experience more rapid and extreme
changes in value than if they invested solely in
securities of U.S. companies. The securities markets of
many foreign countries are relatively small, with a
limited number of companies representing a small number
of securities. In addition, foreign companies usually
are not subject to the same degree of regulation as U.S.
companies. Reporting, accounting, and auditing
standards of foreign countries differ, in some cases
significantly, from U.S. standards. Nationalization,
expropriation or confiscatory taxation, currency
blockage, political changes, or diplomatic developments
could adversely affect a Fund's investments in a foreign
country. In the event of nationalization,
expropriation, or other confiscation, a Fund could lose
its entire investment.
Political, social, and economic changes in a particular
country could result in increased risks for GLOBAL
DOLLAR GOVERNMENT and GLOBAL STRATEGIC INCOME, which
invest a substantial portion of their assets in
SOVEREIGN DEBT OBLIGATIONS, including BRADY BONDS. The
investments in emerging market countries of NORTH
AMERICAN GOVERNMENT INCOME and GLOBAL DOLLAR GOVERNMENT
are likely to involve significant risks. These
countries, such as Mexico, Argentina, Brazil, Morocco,
the Philippines, Russia, and Venezuela, have a history
of political and economic instability. Funds such as
MULTI-MARKET STRATEGY and NORTH AMERICAN GOVERNMENT
INCOME that invest a significant portion of their assets
in a specific geographic area like Europe or the
Americas generally have more exposure to regional
economic risks than Funds making foreign investments
throughout the world's economies.
-- CURRENCY RISK This is the risk that fluctuations in the
exchange rates between the U.S. Dollar and foreign
currencies may negatively affect the value of a Fund's
investments. Funds such as LIMITED MATURITY GOVERNMENT,
MULTI-MARKET STRATEGY, NORTH AMERICAN GOVERNMENT INCOME,
GLOBAL STRATEGIC INCOME and HIGH YIELD that invest in
securities denominated in, and receiving revenues in,
FOREIGN SECURITIES, are subject to currency risk.
-- DIVERSIFICATION RISK Most analysts believe that overall
risk can be reduced through diversification, while
concentration of investments in a small number of
securities increases risks. MULTI-MARKET STRATEGY,
NORTH AMERICAN GOVERNMENT INCOME, GLOBAL DOLLAR
GOVERNMENT, and GLOBAL STRATEGIC INCOME are not
"diversified." This means they can invest more of their
23
assets in a relatively small number of issuers with
greater concentration of risk. Factors affecting these
issuers can have a more significant effect on the Fund's
net asset value. Similarly, a Fund that concentrates
its investments in a particular industry, such as MULTI-
MARKET STRATEGY, which invests at least 25% of its
assets in the banking industry, could have increased
risks because factors affecting that industry could have
a more significant effect on the value of the Fund's
investments.
-- LEVERAGING RISK. When a Fund borrows money or otherwise
leverages its Fund, the value of an investment in that
Fund will be more volatile and all other risks will tend
to be compounded. Each Fund may create leverage by
using REVERSE REPURCHASE AGREEMENTS, INVERSE FLOATING
RATE INSTRUMENTS or DERIVATIVES, or by borrowing money.
-- DERIVATIVES RISK. All Funds may use DERIVATIVES, which
are financial contracts whose value depends on, or is
derived from, the value of an underlying asset,
reference rate, or index. Alliance will sometimes use
derivatives as part of a strategy designed to reduce
other risks. Generally, however, the Funds use
derivatives as direct investments to earn income,
enhance yield, and broaden Fund diversification, which
entail greater risk than if used solely for hedging
purposes. In addition to other risks such as the credit
risk of the counterparty, derivatives involve the risk
of difficulties in pricing and valuation and the risk
that changes in the value of the derivative may not
correlate perfectly with relevant assets, rates, or
indices. Funds that invest in STRUCTURED SECURITIES,
such as GLOBAL DOLLAR GOVERNMENT, GLOBAL STRATEGIC
INCOME, and CORPORATE BOND, could have increased
derivatives risk.
-- LIQUIDITY RISK. Liquidity risk exists when particular
investments are difficult to purchase or sell, possibly
preventing a Fund from selling out of these ILLIQUID
SECURITIES at an advantageous price. All of the Funds
are subject to liquidity risk because DERIVATIVES and
securities involving substantial interest rate and
credit risk tend to involve greater liquidity risk. In
addition, liquidity risk tends to increase to the extent
a Fund invests in debt securities whose sale may be
restricted by law or by contract.
-- MANAGEMENT RISK. Each Fund is subject to management
risk because it is an actively managed investment Fund.
Alliance will apply its investment techniques and risk
24
analyses in making investment decisions for the Funds,
but there can be no guarantee that they will produce the
desired results. In some cases, derivative and other
investment techniques may be unavailable or Alliance may
determine not to use them, possibly even under market
conditions where their use could benefit a Fund.
25
PRINCIPAL RISKS BY FUND
The following chart summarizes the Principal Risks of each Fund.
Risks not marked for a particular Fund may, however, still apply
to some extent to that Fund at various times.
<TABLE>
<CAPTION>
FUND INTEREST CREDIT MARKET FOREIGN CURRENCY DIVERSIFICA- LEVERAGING DERIVATIVES LIQUIDITY MANAGE-
RATE RISK RISK RISK RISK TION RISK RISK RISK RISK MENT RISK
RISK
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term
U.S.
Government X X X X X
U.S.
Government X X X X X
Limited
Maturity
Government X X X X X X X
Mortgage
Securities
Income X X X X X X X
Multi-Market
Strategy X X X X X X X X X
North American
Government
Income X X X X X X X X X X
Global Dollar
Government X X X X X X X X X X
Global
Strategic
Income X X X X X X X X X X
Corporate
Bond X X X X X X X X X X
High Yield X X X X X X X X X X
</TABLE>
26
EXPENSE INFORMATION
This table describes the fees and expenses that you may pay
if you buy and hold shares of the Funds.
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)
CLASS A CLASS B CLASS B CLASS C
SHARES SHARES(a) SHARES(b) SHARES
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) 4.25% None None None
Maximum Deferred Sales Charge None 3.0% 4.0% 1.0%
(Load) (as a percentage of during the during the during
original purchase price or 1st year, 1st year, the
redemption proceeds, whichever decreasing decreasing 1st
is lower) 1.0% 1.0% year,
annually annually 0%
to 0% to 0% there-
after the after the after
3rd year* 4th year**
Exchange Fee None None None None
(a) For all Funds except Global Strategic Income and High Yield.
(b) For Global Strategic Income and High Yield.
* Class B Shares automatically convert to Class A Shares after 6
years.
** Class B Shares automatically convert to Class A Shares after 8
years.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS) AND EXAMPLE
The examples are to help you compare the cost of investing in a
Fund with the cost of investing in other funds. It assumes that
you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. It
also assumes that your investment has a 5% return each year and
that the Fund's operating expenses stay the same. Your actual
costs may be higher or lower.
<TABLE>
OPERATING EXPENSES EXAMPLES
SHORT-TERM U.S. CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
GOVERNMENT A B+ B++ C+ C++
<S> <C> <C> <C> <C> <C> <C> <C> <C>
27
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
Waiver and/or Expense
Reimbursement +++
Net Expenses
</TABLE>
28
<TABLE>
OPERATING EXPENSES EXAMPLES
U.S. GOVERNMENT CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
A B+ B++ C+ C++
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
LIMITED MATURITY CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
GOVERNMENT A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
MORTGAGE SECURITIES CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
INCOME A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
MULTI-MARKET CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
STRATEGY A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
NORTH AMERICAN CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
GOVERNMENT INCOME A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
GLOBAL DOLLAR CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
29
GOVERNMENT A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
GLOBAL STRATEGIC CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
INCOME A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
Waiver and/or Expense
Reimbursement +++
Net Expenses
CORPORATE BOND CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
A B+ B++ C+ C++
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
</TABLE>
30
<TABLE>
OPERATING EXPENSES EXAMPLES
SHORT-TERM U.S. CLASS A CLASS B CLASS C CLASS CLASS CLASS CLASS CLASS
GOVERNMENT A B+ B++ C+ C++
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees % % % After 1st Yr. $ $ $ $ $
Rule 12b-1 Fees % % % After 3 Yrs. $ $ $ $ $
Other Expenses % % % After 5 Yrs. $ $(a) $(a) $ $
After 10 Yrs.
Total Fund Operating % % %
Expenses = = =
Waiver and/or Expense
Reimbursement +++
Net Expenses
<FN>
+ Assumes redemption at end of period.
++ Assumes no redemption at end of period.
+++ Reflects Alliance's waiver of a portion of its advisory fee and/or reimbursement of a portion of the Fund's
operating expenses. The level of waiver or reimbursement may be changed upon 60 days' notice to the Fund.
(a) Assumes Class B shares convert to Class A shares after 6 years, or, for Global Strategic Income and High
Yield, 8 years.
</TABLE>
31
GLOSSARY
This Prospectus uses the following terms.
TYPES OF SECURITIES
BONDS are fixed, floating, and variable rate debt obligations.
CONVERTIBLE SECURITIES are bonds, debentures, corporate notes,
and preferred stocks that are convertible into common and
preferred stock.
DEBT SECURITIES are bonds, debentures, notes, and bills.
EQUITY SECURITIES are common and preferred stocks, securities
convertible into common and preferred stocks, and rights and
warrants to subscribe for the purchase of common and preferred
stocks.
FIXED-INCOME SECURITIES are debt securities, convertible
securities, and preferred stocks, including floating rate and
variable rate instruments. Fixed-income securities may be rated
(or, if unrated, for purposes of the Funds' investment policies
may be determined by Alliance to be of equivalent quality to
those rated) triple-A (Aaa or AAA), high quality (Aa or AA or
above), high grade (A or above) or investment grade (Baa or BBB
or above) by, as the case may be, Moody's, S&P, Duff & Phelps or
Fitch, or may be lower-rated securities, as defined below. In
the case of "split-rated" fixed-income securities (i.e.,
securities assigned non-equivalent credit quality ratings, such
as Baa by Moody's but BB by S&P or Ba by Moody's and BB by S&P
but B by Fitch), a Fund will use the rating deemed by Alliance to
be the most appropriate under the circumstances.
FOREIGN GOVERNMENT SECURITIES are securities issued or
guaranteed, as to payment of principal and interest, by a
foreign government or any of its political subdivisions,
authorities, agencies or instrumentalities.
HIGHER QUALITY COMMERCIAL PAPER is commercial paper rated at
least Prime-2 by Moody's, A-2 by S&P, Fitch-2 by Fitch, or Duff 2
by Duff & Phelps.
INTEREST-ONLY OR IO SECURITIES are debt securities that receive
only the interest payments on an underlying debt that has been
structured to have two classes, one of which is the IO class and
the other of which is the PRINCIPAL-ONLY OR PO CLASS, that
receives only the principal payments on the underlying debt
obligation. POs are similar to, and are sometimes referred to as,
ZERO COUPON SECURITIES, which are debt securities issued without
interest coupons.
32
LOWER-RATED SECURITIES are fixed-income securities rated Ba or BB
or below, or determined by Alliance to be of equivalent quality,
and are commonly referred to as "junk bonds."
MORTGAGE-RELATED SECURITIES are pools of mortgage loans that are
assembled for sale to investors (such as mutual funds) by various
governmental, government-related, and private organizations.
These securities include:
- ARMS, which are adjustable-rate mortgage securities;
- SMRS, which are stripped mortgage-related securities;
- CMOS, which are collateralized mortgage obligations;
- GNMA CERTIFICATES, which are securities issued by the
Government National Mortgage Association or GNMA;
- FNMA CERTIFICATES, which are securities issued by the
Federal National Mortgage Association or FNMA; and
- FHLMC certificates, which are securities issued by the
Federal Home Loan Mortgage Corporation or FHLMC.
QUALIFYING BANK DEPOSITS are certificates of deposit, bankers'
acceptances, and interest-bearing savings deposits of banks that
have total assets of more than $1 billion and are members of the
Federal Deposit Insurance Corporation.
PRIME COMMERCIAL PAPER is commercial paper rated Prime-1 or
higher by Moody's, A-1 or higher by S&P, Fitch-1 by Fitch, or
Duff 1 by Duff & Phelps.
RULE 144A SECURITIES are securities that may be resold under Rule
144A under the Securities Act.
SOVEREIGN DEBT OBLIGATIONS are foreign government debt
securities, loan participations between foreign governments
and financial institutions, and interests in entities organized
and operated for the purpose of restructuring the investment
characteristics of foreign government securities.
U.S. GOVERNMENT SECURITIES are securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. These
securities include securities backed by the full faith and credit
of the United States, those supported by the right of the issuer
to borrow from the U.S. Treasury, and those backed only by the
credit of the issuing agency itself. The first category includes
U.S. Treasury securities (which are U.S. Treasury bills, notes
and bonds) and certificates issued by GNMA. U.S. Government
33
securities not backed by the full faith and credit of the United
States include certificates issued by FNMA and FHLMC.
RATING AGENCIES
DUFF & PHELPS is Duff & Phelps Credit Rating Company.
FITCH is Fitch IBCA, Inc.
MOODY'S is Moody's Investors Service, Inc.
NRSRO is a nationally recognized statistical rating organization.
S&P is Standard & Poor's Ratings Services.
OTHER
1940 ACT is the Investment Company Act of 1940, as amended.
CODE is the Internal Revenue Code of 1986, as amended.
COMMISSION is the Securities and Exchange Commission.
DURATION is a measure that relates the price volatility of a
security to changes in interest rates. The duration of a debt
security is the weighted average term to maturity, expressed in
years, of the present value of all future cash flows, including
coupon payments and principal repayments. Thus, by definition,
duration is always less than or equal to full maturity.
EXCHANGE is the New York Stock Exchange.
LIBOR is the London Interbank Offered Rate.
SECURITIES ACT is the Securities Act of 1933, as amended.
WORLD BANK is the commonly used name for the International Bank
for Reconstruction and Development.
34
DESCRIPTION OF THE FUNDS
This section of the Prospectus provides a more complete
description of the principal investment objectives, strategies,
and risks of the Alliance Bond Funds. Of course, there can be no
assurance that any Fund will achieve its investment objective.
Please note:
- Additional discussion of the Funds' investments,
including the risks of the investments that appear in
bold type can be found in the discussion under
DESCRIPTION OF INVESTMENT PRACTICES following this
section.
- The description of a Fund's risks may include risks
defined in the SUMMARY OF PRINCIPAL RISKS above.
Additional information about risks of investing in a
Fund can be found in the discussions under ADDITIONAL
RISK CONSIDERATIONS.
- Additional descriptions of each Fund's strategies and
investments, as well as other strategies and investments
not described below, may be found in a Fund's Statement
of Additional Information or SAI.
- Except as noted, (i) the Fund's investment objectives
are fundamental and cannot be changed without a
shareholder vote and (ii) the Fund's investment policies
are not fundamental and thus can be changed without a
shareholder vote.
INVESTMENT OBJECTIVES AND POLICIES
U.S. GOVERNMENT FUNDS
The U.S. Government Funds offer investors high current income
consistent with preservation of capital by investing primarily in
U.S. Government securities.
ALLIANCE SHORT-TERM U.S. GOVERNMENT FUND
Alliance Short-Term U.S. Government Fund seeks high current
income consistent with the preservation of capital by investing
primarily in a portfolio of U.S. Government securities. The
Fund's investment objective is not fundamental. The Fund
normally maintains an average dollar-weighted portfolio maturity
of not more than three years and invests at least 65% of its
total assets in U.S. Government securities, including repurchase
agreements and forward commitments relating to U.S. Government
securities.
35
The Fund may invest a portion of its assets in securities of non-
governmental issuers. Although these investments will be of high
quality at the time of purchase, they may have higher levels of
credit risk than do U.S. Government securities. Under its
policies, the Fund is not obligated to dispose of any security
whose credit quality falls below high quality.
The Fund also may:
- invest in certain SMRS;
- invest in VARIABLE, FLOATING, and INVERSE FLOATING RATE
INSTRUMENTS;
- make SHORT SALES AGAINST THE BOX;
- enter into various hedging transactions, such as
INTEREST RATE SWAPS, CAPS, AND FLOORS;
- purchase and sell FUTURES CONTRACTS for hedging
purposes;
- purchase and sell call and put OPTIONS ON FUTURES
CONTRACTS or on SECURITIES, for hedging purposes or to
earn additional income;
- enter into REPURCHASE AGREEMENTS OR REVERSE REPURCHASE
AGREEMENTS; and
- purchase securities for future delivery; and
- make SECURED LOANS OF PORTFOLIO SECURITIES.
U.S. GOVERNMENT PORTFOLIO
U.S. Government Portfolio seeks a high level of current income
that is consistent with prudent investment risk. As a matter of
fundamental policy, the Fund pursues its objective by investing
at least 65% of the value of its total assets in U.S. Government
securities and repurchase agreements and forward contracts
relating to U.S. Government securities. The Fund may invest the
remaining 35% of its total assets in non-U.S. Government
mortgage-related and asset-backed securities.
The Fund will not invest in any security rated below BBB or Baa.
The Fund may invest in unrated securities of equivalent quality
to the rated securities in which it may invest, as determined by
Alliance. The Fund expects, but is not required, to dispose of
securities that are downgraded below BBB and Baa or, if unrated,
are determined by Alliance to have undergone similar credit
quality deterioration.
The Fund also may:
- enter into REPURCHASE AGREEMENTS and REVERSE REPURCHASE
AGREEMENTS, FORWARD CONTRACTS, and DOLLAR ROLLS;
- enter into various hedging transactions, such as
INTEREST RATE SWAPS, CAPS, AND FLOORS;
- purchase and sell FUTURES CONTRACTS for hedging
purposes; and
36
- purchase call and put OPTIONS on FUTURES CONTRACTS or on
SECURITIES for hedging purposes.
ALLIANCE LIMITED MATURITY GOVERNMENT FUND
Alliance Limited Maturity Government Fund seeks the highest level
of current income, consistent with low volatility of net asset
value. As a matter of fundamental policy, the Fund normally has
at least 65% of its total assets invested in U.S. Government
securities, including mortgage-related securities and repurchase
agreements relating to U.S. Government securities.
In pursuing its investment objective and policies, the Fund takes
advantage of a wide range of maturities of debt securities and
adjusts the dollar-weighted average maturity of its portfolio
from time to time, depending on its assessment of relative yields
on securities of different maturities and the expected effect of
future changes in interest rates on the market value of the
Fund's portfolio. At all times, however, each security held by
the Fund has either a remaining maturity of not more than ten
years or a duration not exceeding that of a ten-year Treasury
note.
The Fund may invest up to 35% of its total assets in:
- high quality asset-backed securities, including
mortgage-related securities that are not U.S. Government
securities;
- treasury securities issued by private corporate issuers;
- qualifying bank deposits;
- higher quality commercial paper or, if unrated, issued
by companies that have high quality debt issues
outstanding; and
- high quality debt securities of corporate issuers.
The Fund may invest up to 15% of its total assets in high-quality
debt securities denominated in U.S. Dollars or in foreign
currencies and issued or guaranteed by foreign governments or
issued by foreign non-governmental issuers. The amount of Fund
investments in foreign debt securities will vary and may include
those of a number of foreign countries or, depending upon market
conditions, those of a single country.
The Fund also may:
- enter into FUTURES CONTRACTS and purchase and write
OPTIONS ON FUTURES CONTRACTS;
- enter into FORWARD COMMITMENTS for the purchase or sale
of securities;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS;
- invest in EURODOLLAR INSTRUMENTS;
37
- purchase and write put and call OPTIONS on FOREIGN
CURRENCIES;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
- enter into REPURCHASE AGREEMENTS;
- use REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS; and
- make SECURED LOANS OF ITS PORTFOLIO SECURITIES.
MORTGAGE FUND
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Alliance Mortgage Securities Income Fund seeks a high level of
current income to the extent consistent with prudent investment
risk. The Fund invests at least 65% of its assets in mortgage-
related securities, including CMOs. The average weighted
maturity of the Fund's portfolio of fixed-income securities is
expected to vary between two and ten years.
The Fund expects that governmental, government-related, or
private entities may create mortgage loan pools offering pass-
through investments in addition to those described in this
Prospectus. The mortgages underlying these securities may be
instruments whose principal or interest payments may vary or
whose terms to maturity may differ from customary long-term
fixed-rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Fund will
consider making investments in these new types of securities.
The Fund may invest up to 20% of its total assets in lower-rated
mortgage-related securities.
The Fund may invest up to 35% of the value of its total assets
in:
- U.S. Government securities;
- qualifying bank deposits;
- prime commercial paper or, if unrated, issued by
companies which have an outstanding high quality debt
issue;
- high grade debt securities secured by mortgages on
commercial real estate or residential rental properties;
and
- high grade asset-backed securities.
The Fund also may:
- enter into FORWARD COMMITMENTS for the purchase or sale
of securities;
- purchase put and call OPTIONS written by others and
write covered put and call OPTIONS for hedging purposes;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS;
- enter into INTEREST RATE FUTURES CONTRACTS;
38
- invest in VARIABLE FLOATING AND INVERSE FLOATING RATE
INSTRUMENTS;
- enter into REPURCHASE AGREEMENTS;
- make LOANS OF PORTFOLIO SECURITIES.
MULTI-MARKET FUND
ALLIANCE MULTI-MARKET STRATEGY TRUST
Alliance Multi-Market Strategy Trust is a non-diversified
investment company that offers investors a higher yield than a
money market fund and less fluctuation in net asset value than a
longer-term bond fund. The Fund seeks the highest level of
current income, consistent with what Alliance considers to be
prudent investment risk, that is available from a portfolio of
high quality debt securities having remaining maturities of not
more than five years. The Fund invests in a portfolio of debt
securities denominated in the U.S. Dollar and selected foreign
currencies. The Fund seeks investment opportunities in foreign,
as well as domestic, securities markets. The Fund normally
expects to maintain at least 70% of its assets in debt securities
denominated in foreign currencies, but limits its investments in
a single currency other than the U.S. Dollar to 25% of its net
assets.
In pursuing its investment objective, the Fund seeks to minimize
credit risk and fluctuations in net asset value by investing only
in short-term debt securities. Normally, a high proportion of
the Fund's portfolio consists of money market instruments.
Alliance actively manages the Fund's portfolio in accordance with
a multi-market investment strategy, allocating the Fund's
investments among securities denominated in the U.S. Dollar and
the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. Alliance
adjusts the Fund's exposure to each currency so that the
percentage of assets invested in securities of a particular
country or denominated in a particular currency varies in
accordance with Alliance's assessment of the relative yield and
appreciation potential of such securities and the relative
strength of a country's currency. Fundamental economic strength,
credit quality, and interest rate trends are the principal
factors considered by Alliance in determining whether to increase
or decrease the emphasis placed upon a particular type of
security or industry sector within a Fund's investment portfolio.
The returns available from short-term foreign currency-
denominated debt instruments can be adversely affected by changes
in exchange rates. Alliance believes that the use of foreign
currency hedging techniques, including "cross-hedges", can help
protect against declines in the U.S. Dollar value of income
39
available for distribution to shareholders and declines in the
net asset value of the Fund's shares resulting from adverse
changes in currency exchange rates. The Fund invests in debt
securities denominated in the currencies of countries whose
governments are considered stable by Alliance.
The Fund expects to invest in debt securities denominated in the
Euro and the ECU, which is a "basket" consisting of specified
amounts of currencies of certain of the member states of the
European Union. An issuer of debt securities purchased by the
Fund may be domiciled in a country other than the country in
whose currency the instrument is denominated. In addition, the
Fund may purchase debt securities (sometimes referred to as
"linked" securities) that are denominated in one currency while
the principal amounts of, and value of interest payments on, such
securities are determined with reference to another currency.
The Fund maintains borrowings of approximately 25% of its net
assets.
The Fund seeks to minimize investment risk by limiting its
investments to debt securities of high quality and invests in:
- U.S. Government securities;
- high quality foreign government securities;
- obligations issued by supranational entities and
corporate debt securities having a high-quality rating;
- certificates of deposit and bankers' acceptances issued
or guaranteed by, or time deposits maintained at, banks
(including foreign branches of foreign banks) having
total assets of more than $500 million, and determined
by Alliance to be of high quality; and
- prime commercial paper or unrated commercial paper of
equivalent quality and issued by U.S. or foreign
companies having outstanding high quality debt
securities.
As a matter of fundamental policy, the Fund concentrates at least
25% of its total assets in debt instruments issued by domestic
and foreign companies engaged in the banking industry, including
bank holding companies. These investments may include
certificates of deposit, time deposits, bankers' acceptances, and
obligations issued by bank holding companies, as well as
repurchase agreements entered into with banks.
The Fund also may:
- invest in INDEXED COMMERCIAL PAPER;
- enter into FUTURES CONTRACTS and purchase and write
OPTIONS on FUTURES CONTRACTS;
- purchase and write put and call OPTIONS on FOREIGN
CURRENCIES;
40
- purchase or sell FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
- enter into REPURCHASE AGREEMENTS; and
- make SECURED LOANS OF ITS PORTFOLIO SECURITIES.
GLOBAL BOND FUNDS
The Global Bond Funds are non-diversified investment companies
that offer investors a high level of current income through
investments primarily in foreign government securities.
ALLIANCE NORTH AMERICAN GOVERNMENT INCOME TRUST
Alliance North American Government Income Trust seeks the highest
level of current income, consistent with what Alliance considers
to be prudent investment risk, that is available from a portfolio
of debt securities issued or guaranteed by the United States,
Canada, and Mexico, their political subdivisions (including
Canadian provinces but excluding states of the United States),
agencies, instrumentalities or authorities ("Government
securities"). The Fund invests in investment grade securities
denominated in the U.S. Dollar, the Canadian Dollar, and the
Mexican Peso and expects to maintain at least 25% of its assets
in securities denominated in the U.S. Dollar. In addition, the
Fund may invest up to 25% of its total assets in debt securities
issued by governmental entities of Argentina ("Argentine
Government securities").
The Fund invests at least 65%, and normally substantially more,
of its assets in Government securities and income-producing
securities. The average weighted maturity of the Fund's
portfolio of fixed-income securities is expected to vary between
one year or less and 30 years. The Fund maintains borrowings of
approximately one-third of its net assets.
The Fund expects that it will not retain a debt security which is
downgraded below BBB or Baa, or, if unrated, determined by
Alliance to have undergone similar credit quality deterioration.
The Fund may conclude, under certain circumstances, such as the
downgrading to below investment grade of all of the securities of
a governmental issuer in one of the countries in which the Fund
has substantial investments, that it is in the best interests of
the shareholders to retain its holdings in securities of that
issuer.
Alliance believes that the increasingly integrated economic
relationship among the United States, Canada and Mexico,
41
characterized by the reduction and projected elimination of most
barriers to free trade among the three nations and the growing
coordination of their fiscal and monetary policies, will over the
long term benefit the economic performance of all three countries
and promote greater correlation of currency fluctuation among the
U.S. and Canadian Dollars and the Mexican Peso.
Alliance will actively manage the Fund's assets in relation to
market conditions and general economic conditions and adjust the
Fund's investments in an effort to best enable the Fund to
achieve its investment objective. Thus, the percentage of the
Fund's assets invested in a particular country or denominated in
a particular currency will vary in accordance with Alliance's
assessment of the relative yield and appreciation potential of
such securities and the relationship of the country's currency to
the U.S. Dollar. To the extent that its assets are not invested
in Government securities, however, the Fund may invest the
balance of its total assets in investment grade debt securities
issued by, and denominated in the local currencies of,
governments of countries located in Central and South America or
any of their political subdivisions, agencies, instrumentalities
or authorities, provided that such securities are denominated in
their local currencies. The Fund limits its investments in debt
securities issued by the governmental entities of any one
country, except for Argentine Government securities, to 10% of
its total assets.
The Fund also may:
- enter into FUTURES CONTRACTS and purchase and write
OPTIONS on FUTURES CONTRACTS for hedging purposes;
- purchase and write put and call OPTIONS on FOREIGN
CURRENCIES;
- purchase or sell FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS;
- write covered put and call options and purchase put and
call options on U.S. Government and foreign government
securities traded on U.S. and foreign securities
exchanges, and write put and call options for cross-
hedging purposes;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS;
- enter into FORWARD COMMITMENTS for the purchase or sale
of securities;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
- enter into REPURCHASE AGREEMENTS; and
- make SECURED LOANS OF ITS PORTFOLIO SECURITIES.
42
ALLIANCE GLOBAL DOLLAR GOVERNMENT FUND
Alliance Global Dollar Government Fund seeks primarily a high
level of current income and secondarily capital appreciation. In
seeking to achieve these objectives, the Fund invests at least
65% of its total assets in sovereign debt obligations. The
Fund's investments in sovereign debt obligations will emphasize
obligations referred to as "Brady Bonds," which are issued as
part of debt restructurings and collateralized in full as to
principal due at maturity by zero coupon U.S. Government
securities.
The Fund also may invest up to 35% of its total assets in U.S.
and non-U.S. corporate fixed-income securities. The Fund will
limit its investments in sovereign debt obligations and U.S. and
non-U.S. corporate fixed-income securities to U.S. Dollar-
denominated securities. Alliance expects that, based upon
current market conditions, the Fund's portfolio of U.S.
fixed-income securities will have an average maturity range of
approximately nine to 15 years and the Fund's portfolio of non-
U.S. fixed-income securities will have an average maturity range
of approximately 15 to 25 years. Alliance anticipates that the
Fund's portfolio of sovereign debt obligations will have a longer
average maturity.
Substantially all of the Fund's assets will be invested in lower-
rated securities, which may include securities having the lowest
rating for non-subordinated debt instruments (i.e., rated C by
Moody's or CCC or lower by S&P, Duff & Phelps and Fitch) and
unrated securities of equivalent investment quality. These
securities may have extremely poor prospects of ever attaining
any real investment standing and a current identifiable
vulnerability to default, be unlikely to have the capacity to pay
interest and repay principal when due in the event of adverse
business, financial or economic conditions, and be in default or
not current in the payment of interest or principal.
The Fund may also invest in investment grade securities. Unrated
securities will be considered for investment by the Fund when
Alliance believes that the financial condition of the issuers of
such obligations and the protection afforded by the terms of the
obligations themselves limit the risk to the Fund to a degree
comparable to that of rated securities which are consistent with
the Fund's investment objectives and policies.
As of December 31, 1998, securities ratings (or equivalent
quality) of the Fund's securities were:
- A and above %
- Baa or BBB %
- Ba or BB %
- B %
43
- CC %
- C %
- Non-rated %
The Fund's investments in sovereign debt obligations and non-U.S.
corporate fixed income securities emphasize countries that are
considered at the time of purchase to be emerging markets or
developing countries by the World Bank. The Fund may invest up
to 30% of its total assets in securities or obligations of
Argentina, Brazil, Mexico, Morocco, the Philippines, Russia and
Venezuela. Alliance expects that these countries are now, or are
expected at a future date to be, the principal participants in
debt restructuring programs (including, in the case of Argentina,
Mexico, the Philippines and Venezuela, issuers of currently
outstanding Brady Bonds) that, in Alliance's opinion, will
provide the most attractive investment opportunities for the
Fund. The Fund will limit investments in the sovereign debt
obligations of each country (or of any other single foreign
country) to less than 25% of its total assets.
Alliance anticipates that other countries that will provide
investment opportunities for the Fund include, among others,
Bolivia, Costa Rica, the Dominican Republic, Ecuador, Jordan,
Nigeria, Panama, Peru, Poland, Thailand, Turkey and Uruguay. The
Fund will limit its investments in the sovereign debt obligations
and corporate fixed-income securities of issuers in any other
single foreign country to not more than 10% of its total assets.
The Fund also may:
- invest in STRUCTURED SECURITIES;
- invest in fixed and floating rate loans that are
arranged through private negotiations between an issuer
of sovereign debt obligations and one or more financial
institutions and in participations in and assignments of
these types of loans;
- invest in OTHER INVESTMENT COMPANIES;
- invest in WARRANTS;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS;
- enter into FORWARD COMMITMENTS for the purchase or sale
of securities;
- enter into STANDBY COMMITMENT AGREEMENTS;
- make SHORT SALES OF SECURITIES or maintain a short
position;
- write put and call OPTIONS on securities of the types in
which it is permitted to invest and write call options
for cross-hedging purposes;
- purchase and sell exchange-traded OPTIONS on any
securities index of the types of securities in which it
may invest;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
44
- enter into REVERSE REPURCHASE AGREEMENTS and DOLLAR
ROLLS;
- enter into REPURCHASE AGREEMENTS; and
- make SECURED LOANS OF ITS PORTFOLIO SECURITIES.
While it does not currently intend to do so, the Fund reserves
the right to borrow an amount not to exceed one-third of the
Fund's net assets.
ALLIANCE GLOBAL STRATEGIC INCOME TRUST
Alliance Global Strategic Income Trust seeks primarily a high
level of current income and secondarily capital appreciation.
The Fund invests primarily in a portfolio of fixed-income
securities of U.S. and non-U.S. companies and U.S. Government and
foreign government securities and supranational entities,
including lower-rated securities. The Fund also may use
derivative instruments to attempt to enhance income. The average
weighted maturity of the Fund's portfolio of fixed-income
securities is expected to vary between five years and 30 years in
accordance with Alliance's changing perceptions of the relative
attractiveness of various maturity ranges.
The Fund normally invests at least 65% of its total assets in the
fixed-income securities of issuers located in at least three
countries, one of which may be the United States. The Fund
limits its investments in the securities of any one foreign
government to 25% of its total assets. The Fund's investments in
U.S. Government securities may include mortgage-related
securities and zero coupon securities. The Fund's investments in
fixed-income securities may include preferred stock, mortgage-
related and other asset-backed securities, and zero coupon
securities.
The Fund invests at least 65% of its total assets in investment
grade securities and may invest up to 35% of its total assets in
lower-rated securities. Unrated securities will be considered
for investment by the Fund when Alliance believes that the
financial condition of the issuers of such obligations and the
protection afforded by the terms of the obligations limit the
risk to the Fund to a degree comparable to that of rated
securities that are consistent with the Fund's investment
objectives and policies. Lower-rated securities in which the
Fund may invest include Brady Bonds and fixed-income securities
of issuers located in emerging markets.
The Fund also may:
- invest in RIGHTS AND WARRANTS;
- invest in LOAN PARTICIPATIONS and ASSIGNMENTS;
- invest in FOREIGN CURRENCIES;
45
- purchase and write put and call OPTIONS on securities
and foreign currencies;
- purchase or sell FORWARD FOREIGN EXCHANGE CONTRACTS;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
- invest in INDEXED COMMERCIAL PAPER;
- invest in STRUCTURED SECURITIES;
- purchase and sell securities on a FORWARD COMMITMENT
basis;
- enter into STANDBY COMMITMENTS;
- 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,
foreign government securities or common stock, and
purchase and write options on futures contracts;
- invest in EURODOLLAR INSTRUMENTS;
- enter into INTEREST RATE SWAPS, CAPS, AND FLOORS; and
- make SHORT SALES of securities or maintain a short
position;
- enter into REVERSE REPURCHASE AGREEMENTS and DOLLAR
ROLLS;
- enter into REPURCHASE AGREEMENTS;
- make loans of PORTFOLIO SECURITIES.
The Fund may borrow in order to purchase securities or make other
investments, although it currently limits its borrowings to 25%
of its total assets.
CORPORATE BOND FUNDS
CORPORATE BOND PORTFOLIO
The Corporate Bond Portfolio seeks primarily to maximize income
over the long term consistent with providing reasonable safety in
the value of each shareholder's investment and secondarily to
increase its capital through appreciation of its investments in
order to preserve and, if possible, increase the purchasing power
of each shareholder's investment. In pursuing these objectives,
the Fund's policy is to invest in readily marketable securities
that give promise of relatively attractive yields but do not
involve substantial risk of loss of capital. The Fund invests at
least 65% of its net assets in debt securities. Although the
Fund invests at least 65% of its total assets in corporate bonds,
it also may invest in securities of non-corporate issuers. The
average weighted maturity of the Fund's portfolio of fixed-income
securities is expected to vary between one year or less and 30
years.
The Fund follows an investment strategy that in certain respects
can be regarded as more aggressive than the strategies of many
46
other funds investing primarily in corporate bonds. The Fund's
investments normally tend to have a relatively long average
maturity and duration. The Fund places significant emphasis on
both foreign corporate and sovereign debt obligations and
corporate bonds that are expected to benefit from improvement in
their issuers' credit fundamentals. In recent years the Fund
frequently has experienced greater net asset value volatility
than most other corporate bond funds. Prospective investors in
the Fund should therefore be prepared to accept the degree of
volatility associated with its investment strategy.
The Fund's investments in fixed-income securities have no minimum
rating requirement, except the Fund expects that it will not
retain a security that is downgraded below B, or if unrated,
determined to have undergone similar credit quality deterioration
after purchase. Currently, the Fund believes its objectives and
policies may best be implemented by investing at least 65% of its
total assets in fixed-income securities considered investment
grade or higher. The Fund may invest the remainder of its assets
in lower-rated fixed-income securities. As of December 31, 1998,
the Fund's investments were rated (or equivalent quality):
- A or above %
- Baa or BBB %
- Ba or BB %
- B %
- CC %
- CCC %
- Unrated %
The Fund may invest up to 50% of the value of its total assets in
foreign debt securities, which will consist primarily of
corporate fixed-income securities and sovereign debt obligations.
The Fund invests no more than 15% of the its total assets in
sovereign debt obligations in the form of foreign government loan
participations and assignments, which may be lower rated and
considered to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. All of
the Fund's investments, whether foreign or domestic, are U.S.
Dollar-denominated.
Within these limitations, the Fund has complete flexibility as to
the types and relative proportions of securities in which it will
invest. The Fund plans to vary the proportions of its holdings
of long- and short-term fixed-income securities and of equity
securities in order to reflect its assessment of prospective
cyclical changes even if such action may adversely affect current
income. Substantially all of the Fund's investments, however,
will be income producing.
The Fund also may:
47
- invest in STRUCTURED SECURITIES;
- invest in fixed and floating rate loans that are
arranged through private negotiations between an issuer
of sovereign debt obligations and one or more financial
institutions and in participations in and assignments of
these type of loans;
- for hedging purposes, purchase put and call OPTIONS
written by others and write covered put and call
OPTIONS;
- for hedging purposes, enter into various hedging
transactions, such as INTEREST RATE SWAPS, CAPS, AND
FLOORS;
- invest in VARIABLE, FLOATING, AND INVERSE FLOATING RATE
INSTRUMENTS;
- invest in ZERO COUPON and PAY-IN-KIND SECURITIES; and
- invest in CMOS and MULTI-CLASS PASS-THROUGH MORTGAGE-
RELATED SECURITIES.
ALLIANCE HIGH YIELD FUND
Alliance High Yield Fund seeks primarily to achieve high total
return by maximizing current income and, to the extent consistent
with that objective, capital appreciation. The Fund pursues this
objective by investing primarily in a diversified mix of high
yield, below investment grade fixed-income securities, known as
"junk bonds." These securities involve greater volatility of
price and risk of principal and income than higher quality fixed-
income securities. The Fund is managed to maximize current
income by taking advantage of market developments, yield
disparities, and variations in the creditworthiness of issuers.
The Fund uses various strategies in attempting to achieve its
objective.
The Fund normally invests at least 65% of its total assets in
high yield fixed-income securities rated below investment grade
by two or more NRSROs (i.e., rated lower than Baa by Moody's or
lower than BBB by S&P) or, if unrated, of equivalent quality.
The Fund may invest not more than 10% of its total assets in (i)
fixed-income securities which are rated lower than B3 or B- or
their equivalents by two or more NRSROs or, if unrated, of
equivalent quality, and (ii) money market instruments of any
entity which has an outstanding issue of unsecured debt that is
rated lower than B3 or B- or their equivalents by two or more
NRSROs or, if unrated, of equivalent quality.
As of December 31, 1998, the Fund's investments were rated (or
equivalent quality):
- A and above %
- Ba or BB %
- B %
48
- CCC %
- Unrated %
The Fund may invest a portion of its assets in foreign
securities. The Fund may buy and sell foreign currencies
principally for the purpose of preserving the value of
foreign securities or in anticipation of purchasing foreign
securities.
The Fund also may invest in:
- U.S. Government securities;
- certificates of deposit, bankers' acceptances, bank
notes, time deposits and interest bearing savings
deposits issued or guaranteed by certain domestic and
foreign banks;
- commercial paper (rated at least A-1 by S&P or Prime-1
by Moody's or, if unrated, issued by domestic or foreign
companies having high quality outstanding debt
securities) and participation interests in loans
extended by banks to these companies;
- corporate debt obligations with remaining maturities of
less than one year rated at least high quality as well
as corporate debt obligations rated at least high grade
provided the corporation also has outstanding an issue
of commercial paper rated at least A-1 by S&P or Prime-1
Moody's; and
- floating rate or master demand notes.
The Fund also may:
- invest in MORTGAGE-BACKED and ASSET-BACKED securities;
- invest in loan participations and assignments of loans
to corporate, governmental, or other borrowers
originally made by institutional lenders or lending
syndicates;
- enter into FORWARD COMMITMENTS for the purchase or sale
of securities and purchase and sell securities on a
WHEN-ISSUED or DELAYED DELIVERY basis;
- write covered put and call OPTIONS on fixed-income
securities, securities indices and foreign currencies
and purchase put or call options on fixed-income
securities, securities indices and foreign currencies;
- purchase and sell FUTURES CONTRACTS and related OPTIONS
on debt securities and on indices of debt securities;
- enter into contracts for the purchase or sale of a
specific currency for hedging purposes only;
- enter into REPURCHASE AGREEMENTS; and
- make LOANS OF PORTFOLIO SECURITIES.
49
DESCRIPTION OF INVESTMENT PRACTICES
This section describes the investment practices of the Funds and
risks associated with these practices. Unless otherwise noted, a
Fund's use of any of these practices was specified the previous
section.
DERIVATIVES. The Funds may use derivatives to achieve their
investment objectives. Derivatives are financial contracts whose
value depends on, or is derived from, the value of an underlying
asset, reference rate or index. These assets, rates, and indices
may include bonds, stocks, mortgages, commodities, interest
rates, currency exchange rates, bond indices, and stock indices.
Derivatives can be used to earn income or protect against risk,
or both. For example, one party with unwanted risk may agree to
pass that risk to another party who is willing to accept the
risk, the second party being motivated, for example, by the
desire either to earn income in the form of a fee or premium from
the first party, or to reduce its own unwanted risk by attempting
to pass all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn
income and enhance returns, to hedge or adjust the risk profile
of a portfolio, and either to replace more traditional direct
investments or to obtain exposure to otherwise inaccessible
markets. Each of the Funds is permitted to use derivatives for
one or more of these purposes, although most of the Funds
generally use derivatives primarily as direct investments in
order to enhance yields and broaden portfolio diversification.
Each of these uses entails greater risk than if derivatives were
used solely for hedging purposes. Derivatives are a valuable tool
which, when used properly, can provide significant benefit to
Fund shareholders. A Fund may take a significant position in
those derivatives that are within its investment policies if, in
Alliance's judgment, this represents the most effective response
to current or anticipated market conditions. MULTI-MARKET
STRATEGY, HIGH YIELD, and GLOBAL STRATEGIC INCOME, in particular,
generally make extensive use of carefully selected forwards and
other derivatives to achieve the currency hedging that is an
integral part of their investment strategy. Alliance's use of
derivatives is subject to continuous risk assessment and control
from the standpoint of each Fund's investment objectives and
policies.
Derivatives may be (i) standardized, exchange-traded contracts or
(ii) customized, privately negotiated contracts. Exchange-traded
derivatives tend to be more liquid and subject to less credit
risk than those that are privately negotiated.
50
There are four principal types of derivative instruments-
- -options, futures, forwards, and swaps--from which virtually any
type of derivative transaction can be created.
- Options--An option, which may be standardized and
exchange-traded, or customized and privately negotiated,
is an agreement that, for a premium payment or fee,
gives the option holder (the buyer) the right but not
the obligation to buy or sell the underlying asset (or
settle for cash an amount based on an underlying asset,
rate or index) at a specified price (the exercise price)
during a period of time or on a specified date. A call
option entitles the holder to purchase, and a put option
entitles the holder to sell, the underlying asset (or
settle for cash an amount based on an underlying asset,
rate or index). Likewise, when an option is exercised
the writer of the option is obligated to sell (in the
case of a call option) or to purchase (in the case of a
put option) the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index).
- Futures--A futures contract is an agreement that
obligates the buyer to buy and the seller to sell a
specified quantity of an underlying asset (or settle for
cash the value of a contract based on an underlying
asset, rate or index) at a specific price on the
contract maturity date. Futures contracts are
standardized, exchange-traded instruments and are
fungible (i.e., considered to be perfect substitutes for
each other). This fungibility allows futures contracts
to be readily offset or cancelled through the
acquisition of equal but opposite positions, which is
the primary method in which futures contracts are
liquidated. A cash-settled futures contract does not
require physical delivery of the underlying asset but
instead is settled for cash equal to the difference
between the values of the contract on the date it is
entered into and its maturity date.
- Forwards--A forward contract is an obligation by one
party to buy, and the other party to sell, a specific
quantity of an underlying commodity or other tangible
asset for an agreed upon price at a future date. Forward
contracts are customized, privately negotiated
agreements designed to satisfy the objectives of each
party. A forward contract usually results in the
delivery of the underlying asset upon maturity of the
contract in return for the agreed upon payment.
- Swaps--A swap is a customized, privately negotiated
agreement that obligates two parties to exchange a
51
series of cash flows at specified intervals (payment
dates) based upon or calculated by reference to changes
in specified prices or rates (interest rates in the case
of interest rate swaps, currency exchange rates in the
case of currency swaps) for a specified amount of an
underlying asset (the "notional" principal amount). The
payment flows are netted against each other, with the
difference being paid by one party to the other. Except
for currency swaps, the notional principal amount is
used solely to calculate the payment streams but is not
exchanged. With respect to currency swaps, actual
principal amounts of currencies may be exchanged by the
counterparties at the initiation, and again upon the
termination, of the transaction.
Debt instruments that incorporate one or more of these building
blocks for the purpose of determining the principal amount of
and/or rate of interest payable on the debt instruments are often
referred to as "structured securities." An example of this type
of structured security is indexed commercial paper. The term is
also used to describe certain securities issued in connection
with the restructuring of certain foreign obligations. The term
"derivative" also is sometimes used to describe securities
involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments
are passed through to the owner of, or that collateralize, the
securities. These securities are described below under MORTGAGE-
RELATED SECURITIES and OTHER ASSET-BACKED SECURITIES.
While the judicious use of derivatives by highly-experienced
investment managers such as Alliance can be quite beneficial,
derivatives involve risks different from, and, in certain cases,
greater than, the risks presented by more traditional
investments. The following is a general discussion of important
risk factors and issues relating to the use of derivatives that
investors should understand before investing in a Fund.
- Market Risk--This is the general risk of all investments
that the value of a particular investment will change in
a way detrimental to the Fund's interest based on
changes in the bond market generally.
- Management Risk--Derivative products are highly
specialized instruments that require investment
techniques and risk analyses different from those
associated with stocks and bonds. The use of a
derivative requires an understanding not only of the
underlying instrument but also of the derivative itself,
without the benefit of observing the performance of the
derivative under all possible market conditions. In
particular, the use and complexity of derivatives
52
require the maintenance of adequate controls to monitor
the transactions entered into, the ability to assess the
risk that a derivative adds to a Fund's portfolio, and
the ability to forecast price, interest rate, or
currency exchange rate movements correctly.
- Credit Risk--This is the risk that a loss may be
sustained by a Fund as a result of the failure of a
derivative counterparty to comply with the terms of the
derivative contract. The credit risk for exchange-traded
derivatives is generally less than for privately
negotiated derivatives, since the clearing house, which
is the issuer or counterparty to each exchange-traded
derivative, provides a guarantee of performance. This
guarantee is supported by a daily payment system (i.e.,
margin requirements) operated by the clearing house in
order to reduce overall credit risk. For privately
negotiated derivatives, there is no similar clearing
agency guarantee. Therefore, the Funds consider the
creditworthiness of each counterparty to a privately
negotiated derivative in evaluating potential credit
risk.
- Liquidity Risk--Liquidity risk exists when a particular
instrument is difficult to purchase or sell. If a
derivative transaction is particularly large or if the
relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be
possible to initiate a transaction or liquidate a
position at an advantageous price.
- Leverage Risk--Since many derivatives have a leverage
component, adverse changes in the value or level of the
underlying asset, rate or index can result in a loss
substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of
loss generally is related to a notional principal
amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial
investment.
- Other Risks--Other risks in using derivatives include
the risk of mispricing or improper valuation of
derivatives and the inability of derivatives to
correlate perfectly with underlying assets, rates and
indices. Many derivatives, in particular privately
negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in
increased cash payment requirements to counterparties or
a loss of value to a Fund. Derivatives do not always
53
perfectly or even highly correlate or track the value of
the assets, rates or indices they are designed to
closely track. Consequently, a Fund's use of derivatives
may not always be an effective means of, and sometimes
could be counterproductive to, furthering the Fund's
investment objective.
DERIVATIVES USED BY THE FUNDS. The following describes specific
derivatives that one or more of the Funds may use.
EURODOLLAR INSTRUMENTS. Eurodollar instruments are essentially
U.S. Dollar-denominated futures contracts or options that are
linked to LIBOR. Eurodollar futures contracts enable purchasers
to obtain a fixed rate for the lending of funds and sellers to
obtain a fixed rate for borrowings. LIMITED MATURITY GOVERNMENT
and GLOBAL STRATEGIC INCOME intend to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR
(to which many short-term borrowings and floating rate securities
in which each Fund invests are linked).
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A Fund purchases or
sells forward foreign currency exchange contracts ("forward
contracts") to minimize the risk from adverse changes in the
relationship between the U.S. Dollar and other currencies. A Fund
may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S.
Dollar price of the security (a "transaction hedge"). When a
Fund believes that a foreign currency may suffer a substantial
decline against the U.S. Dollar, it may enter into a forward sale
contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when the Fund believes
that the U.S. Dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward purchase contract
to buy that foreign currency for a fixed dollar amount (a
"position hedge"). Instead of entering into a position hedge, a
Fund may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. Dollar amount
where the Fund believes that the U.S. Dollar value of the
currency to be sold pursuant to the forward contract will fall
whenever there is a decline in the U.S. Dollar value of the
currency in which portfolio securities of the Fund are
denominated (a "cross-hedge").
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund may
buy and sell futures contracts on fixed-income or other
securities or foreign currencies, and contracts based on interest
rates or financial indices, including any index of U.S.
Government securities, foreign government securities or corporate
debt securities.
54
Options on futures contracts are options that call for the
delivery of futures contracts upon exercise. Options on futures
contracts written or purchased by a Fund will be traded on U.S.
or foreign exchanges and, except for SHORT-TERM U.S. GOVERNMENT
and GLOBAL STRATEGIC INCOME, will be used only for hedging
purposes.
LIMITED MATURITY GOVERNMENT, MULTI-MARKET STRATEGY, NORTH
AMERICAN GOVERNMENT INCOME and GLOBAL STRATEGIC INCOME will not
enter into a futures contract or write or purchase an option on a
futures contract if immediately thereafter the market values of
the outstanding futures contracts of the Fund and the currencies
and futures contracts subject to outstanding options written by
the Fund would exceed 50% of its total assets. MORTGAGE
SECURITIES INCOME will not write or purchase options on futures
contracts. Nor will LIMITED MATURITY GOVERNMENT, MORTGAGE
SECURITIES INCOME, MULTI-MARKET STRATEGY, NORTH AMERICAN
GOVERNMENT INCOME or GLOBAL STRATEGIC INCOME enter into a futures
contract or, if otherwise permitted, write or purchase an option
on a futures contract, if immediately thereafter the aggregate of
initial margin deposits on all the outstanding futures contracts
of the Fund and premiums paid on outstanding options on futures
contracts would exceed 5% of the market value of the total assets
of the Fund. In addition, MORTGAGE SECURITIES INCOME and GLOBAL
STRATEGIC INCOME will not enter into any futures contract (i)
other than one on fixed-income securities or based on interest
rates, or (ii) if immediately thereafter the sum of the then
aggregate futures market prices of financial instruments required
to be delivered under open futures contract sales and the
aggregate futures market prices of instruments required to be
delivered under open futures contract purchases would exceed 30%
of the value of the Fund's total assets.
INTEREST RATE TRANSACTIONS (SWAPS, CAPS, AND FLOORS). Each Fund
that may enter into interest rate swap, cap, or floor
transactions expects to do so primarily for hedging purposes,
which may include preserving a return or spread on a particular
investment or portion of its portfolio or protecting against an
increase in the price of securities the Fund anticipates
purchasing at a later date. The Funds do not intend to use these
transactions in a speculative manner.
Interest rate caps and floors are similar to options in that the
purchase of an interest rate cap or floor entitles the purchaser,
to the extent that a specified index exceeds (in the case of a
cap) or falls below (in the case of a floor) a predetermined
interest rate, to receive payments of interest on a notional
amount from the party selling the interest rate cap or floor. A
Fund may enter into interest rate swaps, caps, and floors on
either an asset-based or liability-based basis, depending upon
whether it is hedging its assets or liabilities.
55
There is no limit on the amount of interest rate transactions
that may be entered into by a Fund that is permitted to enter
into such transactions. MULTI-MARKET STRATEGY, NORTH AMERICAN
GOVERNMENT INCOME and GLOBAL STRATEGIC INCOME may enter into
interest rate swaps involving payments in the same currency or in
different currencies. SHORT-TERM U.S. GOVERNMENT, LIMITED
MATURITY GOVERNMENT, MORTGAGE SECURITIES INCOME, GLOBAL DOLLAR
GOVERNMENT, GLOBAL STRATEGIC INCOME and CORPORATE BOND will not
enter into an interest rate swap, cap, or floor transaction
unless the unsecured senior debt or the claims-paying ability of
the other party is then rated in the highest rating category of
at least one NRSRO. Each of MULTI-MARKET STRATEGY, NORTH AMERICAN
GOVERNMENT INCOME, and GLOBAL STRATEGIC INCOME will enter into
interest rate swap, cap or floor transactions with its respective
custodian, and with other counterparties, but only if: (i) for
transactions with maturities under one year, such other
counterparty has outstanding prime commercial paper; or (ii) for
transactions with maturities greater than one year, the
counterparty has high quality debt securities outstanding.
The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become well
established and relatively liquid. Caps and floors are less
liquid than swaps. These transactions do not involve the delivery
of securities or other underlying assets or principal.
Accordingly, unless there is a counterparty default, the risk of
loss to a Fund from interest rate transactions is limited to the
net amount of interest payments that the Fund is contractually
obligated to make.
OPTIONS ON FOREIGN CURRENCIES. A Fund invests in options on
foreign currencies that are privately negotiated or traded on
U.S. or foreign exchanges for the purpose of protecting against
declines in the U.S. Dollar value of foreign currency denominated
securities held by a Fund and against increases in the U.S.
Dollar cost of securities to be acquired. The purchase of an
option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates, although if rates move
adversely, a Fund may forfeit the entire amount of the premium
plus related transaction costs.
OPTIONS ON SECURITIES. In purchasing an option on securities, a
Fund would be in a position to realize a gain if, during the
option period, the price of the underlying securities increased
(in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid; otherwise the Fund would
experience a loss not greater than the premium paid for the
option. Thus, a Fund would realize a loss if the price of the
underlying security declined or remained the same (in the case of
56
a call) or increased or remained the same (in the case of a put)
or otherwise did not increase (in the case of a put) or decrease
(in the case of a call) by more than the amount of the premium.
If a put or call option purchased by a Fund were permitted to
expire without being sold or exercised, its premium would
represent a loss to the Fund.
A Fund may write a put or call option in return for a premium,
which is retained by the Fund whether or not the option is
exercised. Except with respect to uncovered call options written
for cross-hedging purposes, none of the Funds will write
uncovered call or put options on securities. A call option
written by a Fund is "covered" if the Fund owns the underlying
security, has an absolute and immediate right to acquire that
security upon conversion or exchange of another security it
holds, or holds a call option on the underlying security with an
exercise price equal to or less than that of the call option it
has written. A put option written by a Fund is covered if the
Fund holds a put option on the underlying securities with an
exercise price equal to or greater than that of the put option it
has written. The risk involved in writing an uncovered call
option is that there could be an increase in the market value of
the underlying security, and a Fund could be obligated to acquire
the underlying security at its current price and sell it at a
lower price. The risk of loss from writing an uncovered put
option is limited to the exercise price of the option.
A Fund may write a call option on a security that it does not own
in order to hedge against a decline in the value of a security
that it owns or has the right to acquire, a technique referred to
as "cross-hedging." A 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
exceeds that to be received from writing a covered call option,
while at the same time achieving the desired hedge. The
correlation risk involved in cross-hedging may be greater than
the correlation risk involved with other hedging strategies.
SHORT-TERM U.S. GOVERNMENT, MORTGAGE SECURITIES INCOME, NORTH
AMERICAN GOVERNMENT INCOME, GLOBAL DOLLAR GOVERNMENT, GLOBAL
STRATEGIC INCOME, CORPORATE BOND, and HIGH YIELD generally
purchase or write privately negotiated options on securities. A
Fund that does so will effect such transactions only with
investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed
creditworthy by Alliance. Privately negotiated options purchased
or written by a Fund may be illiquid and it may not be possible
for the Fund to effect a closing transaction at an advantageous
time. Neither MORTGAGE SECURITIES INCOME nor CORPORATE BOND will
purchase an option on a security if, immediately thereafter, the
aggregate cost of all outstanding options purchased by the Fund
57
would exceed 2% of the Fund's total assets. Nor will either Fund
write an option if, immediately thereafter, the aggregate value
of the Fund's portfolio securities subject to outstanding options
would exceed 15% of the Fund's total assets.
OPTIONS ON SECURITIES INDICES. An option on a securities index
is similar to an option on a security except that, rather than
taking or making delivery of a security at a specified price, an
option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of
a call) or less than (in the case of a put) the exercise price of
the option.
BRADY BONDS. Brady Bonds are created through the exchange of
existing commercial bank loans to foreign entities for new
obligations in connection with debt restructurings under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F.
Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. Dollar-denominated)
and they are actively traded in the over-the-counter secondary
market.
U.S. Dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are
generally collateralized in full as to principal due at maturity
by U.S. Treasury zero coupon obligations that have the same
maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an
amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having up to four
valuation components: (i) collateralized repayment of principal
at final maturity, (ii) collateralized interest payments, (iii)
uncollateralized interest payments, and (iv) any uncollateralized
repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of
which the payment obligations of the issuer are accelerated, the
U.S. Treasury zero coupon obligations held as collateral for the
payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will
58
equal the principal payments that would have then been due on the
Brady Bonds in the normal course. In light of the residual risk
of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady
Bonds are to be viewed as speculative.
CONVERTIBLE SECURITIES. Prior to conversion, convertible
securities have the same general characteristics as non-
convertible debt securities, which provide a stable stream of
income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a
convertible security will normally vary with changes in the price
of the underlying equity security, although the higher yield
tends to make the convertible security less volatile than the
underlying equity security. As with debt securities, the market
value of convertible securities tends to decrease as interest
rates rise and increase as interest rates decline. While
convertible securities generally offer lower interest or dividend
yields than non-convertible debt securities of similar quality,
they enable investors to benefit from increases in the market
price of the underlying common stock. Convertible debt securities
that are rated Baa or lower by Moody's or BBB or lower by S&P,
Duff & Phelps or Fitch and comparable unrated securities may
share some or all of the risks of debt securities with those
ratings.
FORWARD COMMITMENTS. Forward commitments for the purchase or
sale of securities may include purchases on a WHEN-ISSUED basis
or purchases or sales on a DELAYED DELIVERY basis. In some cases,
a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring or approval of a
proposed financing by appropriate authorities (i.e., a "when, as
and if issued" trade).
When forward commitments with respect to fixed-income securities
are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but payment
for and delivery of the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but settlements beyond two months may be negotiated.
Securities purchased or sold under a forward commitment are
subject to market fluctuation and no interest or dividends
accrues to the purchaser prior to the settlement date.
The use of forward commitments helps a Fund to protect against
anticipated changes in interest rates and prices. For instance,
in periods of rising interest rates and falling bond prices, a
Fund might sell securities in its portfolio on a forward
commitment basis to limit its exposure to falling bond prices. In
59
periods of falling interest rates and rising bond prices, a Fund
might sell a security in its portfolio and purchase the same or a
similar security on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields. No
forward commitments will be made by LIMITED MATURITY GOVERNMENT,
NORTH AMERICAN GOVERNMENT INCOME, GLOBAL DOLLAR GOVERNMENT or
GLOBAL STRATEGIC INCOME if, as a result, the Fund's aggregate
forward commitments under such transactions would be more than
25% of the total assets of GLOBAL STRATEGIC INCOME and 30% of the
total assets of each of the other Funds.
A Fund's right to receive or deliver a security under a forward
commitment may be sold prior to the settlement date. The Funds
enter into forward commitments, however, only with the intention
of actually receiving securities or delivering them, as the case
may be. If a Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or
dispose of its right to deliver or receive against a forward
commitment, it may realize a gain or incur a loss.
ILLIQUID SECURITIES. The Funds will limit their investments in
illiquid securities to 15% of their net assets, except that the
limit is 10% for MORTGAGE SECURITIES INCOME, MULTI-MARKET
STRATEGY, AND NORTH AMERICAN GOVERNMENT INCOME, and 5% for SHORT-
TERM U.S. GOVERNMENT. As a matter of fundamental policy,
CORPORATE BOND cannot purchase illiquid securities. Illiquid
securities generally include (i) direct placements or other
securities that are subject to legal or contractual restrictions
on resale or for which there is no readily available market
(e.g., when trading in the security is suspended or, in the case
of unlisted securities, when market makers do not exist or will
not entertain bids or offers), including many currency swaps and
any assets used to cover currency swaps, (ii) over-the-counter
options and assets used to cover over-the-counter options, and
(iii) repurchase agreements not terminable within seven days.
A Fund that invests in illiquid securities may not be able to
sell such securities and may not be able to realize their full
value upon sale. Alliance will monitor each Fund's investments
in illiquid securities. Rule 144A securities will not be treated
as "illiquid" for the purposes of the limit on investments so
long as the securities meet liquidity guidelines established by
the Board of Directors.
INDEXED COMMERCIAL PAPER. Indexed commercial paper may have its
principal linked to changes in foreign currency exchange rates
whereby its principal amount is adjusted upwards or downwards
(but not below zero) at maturity to reflect changes in the
referenced exchange rate. Each Fund that invests in indexed
commercial paper may do so without limitation. A Fund will
receive interest and principal payments on such commercial paper
60
in the currency in which such commercial paper is denominated,
but the amount of principal payable by the issuer at maturity
will change in proportion to the change (if any) in the exchange
rate between the two specified currencies between the date the
instrument is issued and the date the instrument matures. While
such commercial paper entails the risk of loss of principal, the
potential for realizing gains as a result of changes in foreign
currency exchange rates enables a Fund to hedge (or cross-hedge)
against a decline in the U.S. Dollar value of investments
denominated in foreign currencies while providing an attractive
money market rate of return. A Fund will purchase such
commercial paper for hedging purposes only, not for speculation.
INVESTMENT IN OTHER INVESTMENT COMPANIES. GLOBAL DOLLAR
GOVERNMENT may invest in other investment companies whose
investment objectives and policies are consistent with those of
the Fund. If the Fund acquires shares in investment companies,
shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees)
and, indirectly, the expenses of such investment companies
(including management and advisory fees).
LOANS OF PORTFOLIO SECURITIES. A Fund may make secured loans of
portfolio securities to brokers, dealers and financial
institutions, provided that cash, liquid high grade debt
securities or bank letters of credit equal to at least 100% of
the market value of the securities loaned is deposited and
maintained by the borrower with the Fund. The risks in lending
portfolio securities, as with other secured extensions of credit,
consist of possible loss of rights in the collateral should the
borrower fail financially. In determining whether to lend
securities to a particular borrower, Alliance will consider all
relevant facts and circumstances, including the creditworthiness
of the borrower. While securities are on loan, the borrower will
pay the Fund any income earned from the securities. The Fund may
invest any cash collateral in portfolio securities and earn
additional income or receive an agreed-upon amount of income from
a borrower who has delivered equivalent collateral. Lending of
portfolio securities is limited to 50% of net assets for HIGH
YIELD, 25% for SHORT-TERM U.S. GOVERNMENT and GLOBAL STRATEGIC
INCOME, and 20% for LIMITED MATURITY GOVERNMENT, MORTGAGE
SECURITIES INCOME, MULTI-MARKET STRATEGY, NORTH AMERICAN
GOVERNMENT INCOME and GLOBAL DOLLAR GOVERNMENT.
LOAN PARTICIPATIONS AND ASSIGNMENTS. A Fund's investments in
loans are expected in most instances to be in the form of
participations in loans and assignments of all or a portion of
loans from third parties. A Fund's investment in loan
participations typically will result in the Fund having a
contractual relationship only with the lender and not with the
borrower. A Fund will acquire participations only if the lender
61
interpositioned between the Fund and the borrower is a lender
having total assets of more than $25 billion and whose senior
unsecured debt is rated investment grade or higher. When a Fund
purchases a loan assignment from a lender it will acquire direct
rights against the borrower on the loan. Because loan assignments
are arranged through private negotiations between potential
assignees and potential assignors, however, the rights and
obligations acquired by a Fund as the purchaser of an assignment
may differ from, and be more limited than, those held by the
assigning lender.
The assignability of certain sovereign debt obligations, with
respect to GLOBAL DOLLAR GOVERNMENT and GLOBAL STRATEGIC INCOME,
or foreign government securities, with respect to CORPORATE BOND
and HIGH YIELD, is restricted by the governing documentation as
to the nature of the assignee such that the only way in which the
Fund may acquire an interest in a loan is through a participation
and not an assignment. A Fund may have difficulty disposing of
assignments and participations because to do so it will have to
assign such securities to a third party. Because there may not be
a liquid market for such investments, they can probably be sold
only to a limited number of institutional investors. The lack of
a liquid secondary market may have an adverse effect on the value
of such investments and a Fund's ability to dispose of particular
participations and assignments when necessary to meet its
liquidity needs in response to a specific economic event such as
a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for participations and assignments
also may make it more difficult for the Fund to assign a value to
these investments for purposes of valuing the Fund's portfolio
and calculating its net asset value.
GLOBAL DOLLAR GOVERNMENT and GLOBAL STRATEGIC INCOME may invest
up to 25%, and CORPORATE BOND may invest up to 15%, of their
total assets, in loan participations and assignments.
MORTGAGE-RELATED SECURITIES. The Funds' investments in mortgage-
related securities typically are securities representing
interests in pools of mortgage loans made to home owners. The
mortgage loan pools may be assembled for sale to investors (such
as a Fund) by governmental or private organizations. Mortgage-
related securities bear interest at either a fixed rate or an
adjustable rate determined by reference to an index rate.
Mortgage-related securities frequently provide for monthly
payments that consist of both interest and principal, unlike more
traditional debt securities, which normally do not provide for
periodic repayments of principal.
Securities representing interests in pools created by private
issuers generally offer a higher rate of interest than securities
representing interests in pools created by governmental issuers
62
because there are no direct or indirect governmental guarantees
of the underlying mortgage payments. Private issuers sometimes
obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit
enhancement to support the timely payment of interest and
principal with respect to their securities if the borrowers on
the underlying mortgages fail to make their mortgage payments.
The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and
credit support and would be adversely affected if the rating of
such an enhancer were downgraded. A Fund may buy mortgage-related
securities without credit enhancement if the securities meet the
Fund's investment standards.
One type of mortgage-related security is of the "pass-through"
variety. The holder of a pass-through security is considered to
own an undivided beneficial interest in the underlying pool of
mortgage loans and receives a pro rata share of the monthly
payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities.
Prepayments of mortgages resulting from the sale, refinancing, or
foreclosure of the underlying properties are also paid to the
holders of these securities, which, as discussed below,
frequently causes these securities to experience significantly
greater price and yield volatility than experienced by
traditional fixed-income securities. Some mortgage-related
securities, such as securities issued by GNMA, are referred to as
"modified pass-through" securities. The holders of these
securities are entitled to the full and timely payment of
principal and interest, net of certain fees, regardless of
whether payments are actually made on the underlying mortgages.
Another form of mortgage-related security is a "pay-through"
security, which is a debt obligation of the issuer secured by a
pool of mortgage loans pledged as collateral that is legally
required to be paid by the issuer, regardless of whether payments
are actually made on the underlying mortgages. CMOs are the
predominant type of "pay-through" mortgage-related security. In a
CMO, a series of bonds or certificates is issued in multiple
classes. Each class of a CMO, often referred to as a "tranche,"
is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral
underlying a CMO may cause one or more tranches of the CMO to be
retired substantially earlier than the stated maturities or final
distribution dates of the collateral. The principal and interest
on the underlying mortgages may be allocated among several
classes of a series of a CMO in many ways. CMOs may be issued by
a U.S. Government instrumentality or agency or by a private
issuer. Although payment of the principal of, and interest on,
the underlying collateral securing privately issued CMOs may be
guaranteed by GNMA, FNMA or FHLMC, these CMOs represent
63
obligations solely of the private issuer and are not insured or
guaranteed by GNMA, FNMA, FHLMC, any other governmental agency or
any other person or entity.
Another type of mortgage-related security, known as ARMS, bears
interest at a rate determined by reference to a predetermined
interest rate or index. There are two main categories of rates or
indices: (i) rates based on the yield on U.S. Treasury securities
and (ii) indices derived from a calculated measure such as a cost
of funds index or a moving average of mortgage rates. Some rates
and indices closely mirror changes in market interest rate
levels, while others tend to lag changes in market rate levels
and tend to be somewhat less volatile.
ARMS may be secured by fixed-rate mortgages or adjustable-rate
mortgages. ARMS secured by fixed-rate mortgages generally have
lifetime caps on the coupon rates of the securities. To the
extent that general interest rates increase faster than the
interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have
caps that limit the maximum amount by which the interest rate or
the monthly principal and interest payments on the mortgages may
increase. These payment caps can result in negative amortization
(i.e., an increase in the balance of the mortgage loan). Since
many adjustable-rate mortgages only reset on an annual basis, the
values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable-rate
mortgages.
SMRS are mortgage-related securities that are usually structured
with two classes of securities collateralized by a pool of
mortgages or a pool of mortgaged-backed bonds or pass-through
securities, with each class receiving different proportions of
the principal and interest payments from the underlying assets. A
common type of SMRS has one class of interest-only securities or
IOs receiving all of the interest payments from the underlying
assets; while the other class of securities, principal-only
securities or POs, receives all of the principal payments from
the underlying assets. IOs and POs are extremely sensitive to
interest rate changes and are more volatile than mortgage-related
securities that are not stripped. IOs tend to decrease in value
as interest rates decrease, while POs generally increase in value
as interest rates decrease. If prepayments of the underlying
mortgages are greater than anticipated, the amount of interest
earned on the overall pool will decrease due to the decreasing
principal balance of the assets. Changes in the values of IOs and
POs can be substantial and occur quickly, such as occurred in the
first half of 1994 when the value of many POs dropped
precipitously due to increases in interest rates. For this
64
reason, none of the Funds relies on IOs and POs as the principal
means of furthering its investment objective.
The value of mortgage-related securities is affected by a number
of factors. Unlike traditional debt securities, which have fixed
maturity dates, mortgage-related securities may be paid earlier
than expected as a result of prepayments of underlying mortgages.
Such prepayments generally occur during periods of falling
mortgage interest rates. If property owners make unscheduled
prepayments of their mortgage loans, these prepayments will
result in the early payment of the applicable mortgage-related
securities. In that event, a Fund may be unable to invest the
proceeds from the early payment of the mortgage-related
securities in investments that provide as high a yield as the
mortgage-related securities. Early payments associated with
mortgage-related securities cause these securities to experience
significantly greater price and yield volatility than is
experienced by traditional fixed-income securities. The
occurrence of mortgage prepayments is affected by the level of
general interest rates, general economic conditions, and other
social and demographic factors. During periods of falling
interest rates, the rate of mortgage prepayments tends to
increase, thereby tending to decrease the life of mortgage-
related securities. Conversely, during periods of rising
interest rates, a reduction in prepayments may increase the
effective life of mortgage-related securities, subjecting them to
greater risk of decline in market value in response to rising
interest rates. If the life of a mortgage-related security is
inaccurately predicted, a Fund may not be able to realize the
rate of return it expected.
Although the market for mortgage-related securities is becoming
increasingly liquid, those issued by certain private
organizations may not be readily marketable. In particular, the
secondary markets for CMOs, IOs, and POs may be more volatile and
less liquid than those for other mortgage-related securities,
thereby potentially limiting a Fund's ability to buy or sell
those securities at any particular time.
As with fixed-income securities generally, the value of mortgage-
related securities can also be adversely affected by increases in
general interest rates relative to the yield provided by such
securities. Such an adverse effect is especially possible with
fixed-rate mortgage securities. If the yield available on other
investments rises above the yield of the fixed-rate mortgage
securities as a result of general increases in interest rate
levels, the value of the mortgage-related securities will
decline. Although the negative effect could be lessened if the
mortgage-related securities were to be paid earlier (thus
permitting a Fund to reinvest the prepayment proceeds in
investments yielding the higher current interest rate), as
65
described above the rates of mortgage prepayments and early
payments of mortgage-related securities generally tend to decline
during a period of rising interest rates. Although the values of
ARMS may not be affected as much as the values of fixed-rate
mortgage securities by rising interest rates, ARMS may still
decline in value as a result of rising interest rates. Although,
as described above, the yields on ARMS vary with changes in the
applicable interest rate or index, there is often a lag between
increases in general interest rates and increases in the yield on
ARMS as a result of relatively infrequent interest rate reset
dates. In addition, adjustable-rate mortgages and ARMS often
have interest rate or payment caps that limit the ability of the
adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.
OTHER ASSET-BACKED SECURITIES. The securitization techniques
used to develop mortgage-related securities are being applied to
a broad range of financial assets. Through the use of trusts and
special purpose corporations, various types of assets, including
automobile loans and leases, credit card receivables, home equity
loans, equipment leases and trade receivables, are being
securitized in structures similar to the structures used in
mortgage securitizations. These asset-backed securities are
subject to risks associated with changes in interest rates and
prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks
depending on the type of assets involved and the legal structure
used. For example, credit card receivables are generally
unsecured obligations of the credit card holder and the debtors
are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby
reducing the balance due. In some transactions, the value of the
asset-backed security is dependent on the performance of a third
party acting as credit enhancer or servicer. In some
transactions (such as those involving the securitization of
vehicle loans or leases) it may be administratively burdensome to
perfect the interest of the security issuer in the underlying
collateral and the underlying collateral may become damaged or
stolen.
REPURCHASE AGREEMENTS. A repurchase agreement arises when a
buyer purchases a security and simultaneously agrees to resell it
to the vendor at an agreed-upon future date, normally a day or a
few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon interest rate for the period the
buyer's money is invested in the security. Such agreements permit
a Fund to keep all of its assets at work while retaining
"overnight" flexibility in pursuit of investments of a longer-
66
term nature. A Fund requires continual maintenance of collateral
in an amount equal to, or in excess of, the resale price. If a
vendor defaults on its repurchase obligation, a Fund would suffer
a loss to the extent that the proceeds from the sale of the
collateral were less than the repurchase price. If a vendor goes
bankrupt, a Fund might be delayed in, or prevented from, selling
the collateral for its benefit.
REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS. Reverse
repurchase agreements involve sales by a Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same
assets at a later date at a fixed price. During the reverse
repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities. Generally,
the effect of such a transaction is that a Fund can recover all
or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while it
will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if
the interest cost to a Fund of the reverse repurchase transaction
is less than the cost of otherwise obtaining the cash.
Dollar rolls involve sales by a Fund of securities for delivery
in the current month and the Fund's simultaneously contracting to
repurchase substantially similar (same type and coupon)
securities on a specified future date. During the roll period, a
Fund forgoes principal and interest paid on the securities. A
Fund is compensated by the difference between the current sales
price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale.
Reverse repurchase agreements and dollar rolls involve the risk
that the market value of the securities a Fund is obligated to
repurchase under the agreement may decline below the repurchase
price. In the event the buyer of securities under a reverse
repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Fund's obligation
to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative
techniques and are considered borrowings by the Funds. SHORT-
TERM U.S. GOVERNMENT may enter into reverse repurchase agreements
with commercial banks and registered broker-dealers in order to
increase income, in an amount up to 33-1/3% of its total assets.
Under normal circumstances, LIMITED MATURITY GOVERNMENT does not
expect to engage in reverse repurchase agreements and dollar
rolls with respect to greater than 50% of its total assets.
Reverse repurchase agreements and dollar rolls together with any
67
borrowings by GLOBAL DOLLAR GOVERNMENT will not exceed 33% of its
total assets less liabilities (other than amounts borrowed).
GLOBAL STRATEGIC INCOME may enter into reverse repurchase
agreements with commercial banks and registered broker-dealers in
order to increase income, in an amount up to 25% of its total
assets. Reverse repurchase agreements and dollar rolls together
with any borrowings by GLOBAL STRATEGIC INCOME will not exceed
25% of its total assets.
RIGHTS AND WARRANTS. GLOBAL DOLLAR GOVERNMENT may invest in
warrants, and GLOBAL STRATEGIC INCOME may invest in rights and
warrants, which are option securities permitting their holders to
subscribe for other securities. GLOBAL DOLLAR GOVERNMENT may
invest in warrants, and Global Strategic Income may invest in
rights and warrants, for debt securities or for equity securities
that are acquired in connection with debt instruments. Rights
are similar to warrants except that they have a substantially
shorter duration. Rights and warrants do not carry with them
dividend or voting rights with respect to the underlying
securities, or any rights in the assets of the issuer. As a
result, an investment in rights and warrants may be considered
more speculative than certain other types of investments. In
addition, the value of a right or a warrant does not necessarily
change with the value of the underlying securities, and a right
or a warrant ceases to have value if it is not exercised prior to
its expiration date. GLOBAL STRATEGIC INCOME may invest up to 20%
of its total assets in rights and warrants.
SHORT SALES. A short sale is effected by selling a security that
a Fund does not own, or if the Fund owns the security, is not to
be delivered upon consummation of the sale. A short sale is
"against the box" if a Fund owns or has the right to obtain
without payment securities identical to those sold short. SHORT-
TERM U.S. GOVERNMENT and GLOBAL DOLLAR GOVERNMENT each may make
short sales only against the box and only for the purpose of
deferring realization of gain or loss for U.S. federal income tax
purposes. In addition, each of these Funds may not make a short
sale if, as a result, more than 10% of net assets (taken at
market value), with respect to GLOBAL DOLLAR GOVERNMENT, and 10%
of total assets, with respect to SHORT-TERM U.S. GOVERNMENT,
would be held as collateral for short sales.
GLOBAL STRATEGIC INCOME may make a short sale in anticipation
that the market price of that security will decline. When the
Fund makes a short sale of a security that it does not own, it
must borrow from a broker-dealer the security sold short and
deliver the security to the broker-dealer upon conclusion of the
short sale. The Fund may be required to pay a fee to borrow
particular securities and is often obligated to pay over any
payments received on such borrowed securities. The Fund's
obligation to replace the borrowed security will be secured by
68
collateral deposited with a broker-dealer qualified as a
custodian. Depending on the arrangements the Fund makes with the
broker-dealer from which it borrowed the security regarding
remittance of any payments received by the Fund on such security,
the Fund may or may not receive any payments (e.g., dividends or
interest) on its collateral deposited with the broker-dealer.
In order to defer realization of gain or loss for U.S. federal
income tax purposes, GLOBAL STRATEGIC INCOME may also make short
sales "against the box" of securities which are eligible for such
deferral. The Fund may not make a short sale, if as a result,
more than 25% of its total 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 a Fund replaces the borrowed
security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a short-term capital gain. Any
gain will be decreased, and any loss increased, by the
transaction costs described above. Although a Fund's gain is
limited to the price at which it sold the security short, its
potential loss is theoretically unlimited.
STANDBY COMMITMENT AGREEMENTS. Standby commitment agreements are
similar to put options that commit a Fund, for a stated period of
time, to purchase a stated amount of a security that may be
issued and sold to the Fund at the option of the issuer. The
price and coupon of the security are fixed at the time of the
commitment. At the time of entering into the agreement, the Fund
is paid a commitment fee regardless of whether the security
ultimately is issued. The Funds will enter into such agreements
only for the purpose of investing in the security underlying the
commitment at a yield and price considered advantageous and
unavailable on a firm commitment basis. No Fund will enter into
a standby commitment with a remaining term in excess of 45 days.
The Funds will limit their investments in standby commitments so
that the aggregate purchase price of the securities subject to
the commitments does not exceed 20%, or 25% with respect to
GLOBAL STRATEGIC INCOME, of their assets.
There is no guarantee that the security subject to a standby
commitment will be issued. In addition, the value of the
security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security is
at the option of the issuer, a Fund will bear the risk of capital
loss in the event the value of the security declines and may not
benefit from an appreciation in the value of the security during
the commitment period if the issuer decides not to issue and sell
the security to the Fund.
69
STRUCTURED SECURITIES. Structured securities in which GLOBAL
DOLLAR GOVERNMENT, GLOBAL STRATEGIC INCOME and CORPORATE BOND may
invest represent interests in entities organized and operated
solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations, with respect to
GLOBAL DOLLAR GOVERNMENT and GLOBAL STRATEGIC INCOME, or foreign
government securities, with respect to CORPORATE BOND. This type
of restructuring involves the deposit with or purchase by an
entity, such as a corporation or trust, of specified instruments
(such as commercial bank loans or Brady Bonds) and the issuance
by that entity of one or more classes of structured securities
backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured securities to
create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to
structured securities is dependent on the extent of the cash flow
on the underlying instruments. Because structured securities
typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying
instruments. Structured securities of a given class may be
either subordinated or unsubordinated to the right of payment of
another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated
structured securities. GLOBAL DOLLAR GOVERNMENT may invest up to
25% of its total assets, and GLOBAL STRATEGIC INCOME and
CORPORATE BOND may invest without limit, in these types of
structured securities.
VARIABLE, FLOATING AND INVERSE FLOATING RATE INSTRUMENTS. Fixed-
income securities may have fixed, variable or floating rates of
interest. Variable and floating rate securities pay interest at
rates that are adjusted periodically, according to a specified
formula. A "variable" interest rate adjusts at predetermined
intervals (e.g., daily, weekly or monthly), while a "floating"
interest rate adjusts whenever a specified benchmark rate (such
as the bank prime lending rate) changes.
A Fund may invest in fixed-income securities that pay interest at
a coupon rate equal to a base rate, plus additional interest for
a certain period of time if short-term interest rates rise above
a predetermined level or "cap." The amount of such an additional
interest payment typically is calculated under a formula based on
a short-term interest rate index multiplied by a designated
factor.
Leveraged inverse floating rate debt instruments are sometimes
known as inverse floaters. The interest rate on an inverse
floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse
70
floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of
the change in the index rate of interest. The higher degree of
leverage inherent in inverse floaters is associated with greater
volatility in market value, such that, during periods of rising
interest rates, the market values of inverse floaters will tend
to decrease more rapidly than those of fixed rate securities.
ZERO COUPON AND PRINCIPAL-ONLY SECURITIES. Zero coupon
securities and principal-only (PO) securities are debt securities
that have been issued without interest coupons or stripped of
their unmatured interest coupons, and include receipts or
certificates representing interests in such stripped debt
obligations and coupons. Such a security pays no interest to its
holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the
price for which it was acquired, which is generally an amount
significantly less than its face value. Such securities usually
trade at a deep discount from their face or par value and are
subject to greater fluctuations in market value in response to
changing interest rates than debt obligations of comparable
maturities and credit quality that make current distributions of
interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, these
securities eliminate reinvestment risk and "lock in" a rate of
return to maturity.
Zero coupon Treasury securities are U.S. Treasury bills issued
without interest coupons. Principal-only Treasury securities are
U.S. Treasury notes and bonds that have been stripped of their
unmatured interest coupons, and receipts or certificates
representing interests in such stripped debt obligations.
Currently the only U.S. Treasury security issued without coupons
is the Treasury bill. Although the U.S. Treasury does not itself
issue Treasury notes and bonds without coupons, under the U.S.
Treasury STRIPS program interest and principal payments on
certain long-term Treasury securities may be maintained
separately in the Federal Reserve book entry system and may be
separately traded and owned. In addition, in the last few years
a number of banks and brokerage firms have separated ("stripped")
the principal portions from the coupon portions of U.S. Treasury
bonds and notes and sold them separately in the form of receipts
or certificates representing undivided interests in these
instruments (which are generally held by a bank in a custodial or
trust account).
GLOBAL STRATEGIC INCOME and CORPORATE BOND also may invest in
"pay-in-kind" debentures (i.e., debt obligations the interest on
which may be paid in the form of obligations of the same type
rather than cash), which have characteristics similar to zero
coupon securities.
71
FUTURE DEVELOPMENTS. A Fund may, following written notice to its
shareholders, take advantage of other investment practices that
are not currently contemplated for use by the Fund, or are not
available but may yet be developed, to the extent such investment
practices are consistent with the Fund's investment objective and
legally permissible for the Fund. Such investment practices, if
they arise, may involve risks that are different from or exceed
those involved in the practices described above.
PORTFOLIO TURNOVER. The portfolio turnover rate for each Fund is
included in the FINANCIAL HIGHLIGHTS section. The Funds are
actively managed and, in some cases in response to market
conditions, a Fund's portfolio turnover may exceed 100%. A
higher rate of portfolio turnover increases brokerage and other
expenses, which must be borne by the Fund and its shareholders.
High portfolio turnover also may result in the realization of
substantial net short-term capital gains, which, when
distributed, are taxable to shareholders.
TEMPORARY DEFENSIVE POSITION. For temporary defensive purposes,
each Fund may invest in certain types of short-term, liquid, high
grade or high quality (depending on the Fund) debt securities.
These securities may include U.S. Government securities,
qualifying bank deposits, money market instruments, prime
commercial paper and other types of short-term debt securities,
including notes and bonds. For Funds that may invest in foreign
countries, such securities may also include short-term, foreign-
currency denominated securities of the type mentioned above
issued by foreign governmental entities, companies and
supranational organizations.
ADDITIONAL RISK CONSIDERATIONS
CURRENCY CONSIDERATIONS. Those Funds that invest some portion of
their assets in securities denominated in, and receive revenues
in, foreign currencies will be adversely affected by reductions
in the value of those currencies relative to the U.S. Dollar.
These changes will affect a Fund's net assets, distributions and
income. If the value of the foreign currencies in which a Fund
receives income falls relative to the U.S. Dollar between receipt
of the income and the making of Fund distributions, a Fund may be
required to liquidate securities in order to make distributions
if the Fund has insufficient cash in U.S. Dollars to meet the
distribution requirements that the Fund must satisfy to qualify
as a regulated investment company for federal income tax
purposes. Similarly, if an exchange rate declines between the
time a Fund incurs expenses in U.S. Dollars and the time cash
expenses are paid, the amount of the currency required to be
converted into U.S. Dollars in order to pay expenses in U.S.
Dollars could be greater than the equivalent amount of such
expenses in the currency at the time they were incurred. In
72
light of these risks, a Fund may engage in certain currency
hedging transactions, as described above, which involve certain
special risks.
EFFECTS OF BORROWING. A Fund's loan agreements provide for
additional borrowings and for repayments and reborrowings from
time to time, and each Fund that may borrow expects to effect
borrowings and repayments at such times and in such amounts as
will maintain investment leverage in an amount approximately
equal to its borrowing target. The loan agreements provide for a
selection of interest rates that are based on the bank's short-
term funding costs in the U.S. and London markets.
Borrowings by a Fund result in leveraging of the Fund's shares.
Utilization of leverage, which is usually considered speculative,
involves certain risks to a Fund's shareholders. These include a
higher volatility of the net asset value of a Fund's shares and
the relatively greater effect on the net asset value of the
shares. So long as a Fund is able to realize a net return on its
investment portfolio that is higher than the interest expense
paid on borrowings, the effect of leverage will be to cause the
Fund's shareholders to realize a higher current net investment
income than if the Fund were not leveraged. On the other
hand, interest rates on U.S. Dollar-denominated and foreign
currency-denominated obligations change from time to time as does
their relationship to each other, depending upon such factors as
supply and demand forces, monetary and tax policies within each
country and investor expectations. Changes in such factors could
cause the relationship between such rates to change so that rates
on U.S. Dollar-denominated obligations may substantially increase
relative to the foreign currency-denominated obligations of a
Fund's investments. If the interest expense on borrowings
approaches the net return on a Fund's investment portfolio, the
benefit of leverage to the Fund's shareholders will be reduced.
If the interest expense on borrowings were to exceed the net
return to shareholders, a Fund's use of leverage would result in
a lower rate of return. Similarly, the effect of leverage in a
declining market could be a greater decrease in net asset
value per share. In an extreme case, if a Fund's current
investment income were not sufficient to meet the interest
expense on borrowings, it could be necessary for the Fund to
liquidate certain of its investments and reduce the net asset
value of a Fund's shares.
In the event of an increase in rates on U.S. Government
securities or other changed market conditions, to the point where
leverage by MULTI-MARKET STRATEGY, GLOBAL STRATEGIC INCOME or
NORTH AMERICAN GOVERNMENT INCOME could adversely affect the
Funds' shareholders, as noted above, or in anticipation of such
changes, each Fund may increase the percentage of its investment
portfolio invested in U.S. Government securities, which would
73
tend to offset the negative impact of leverage on Fund
shareholders. Each Fund may also reduce the degree to which it
is leveraged by repaying amounts borrowed.
FIXED-INCOME SECURITIES. The value of each Fund's shares will
fluctuate with the value of its investments. The value of each
Fund's investments will change as the general level of interest
rates fluctuates. During periods of falling interest rates, the
values of a Fund's securities will generally rise, although if
falling interest rates are viewed as a precursor to a recession,
the values of a Fund's securities may fall along with interest
rates. Conversely, during periods of rising interest rates, the
values of a Fund's securities will generally decline. Changes in
interest rates have a greater effect on fixed-income securities
with longer maturities and durations than those with shorter
maturities and durations.
In seeking to achieve a Fund's investment objective, there will
be times, such as during periods of rising interest rates, when
depreciation and realization of capital losses on securities in a
Fund's portfolio will be unavoidable. Moreover, medium- and
lower-rated securities and non-rated securities of comparable
quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market
conditions. Such fluctuations after a security is acquired do
not affect the cash income received from that security but will
be reflected in the net asset value of a Fund.
FOREIGN SECURITIES. The securities markets of many foreign
countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited
number of companies representing a small number of industries.
Consequently, a Fund whose investment portfolio includes foreign
securities may experience greater price volatility and
significantly lower liquidity than a portfolio invested solely in
securities of U.S. companies. These markets may be subject to
greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of
securities, than is usual in the United States.
Securities registration, custody and settlements may in some
instances be subject to delays and legal and administrative
uncertainties. Furthermore, foreign investment in the securities
markets of certain foreign countries is restricted or controlled
to varying degrees. These restrictions or controls may at times
limit or preclude investment in certain securities and may
increase the cost and expenses of a Fund. In addition, the
repatriation of investment income, capital or the proceeds of
sales of securities from certain of the countries is controlled
under regulations, including in some cases the need for certain
advance government notification or authority, and if a
74
deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital
remittances.
A Fund also could also be adversely affected by delays in, or a
refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other
restrictions on investment. Investing in local markets may
require a Fund to adopt special procedures or seek local
governmental approvals or other actions, any of which may involve
additional costs to a Fund. These factors may affect the
liquidity of a Fund's investments in any country and Alliance
will monitor the effect of any such factor or factors on a Fund's
investments. Furthermore, transaction costs including brokerage
commissions for transactions both on and off the securities
exchanges in many foreign countries are generally higher than in
the U.S.
Issuers of securities in foreign jurisdictions are generally not
subject to the same degree of regulation as are U.S. issuers with
respect to such matters as insider trading rules, restrictions on
market manipulation, shareholder proxy requirements, and timely
disclosure of information. The reporting, accounting, and
auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects, and
less information may be available to investors in foreign
securities than to investors in U.S. securities. Substantially
less information is publicly available about certain non-U.S.
issuers than is available about most U.S. issuers.
The economies of individual foreign countries may differ
favorably or unfavorably from the U.S. economy in such respects
as growth of gross domestic product or gross national product,
rate of inflation, capital reinvestment, resource self-
sufficiency, and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage,
political changes, government regulation, political or social
instability, or diplomatic developments could affect adversely
the economy of a foreign country. In the event of
nationalization, expropriation or other confiscation, a Fund
could lose its entire investment in securities in the country
involved. In addition, laws in foreign countries governing
business organizations, bankruptcy and insolvency may provide
less protection to security holders such as the Fund than that
provided by U.S. laws.
Alliance believes that, except for currency fluctuations between
the U.S. Dollar and the Canadian Dollar, the matters described
above are not likely to have a material adverse effect on NORTH
AMERICAN GOVERNMENT INCOME'S investments in the securities of
Canadian issuers or investments denominated in Canadian Dollars.
75
The factors described above are more likely to have a material
adverse effect on the Fund's investments in the securities of
Mexican and other non-Canadian foreign issuers, including
investments in securities denominated in Mexican Pesos or other
non-Canadian foreign currencies. If not hedged, however,
currency fluctuations could affect the unrealized appreciation
and depreciation of Canadian Government securities as expressed
in U.S. Dollars.
INVESTMENT IN THE BANKING INDUSTRY. Due to its investment
policies with respect to investments in the banking industry,
MULTI-MARKET STRATEGY will have greater exposure to the risk
factors which are characteristic of such investments. In
particular, the value of and investment return on the Fund's
shares will be affected by economic or regulatory developments in
or related to the banking industry. Sustained increases in
interest rates can adversely affect the availability and cost of
funds for a bank's lending activities, and a deterioration in
general economic conditions could increase the exposure to credit
losses. The banking industry is also subject to the effects of
the concentration of loan portfolios in particular businesses
such as real estate, energy, agriculture or high technology-
related companies; competition within those industries as well as
with other types of financial institutions; and national and
local governmental regulation. In addition, the Fund's
investments in commercial banks located in several foreign
countries are subject to additional risks due to the combination
in such banks of commercial banking and diversified securities
activities. As discussed above, however, the Fund will seek to
minimize their exposure to such risks by investing only in debt
securities which are determined to be of high quality.
INVESTMENT IN FIXED-INCOME SECURITIES RATED BAA AND BBB.
Securities rated Baa or BBB are considered to have speculative
characteristics and share some of the same characteristics as
lower-rated securities, as described below. Sustained periods of
deteriorating economic conditions or of rising interest rates are
more likely to lead to a weakening in the issuer's capacity to
pay interest and repay principal than in the case of higher-rated
securities.
INVESTMENT IN LOWER-RATED FIXED-INCOME SECURITIES. Lower-rated
securities are subject to greater risk of loss of principal and
interest than higher-rated securities. They are also generally
considered to be subject to greater market risk than higher-rated
securities, and the capacity of issuers of lower-rated securities
to pay interest and repay principal is more likely to weaken than
is that of issuers of higher-rated securities in times of
deteriorating economic conditions or rising interest rates. In
addition, lower-rated securities may be more susceptible to real
or perceived adverse economic conditions than investment grade
76
securities. Securities rated Ba or BB are judged to have
speculative elements or to be predominantly speculative with
respect to the issuer's ability to pay interest and repay
principal. Securities rated B are judged to have highly
speculative elements or to be predominantly speculative. Such
securities may have small assurance of interest and principal
payments. Securities rated Baa by Moody's are also judged to have
speculative characteristics.
The market for lower-rated securities may be thinner and less
active than that for higher-rated securities, which can adversely
affect the prices at which these securities can be sold. To the
extent that there is no established secondary market for lower-
rated securities, a Fund may experience difficulty in valuing
such securities and, in turn, the Fund's assets.
Alliance will try to reduce the risk inherent in investment in
lower-rated securities through credit analysis, diversification,
and attention to current developments and trends in interest
rates and economic and political conditions. There can be no
assurance, however, that losses will not occur. Since the risk of
default is higher for lower-rated securities, Alliance's research
and credit analysis are a correspondingly more important aspect
of its program for managing a Fund's securities than would be the
case if a Fund did not invest in lower-rated securities. In
considering investments for the Fund, Alliance will attempt to
identify those high-yielding securities whose financial condition
is adequate to meet future obligations, has improved, or is
expected to improve in the future. Alliance's analysis focuses
on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience
and managerial strength of the issuer.
UNRATED SECURITIES. Unrated securities will also be considered
for investment by NORTH AMERICAN GOVERNMENT INCOME, GLOBAL DOLLAR
GOVERNMENT, GLOBAL STRATEGIC INCOME, CORPORATE BOND and HIGH
YIELD when Alliance believes that the financial condition of the
issuers of such securities, or the protection afforded by the
terms of the securities themselves, limits the risk to the Fund
to a degree comparable to that of rated securities which are
consistent with the Fund's objective and policies.
SOVEREIGN DEBT OBLIGATIONS. No established secondary markets may
exist for many of the sovereign debt obligations in which GLOBAL
DOLLAR GOVERNMENT and GLOBAL STRATEGIC INCOME will invest.
Reduced secondary market liquidity may have an adverse effect on
the market price and a Fund's ability to dispose of particular
instruments when necessary to meet its liquidity requirements or
in response to specific economic events such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain sovereign debt obligations may also make it
77
more difficult for a Fund to obtain accurate market quotations
for the purpose of valuing its portfolio. Market quotations are
generally available on many sovereign debt obligations only from
a limited number of dealers and may not necessarily represent
firm bids of those dealers or prices for actual sales.
By investing in sovereign debt obligations, the Funds will be
exposed to the direct or indirect consequences of political,
social, and economic changes in various countries. Political
changes in a country may affect the willingness of a foreign
government to make or provide for timely payments of its
obligations. The country's economic status, as reflected, among
other things, in its inflation rate, the amount of its external
debt and its gross domestic product, will also affect the
government's ability to honor its obligations.
The sovereign debt obligations in which the Funds will invest in
many cases pertain to countries that are among the world's
largest debtors to commercial banks, foreign governments,
international financial organizations, and other financial
institutions. In recent years, the governments of some of these
countries have encountered difficulties in servicing their
external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Certain
governments have not been able to make payments of interest on or
principal of sovereign debt obligations as those payments have
come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and
social stability of those issuers.
The Funds are permitted to invest in sovereign debt obligations
that are not current in the payment of interest or principal or
are in default so long as Alliance believes it to be consistent
with the Funds' investment objectives. The Funds may have limited
legal recourse in the event of a default with respect to certain
sovereign debt obligations it holds. For example, remedies from
defaults on certain sovereign debt obligations, unlike those on
private debt, must, in some cases, be pursued in the courts of
the defaulting party itself. Legal recourse therefore may be
significantly diminished. Bankruptcy, moratorium and other
similar laws applicable to issuers of sovereign debt obligations
may be substantially different from those applicable to issuers
of private debt obligations. The political context, expressed as
the willingness of an issuer of sovereign debt obligations to
meet the terms of the debt obligation, for example, is of
considerable importance. In addition, no assurance can be given
78
that the holders of commercial bank debt will not contest
payments to the holders of securities issued by foreign
governments in the event of default under commercial bank loan
agreements.
U.S. CORPORATE FIXED-INCOME SECURITIES. The U.S. corporate
fixed-income securities in which GLOBAL DOLLAR GOVERNMENT and
HIGH YIELD invest may include securities issued in connection
with corporate restructurings such as takeovers or leveraged
buyouts, which may pose particular risks. Securities issued to
finance corporate restructurings may have special credit risks
due to the highly leveraged conditions of the issuer. In
addition, such issuers may lose experienced management as a
result of the restructuring. Furthermore, the market price of
such securities may be more volatile to the extent that expected
benefits from the restructuring do not materialize. The Funds may
also invest in U.S. corporate fixed-income securities that are
not current in the payment of interest or principal or are in
default, so long as Alliance believes such investment is
consistent with the Fund's investment objectives. The Funds'
rights with respect to defaults on such securities will be
subject to applicable U.S. bankruptcy, moratorium and other
similar laws.
YEAR 2000 AND EURO. Many computer systems and applications in
use today process transactions using two-digit date fields for
the year of the transaction, rather than the full four digits.
If these systems are not modified or replaced, transactions
occurring after 1999 could be processed as year "1900", which
could result in processing inaccuracies and computer system
failures. This is commonly known as the Year 2000 problem. In
addition to the Year 2000 problem, the European Economic and
Monetary Union has established a single currency, the Euro
Currency ("Euro") that will replace the national currency of
certain European countries effective January 1, 1999. Computer
systems and applications must be adapted in order to be able to
process Euro sensitive information accurately beginning in 1999.
Should any of the computer systems employed by the Funds' major
service providers fail to process Year 2000 or Euro related
information properly, that could have a significant negative
impact on the Funds' operations and the services that are
provided to the Funds' shareholders. In addition, to the extent
that the operations of issuers of securities held by the Funds
are impaired by the Year 2000 problem or the Euro, or prices of
securities held by the Funds decline as a result of real or
perceived problems relating to the Year 2000 or the Euro, the
value of the Funds' shares may be materially affected.
With respect to the Year 2000, the Funds have been advised that
Alliance, each Fund's investment adviser, Alliance Fund
Distributors, Inc. ("AFD"), each Fund's principal underwriter,
79
and Alliance Fund Services, Inc. ("AFS"), each Fund's registrar,
transfer agent and dividend disbursing agent, (collectively,
"Alliance"), began to address the Year 2000 issue several years
ago in connection with the replacement or upgrading of certain
computer systems and applications. During 1997, Alliance began a
formal Year 2000 initiative, which established a structured and
coordinated process to deal with the Year 2000 issue. Alliance
reports that it has completed its assessment of the Year 2000
issues on its domestic and international computer systems and
applications. Currently, management of Alliance expects that the
required modifications for the majority of its significant
systems and applications that will be in use on January 1, 2000,
will be completed and tested by the end of 1998. Full
integration testing of these systems and testing of interfaces
with third-party suppliers will continue through 1999. At this
time, management of Alliance believes that the costs associated
with resolving this issue will not have a material adverse effect
on its operations or on its ability to provide the level of
services it currently provides to the Funds.
With respect to the Euro, the Funds have been advised that
Alliance has established a project team to assess changes that
will be required in connection with the introduction of the Euro.
Alliance reports that its project team has assessed all systems,
including those developed or managed internally, as well as those
provided by vendors, in order to determine the modifications that
will be required to process accurately transactions denominated
in Euro after 1998. At this time, management of Alliance expects
that the required modifications for the introduction of the Euro
will be completed and tested before the end of 1998. Management
of Alliance believes that the costs associated with resolving
this issue will not have a material adverse effect on its
operations or on its ability to provide the level of services it
currently provides to the Funds.
The Funds and Alliance have been advised by the Funds' Custodians
that they are also in the process of reviewing their systems with
the same goals. As of the date of this prospectus, the Funds and
Alliance have no reason to believe that the Custodians will be
unable to achieve these goals.
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MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Each Fund's Adviser is Alliance Capital Management, L.P., 1345
Avenue of the Americas, New York, New York 10105. Alliance is a
leading international investment manager supervising client
accounts with assets as of December 31, 1998, totaling more than
$___ billion (of which approximately $___ billion represented the
assets of investment companies). Alliance's clients are primarily
major corporate employee benefit funds, public employee
retirement systems, investment companies, foundations, and
endowment funds. The __ registered investment companies, with
more than ___ separate portfolios, managed by Alliance currently
have over three million shareholder accounts. As of December 31,
1998, Alliance was retained as an investment manager for employee
benefit plan assets of __ of the FORTUNE 100 companies.
Alliance provides investment advisory services and order
placement facilities for the Funds. For these advisory services,
the Funds paid Alliance as a percentage of net assets:
<BB=>
FEE AS A PERCENTAGE FISCAL YEAR
FUND OF NET ASSETS * ENDING
Short-Term U.S. Governments
U.S. Government Portfolio
Limited Maturity Government
Mortgage Securities Income
Multi-Market Strategy
North American Government Income
Global Dollar Government
Global Strategic Income
Corporate Bond Portfolio
High Yield
* Fees are stated net of waivers and/or reimbursements. See the "Fee
Table" at the beginning of the Prospectus for more information about fee
waivers.
81
PORTFOLIO MANAGER
The following table lists the person or persons who are primarily
responsible for the day-to-day management of each Fund's
portfolio, the length of time that each person has been primarily
responsible, and each person's principal occupation during the
past five years.
82
EMPLOYEE; TIME PERIOD; PRINCIPAL
TITLE WITH ACMC OCCUPATION DURING
FUND THE PAST FIVE YEARS
Short-Term U.S. Patricia J. Young; Associated with
Government since inception; Alliance
Senior Vice President
Jeffrey S. Phlegar; since Associated with
1997; Senior Vice President Alliance
U.S. Government Wayne D. Lyski; since 1983; Associated with
Senior Vice President Alliance
Patricia J. Young; since 1997; (see above)
Jeffrey S. Phelgar; since 1997; (see above)
Limited Maturity Patricia J. Young; since 1997; (see above)
Government
Jeffrey S. Phelgar; since 1997; (see above)
Mortgage Securities Patricia J. Young; since 1997; (see above)
Income
Jeffrey S. Phelgar; since 1997; (see above)
Multi-Market Douglas J. Peebles; since Associated with
Strategy inception; Senior Vice President Alliance
North American Wayne D. Lyski; since inception; (see above)
Government Income
Global Dollar Wayne D. Lyski; since inception; (see above)
Government
Global Strategic Wayne D. Lyski; since inception; (see above)
Income
Douglas J. Peebles; since (see above)
inception;
Corporate Bond Wayne D. Lyski; since 1987; (see above)
Paul J. DeNoon; since Associated with
January 1992; Alliance
Vice President
High Yield Wayne C. Tappe; since 1991; Associated with
Senior Vice President Alliance
Nelson Jantzen; since 1991; Associated with
Senior Vice President Alliance
83
PERFORMANCE OF A SIMILARLY MANAGED PORTFOLIO
Alliance is the investment adviser of a portfolio (the
"Historical Portfolio") of a registered investment company, sold
only to separate accounts of insurance companies in connection
with variable life insurance contracts and variable annuities
certificates and contracts (the "Contracts"), that has
substantially the same investment objective and policies and has
been managed in accordance with essentially the same investment
strategies and techniques as those of High Yield. Alliance since
July 22, 1993, and prior thereto, Equitable Capital Management
Corporation, whose advisory business Alliance acquired on that
date, have served as investment adviser to the Historical
Portfolio since its inception in 1987. Wayne C. Tappe, who
together with Nelson Jantzen is primarily responsible for the
day-to-day management of High Yield, has been the person
principally responsible for the day-to-day management of the
Historical Portfolio since 1995.
The following tables set forth performance results for the
Historical Portfolio since its inception (January 2, 1987),
together with those of High Yield and the Lipper High Current
Yield Mutual Funds Average as a comparative benchmark. As of
September 30, 1998, the assets in the Historical Portfolio
totalled approximately $571 million.
The performance data do not reflect account charges applicable to
the Contracts or imposed at the insurance company separate
account level, which, if reflected, would lower the performance
of the Historical Portfolio. In addition, the performance data
do not reflect the Fund's higher expenses, which, if reflected,
would lower the performance of the Historical Portfolio. The
performance data have not been adjusted for corporate or
individual taxes, if any, payable with respect to the Historical
Portfolio. The rates of return shown for the Historical
Portfolio are not an estimate or guarantee of future investment
performance of the Fund.
The Lipper High Current Yield Mutual Funds Average is a survey of
the performance of a large number of mutual funds the investment
objective of each of which is similar to that of the Fund.
Nonetheless, the investment policies pursued by Funds in the
survey may differ from those of High Yield and the Historical
Portfolio. This survey is published by Lipper Analytical
Services, Inc. ("Lipper"), a firm recognized for its reporting of
performance of actively managed funds. According to Lipper,
performance data are presented net of investment management fees,
operating expenses and, for funds with Rule 12b-1 plans, asset-
based sales charges.
84
The performance results presented below are based on percent
changes in net asset values of the Historical Portfolio with
dividends and capital gains reinvested. Cumulative rates of
return reflect performance over a stated period of time.
Annualized rates of return represent the rate of growth that
would have produced the corresponding cumulative return had
performance been constant over the entire period. Rates of
return for High Yield Class A shares assume the imposition of the
maximum 4.25% sales charge. The inception date for the
Historical Portfolio and Lipper data is January 2, 1987 and for
High Yield is April 22, 1997.
ANNUALIZED RATES OF RETURN
PERIODS ENDED DECEMBER 31, 1998
Portfolio/Benchmark 1 Year 3 Years 5 Years 10 Years Inception
Historical Portfolio % % % % %
Lipper High Current
Yield Mutual Funds
Average
High Yield
CUMULATIVE RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1998
Portfolio/Benchmark 1 Year 3 Years 5 Years 10 Years Inception
Historical Portfolio % % % % %
Lipper High Current
Yield Mutual Funds
Average
High Yield
PURCHASE AND SALE OF SHARES
HOW THE FUNDS VALUE THEIR SHARES
The Funds' net asset value or NAV is calculated at 4 p.m. Eastern
time each day the Exchange is open for business. To calculate
NAV, a Fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the
number of shares outstanding. The Funds' value their securities
at their current market value determined on the basis of market
quotations or, if such quotations are not readily available, such
other methods as the Fund's Directors or Trustees believe
accurately reflect fair market value.
Your order for purchase, sale, or exchange of shares is priced at
the next NAV calculated after your order is accepted by the Fund.
Your purchase of Fund shares may be subject to an initial sales
charge. Sales of Fund shares may be subject to a contingent
85
deferred sales charge or CDSC. See the next section of this
Prospectus, DISTRIBUTION ARRANGEMENTS, for details.
HOW TO BUY SHARES
You may purchase a Fund's shares through broker-dealers, banks,
or other financial intermediaries. You also may purchase shares
directly from the Funds' principal underwriter, Alliance Fund
Distributors, Inc., or AFD.
Minimum investment amounts are:
- Initial $250
- Subsequent $ 50
- Automatic Investment Program $ 25
If you are an existing Fund shareholder, you may purchases shares
by electronic funds transfer in amounts not exceeding $500,000 if
you have completed the appropriate section of the Subscription
Application or the Shareholder Options form obtained from AFS.
Call 800-221-5672 to arrange a transfer from your bank account.
A Fund is required to withhold 31% of taxable dividends, capital
gains distributions, and redemptions paid to shareholders who
have not provided the Fund with their certified taxpayer
identification number. To avoid this, you must provide your
correct Tax Identification Number (Social Security Number for
most investors) on your account application. The Funds may
refuse any order to purchase shares. In this regard, the Funds
reserve the right to restrict purchases of Fund shares (including
through exchanges) when they appear to evidence a pattern of
frequent purchases and sales made in response to short-term
considerations.
HOW TO EXCHANGE SHARES
You may exchange your Fund shares for shares of the same class of
other Alliance Mutual Funds (including AFD Exchange Reserves, a
money market fund managed by Alliance). Exchanges of shares are
made at next-determined NAV, without sales or service charges.
You may request an exchange by mail or telephone. You must call
by 4:00 p.m. Eastern time to receive that day's NAV. The Funds
may change, suspend, or terminate the exchange service on 60
days' written notice.
HOW TO SELL SHARES
You may "redeem" your shares (i.e., sell your shares to the Fund)
on any day the Exchange is open, either directly or through your
financial intermediary. Your sales price will be the next-
86
determined NAV, less any applicable CDSC, after the Fund receives
your request in proper form. Normally, proceeds will be sent to
you within seven days. If you recently purchased your shares by
check or electronic funds transfer, you cannot redeem your any
portion of it until the Fund is reasonably satisfied that the
check or electronic funds transfer has been collected (which may
take up to 15 days).
SELLING SHARES THROUGH YOUR BROKER
Your broker must receive your request by 4:00 p.m., Eastern time,
and submit it to the Fund by 5:00 p.m., Eastern time, for you to
receive that day's NAV, less any applicable CDSC. Your broker is
responsible for furnishing all necessary documentation to a Fund
and may charge you for this service.
SELLING SHARES DIRECTLY TO A FUND
BY MAIL
- Send a signed letter of instruction or stock power form
to AFS, along with certificates, to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, NJ 07096-1520
800-221-5672
- For your protection, a bank, a member firm of a national
stock exchange or other eligible guarantor institution
must guarantee signatures. Stock power forms are
available from your financial intermediary, AFS, and
many commercial banks. Additional documentation is
required for the sale of shares by corporations,
intermediaries, fiduciaries, and surviving joint owners.
BY TELEPHONE
- You may redeem your shares for which no stock
certificates have been issued by telephone request.
Call AFS at 800-221-5672 with instructions on how you
wish to receive your sale proceeds.
- A telephone redemption request must be made by 4:00 p.m.
Eastern time for you to receive that day's NAV, less any
applicable CDSC and, except for certain omnibus
accounts, may be made only once per day.
- If you have selected electronic funds transfer in your
Subscription Application, the redemption proceeds may be
87
sent directly to your bank. Otherwise, the proceeds
will be mailed to you.
- Redemption requests by electronic funds transfer may not
exceed $100,000 per day and redemption requests by check
cannot exceed $50,000 per day.
- Telephone redemption is not available for shares held in
nominees or "street name" accounts or retirement plan
accounts or shares held by a shareholder who has changed
his or her address of record within the previous 30
calendar days.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Funds declare dividends on their shares each Fund business
day. For Saturdays, Sundays, and holidays dividends will be as
of the previous business day. Each Fund pays dividends on its
shares after the close of business on the twentieth day of each
month or on the first day after that day if the day is not a
business day.
Each Fund's income dividend and capital gains distribution, if
any, declared by a Fund on its outstanding shares will, at the
election of each shareholder, be paid in cash or in additional
shares of the same class of shares of that Fund. If paid in
additional shares, the shares will have an aggregate NAV as of
the close of business on the day following the declaration date
of the dividend or distribution equal to the cash amount of the
dividend or distribution. You may make an election to receive
dividends and distributions in cash or in shares at the time you
purchase shares. Your election can be changed at any time prior
to a record date for a dividend. There is no sales or other
charge in connection with the reinvestment of dividends or
capital gains distributions. Cash dividends may be paid in
check, or at your election, electronically via the ACH network.
There is no sales or other charge on the reinvestment of Fund
dividends and distributions.
If you receive an income dividend or capital gains distribution
in cash you may, within 120 days following the date of its
payment, reinvest the dividend or distribution in additional
shares of that Fund without charge by returning to Alliance, with
appropriate instructions, the check representing the dividend or
distribution. Thereafter, unless you otherwise specify, you will
be deemed to have elected to reinvest all subsequent dividends
and distributions in shares of that Fund.
88
While it is the intention of each Fund to distribute to its
shareholders substantially all of each fiscal year's net income
and net realized capital gains, if any, the amount and timing of
any such dividend or distribution must necessarily depend upon
the realization by such Fund of income and capital gains from
investments. There is no fixed dividend rate and there can be no
assurance that a Fund will pay any dividends or realize any
capital gains.
Investment income received by a Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the
source. To the extent that any Fund is liable for foreign income
taxes withheld at the source, each Fund intends, if possible, to
operate so as to meet the requirements of the Code to "pass
through" to the Fund's shareholders credits or deductions for
foreign income taxes paid, but there can be no assurance that any
Fund will be able to do so. Furthermore, a shareholder's ability
to claim a foreign tax credit or deduction for foreign taxes paid
by a Fund may be subject to certain limitations imposed by the
Code, as a result of which a shareholder may not be permitted to
claim a full credit or deduction for the amount of such taxes.
Under certain circumstances, if a Fund realizes losses (e.g.,
from fluctuations in currency exchange rates) after paying a
dividend, all or a portion of the dividend may subsequently be
characterized as a return of capital. Returns of capital are
generally nontaxable, but will reduce a shareholder's basis in
shares of a Fund. If that basis is reduced to zero (which could
happen if the shareholder does not reinvest distributions and
returns of capital are significant), any further returns of
capital will be taxable as capital gain.
U.S. FEDERAL INCOME TAXES
The Funds expect that distributions will consist either of net
income (or short-term capital gains) or long-term capital gains.
For federal income tax purposes, the Fund's dividend
distributions of net income (or short-term taxable gains) will be
taxable to you as ordinary income. Any capital gains
distributions may be taxable to you as capital gains. A Fund's
distributions also may be subject to certain state and local
taxes.
If you buy shares just before a Fund deducts a distribution from
its NAV, you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.
The sale or exchange of Fund shares is a taxable transaction for
Federal income tax purposes. Each year shortly after December
31, the Fund will send you tax information stating the amount and
type of all its distributions for the year. Consult your tax
89
adviser about the federal, state, and local tax consequences in
your particular circumstances.
90
DISTRIBUTION ARRANGEMENT
SHARE CLASSES. The Funds offer three classes of shares.
CLASS A SHARES--INITIAL SALES CHARGE ALTERNATIVE
You can purchase Class A shares at NAV plus an initial sales
charge, as follows:
INITIAL SALES CHARGE
COMMISSION
AS % OF NET AS % OF TO DEALER/
AMOUNT OFFERING AGENT AS % OF
AMOUNT PURCHASED INVESTED PRICE OFFERING PRICE
Up to $100,000 4.44% 4.25% 4.00%
$100,000 up to $250,000 3.36% 3.25% 3.00%
$250,000 up to $500,000 2.30% 2.25% 2.00%
$500,000 up to $1,000,000 1.78% 1.75% 1.50%
You pay no initial sales charge on purchases of Class A Shares in
the amount of $1,000,000, but may pay a 1% CDSC if you redeem
your shares within 1 year. Alliance may pay the dealer or agent
a fee of up to 1% of the dollar amount purchased. Certain
purchases of Class A shares may qualify for reduced or eliminated
sales charges under a Fund's Combined Purchase Privilege,
Cumulative Quantity Discount, Statement of Intention, Privilege
for Certain Retirement Plans, Reinstatement Privilege, and Sales
at Net Asset Value Programs. Consult the Subscription
Application and a Fund's SAI for additional information about
these options.
CLASS B SHARES--DEFERRED SALES CHARGE ALTERNATIVE
You can purchase Class B shares at NAV without an initial sales
charge. A Fund will thus receive the full amount of your
purchase. Your investment, however, will be subject to a CDSC if
you redeem shares within three years (four years in the case of
Global Strategic Income and High Yield) after purchase. The CDSC
varies depending on the number of years you hold the shares. The
CDSC amounts are:
91
GLOBAL STRATEGIC INCOME and HIGH YIELD:
Year Since Purchase CDSC
First 4.0%
Second 3.0%
Third 2.0%
Fourth 1.0%
Fifth None
ALL OTHER FUNDS:
Year Since Purchase CDSC
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
If you exchange your shares for the Class B shares of another
Alliance Mutual Fund, the CDSC also will apply to those Class B
shares. The CDSC period begins with the date of your original
purchase, not the date of exchange for the other Class B shares.
The Fund's Class B shares purchased for cash automatically
convert to Class A shares six years after the end of the month of
your purchase. If you purchase shares by exchange for the Class B
shares of another Alliance Mutual Fund, the conversion period
runs from the date of your original purchase.
CLASS C SHARES--ASSET-BASED SALES CHARGE ALTERNATIVE
You can purchase Class C shares at NAV without any initial sales
charge. A Fund will thus receive the full amount of your
purchase. Your investment, however, will be subject to a 1% CDSC
if you redeem your shares within 1 year. If you exchange your
shares for the Class C shares of another Alliance Mutual Fund,
the 1% CDSC also will apply to those Class C shares. The 1-year
period for the CDSC begins with the date of your original
purchase, not the date of the exchange for the other Class C
shares.
Class C shares do not convert to any other class of shares of the
Fund.
ASSET-BASED SALES CHARGE OR RULE 12B-1 FEES. Each Fund has
adopted a plan under SEC Rule 12b-1 that allows the Fund to pay
asset-based sales charges or distribution and service fees for
the distribution and sale of its shares. The amount of these
fees for each class of the Fund's shares is:
92
Rule 12b-1 Fee
(as a percent of Aggregate average daily net assets)
Class A .30%
Class B 1.00%
Class C 1.00%
Because these fees are paid out of the Fund's assets on an on-
going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales
fees. Class B and Class C shares are subject to higher
distribution fees than Class A shares (Class B shares are subject
to these higher fees for a period of six years, after which they
convert to Class A shares). The higher fees mean a higher
expense ratio, so Class B and Class C shares pay correspondingly
lower dividends and may have a lower NAV than Class A shares.
CHOOSING A CLASS OF SHARES. The decision as to which class of
shares is more beneficial to you depends on the amount and
intended length of your investment. If you are making a large
investment, thus qualifying for a reduced sales charge, you might
consider purchasing Class A shares. If you are making a smaller
investment, you might consider purchasing Class B shares because
100% of your purchase is invested immediately. If you are unsure
of the length of your investment, you might consider Class C
shares because there is no initial sales charge and no CDSC as
long as the shares are held for one year or more. Dealers and
agents may receive differing compensation for selling Class A,
Class B, or Class C shares. There is no size limit on purchases
of Class A shares. The maximum purchase of Class B shares is
$250,000. The maximum purchase of Class C hares is $1,000,000.
You should consult your financial agent to assist in choosing a
class of Fund shares.
APPLICATION OF THE CDSC. The CDSC is applied to the lesser of
the original cost of shares being redeemed or NAV at the time of
redemption (or, as to Fund shares acquired through an exchange,
the cost of the Alliance Fund shares originally purchased for
cash). Shares obtained from dividend or distribution
reinvestment are not subject to the CDSC. The Fund may waive the
CDSC on redemptions of shares following the death or disability
of a shareholder, to meet the requirements of certain qualified
retirement plans, or under a monthly, bimonthly, or quarterly
systematic withdrawal plan. See the Fund's SAI or further
information about CDSC waivers.
OTHER. A transaction, service, administrative, or other similar
fee may be charged by your broker-dealer, agent, financial
intermediary, or other financial representative with respect to
the purchase, sale, or exchange of Class A, Class B or Class C
shares made through your financial representative. The financial
93
intermediaries also may impose requirements on the purchase,
sale, or exchange of shares that are different from, or in
addition to, those imposed by a Fund, including requirements as
to the minimum initial and subsequent investment amounts.
In addition to the discount or commission paid to dealers or
agents, AFD from time to time pays additional cash or other
incentives to dealers or agents, including EQ Financial
Consultants Inc., an affiliate of AFD, in connection with the
sale of shares of the Funds. These additional amounts may be
utilized, in whole or in part, in some cases together with other
revenues of such dealers or agents, to provide additional
compensation to registered representatives who sell shares of the
Funds. On some occasions, the cash or other incentives will be
conditioned upon the sale of a specified minimum dollar amount of
the shares of a Fund and/or other Alliance Mutual Funds during a
specific period of time. The incentives may take the form of
payment for attendance at seminars, meals, sporting events or
theater performances, or payment for travel, lodging and
entertainment incurred in connection with travel by persons
associated with a dealer or agent and their immediate family
members to urban or resort locations within or outside the United
States. The dealer or agent may elect to receive cash incentives
of equivalent amount in lieu of such payments.
GENERAL INFORMATION
Under unusual circumstances, a Fund may suspend redemptions or
postpone payment for up to seven days or longer, as permitted by
federal securities law. The Funds reserve the right to close an
account that through redemption has remained below $200 for 90
days. Shareholders will receive 60 days' written notice to
increase the account value before the account is closed.
During drastic economic or market developments, you might have
difficulty reaching AFS by telephone, in which event you should
issue written instructions to AFS. AFS is not responsible for the
authenticity of telephonic requests to purchase, sell, or
exchange shares. AFS will employ reasonable procedures to verify
that telephone requests are genuine, and could be liable for
losses resulting from unauthorized transactions if it fails to do
so. Dealers and agents may charge a commission for handling
telephonic requests. The telephone service may be suspended or
terminated at any time without notice.
SHAREHOLDER SERVICES. AFS offers a variety of shareholder
services. For more information about these services or your
account, call AFS's toll-free number, 800-221-5672. Some services
are described in the attached Subscription Application. A
shareholder manual explaining all available services will be
94
provided upon request. To request a shareholder manual, call 800-
227-4618.
EMPLOYEE BENEFIT PLANS. Certain employee benefit plans,
including employer-sponsored tax-qualified 401(k) plans and other
defined contribution retirement plans ("Employee Benefit Plans"),
may establish requirements as to the purchase, sale or exchange
of shares of the Funds, including maximum and minimum initial
investment requirements, that are different from those described
in this Prospectus. Employee Benefit Plans also may not offer all
classes of shares of the Funds. In order to enable participants
investing through Employee Benefit Plans to purchase shares of
the Funds, the maximum and minimum investment amounts may be
different for shares purchased through Employee Benefit Plans
from those described in this Prospectus. In addition, the Class
A, Class B and Class C CDSC may be waived for investments made
through Employee Benefit Plans.
PENDING LEGAL PROCEEDINGS INVOLVING NORTH AMERICAN GOVERNMENT
INCOME. On July 25, 1995, a Consolidated and Supplemental Class
Action Complaint ("Complaint") styled In re Alliance North
American Government Income Trust, Inc. Securities Litigation was
filed in the U.S. District Court for the Southern District of New
York ("District Court") against the Fund, Alliance, ACMC, AFD,
The Equitable Companies Incorporated ("ECI"), a parent of the
Adviser, and certain current and former officers and directors of
the Fund and ACMC, alleging violations of the federal securities
laws, fraud and breach of fiduciary duty in connection with the
Fund's investments in Mexican and Argentine securities. The
Complaint sought certification of a plaintiff class of all
persons who purchased or owned Class A, B or C shares of the Fund
from March 27, 1992 through December 23, 1994. Plaintiffs alleged
that during 1995 the Fund's losses exceeded $750,000,000 and
sought as relief unspecified damages, costs and attorney's fees.
On September 26, 1996, the District Court granted defendants'
motion to dismiss all counts of the Complaint ("First Decision").
On October 11, 1996, plaintiffs filed a motion for
reconsideration of the First Decision. On November 25, 1996, the
District Court denied plaintiffs' motion for reconsideration of
the First Decision. On October 29, 1997, the United States Court
of Appeals for the Second Circuit ("Court of Appeals") issued an
order granting defendants' motion to strike and dismissing
plaintiffs' appeal of the First Decision.
On October 29, 1996, plaintiffs filed a motion for leave to file
an amended complaint ("Amended Complaint"). In the Amended
Complaint, plaintiffs asserted claims against the Fund, Alliance,
ACMC, AFD, ECI, and certain current and former officers of the
Fund and ACMC alleging violations of the federal securities laws,
fraud and breach of fiduciary duty. The principal allegations of
95
the Amended Complaint related to the Fund's hedging practices,
the Fund's investments in certain mortgage-backed securities, and
the risk and objectives of the Fund as described in the Fund's
marketing materials. The Amended Complaint made similar requests
for class certification and damages as made in the Complaint. On
July 15, 1997, the District Court denied plaintiffs' motion for
leave to file the Amended Complaint and dismissed the case
("Second Decision").
On November 17, 1997, plaintiffs filed a notice of appeal of the
Second Decision to the Court of Appeals. On October 15, 1998, the
Court of Appeals affirmed in part and reversed in part the Second
Decision. The Court of Appeals affirmed the District Court's
denial of plaintiffs' motion for leave to file the Amended
Complaint insofar as the Amended Complaint alleged that
defendants had made misrepresentations and omissions relating to
the Funds' investments in certain mortgage-backed securities and
in the Fund's marketing materials. The Court of Appeals reversed
the District Court's decision to deny plaintiffs' motions for
leave to file the Amended Complaint insofar as the Amended
Complaint alleged that defendants had made actionable
misrepresentations and omissions relating to the Fund's hedging
practices. The Fund and Alliance believe that the allegations in
the Complaint and the Amended Complaint are without merit and
intend to defend vigorously against those claims.
96
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you
understand the Fund's financial performance for the period of the
Fund's operations. Certain information reflects financial
information for a single Fund share. The total return in the
table represents the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). The information has been audited
by ______________, the Fund's independent auditors, whose report,
along with Fund's financial statements, appears in the Statement
of Additional Information, which is available upon request.
[To Follow]
97
For more information about the Funds, the following documents are
available upon request:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The Fund's annual and semi-annual reports to shareholders contain
additional information on the Funds' investments. In the annual
report, you will find a discussion of the market conditions and
investment strategies that significantly affected a Fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Each Fund has an SAI, which contains more detailed information
about the Fund, including its operations and investment policies.
The Funds' SAIs are incorporated by reference into (and is
legally part of) this prospectus.
You may request a free copy of the current annual/semi-annual
report or the SAI, by contacting your broker or other financial
intermediary, or by contacting Alliance:
BY MAIL: c/o Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, NJ 07096-1520
BY PHONE: For Information: (800) 221-5672
For Literature: (800) 227-4618
Or you may view or obtain these documents from the Commission:
IN PERSON: at the Commission's Public Reference Room in
Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
ON THE INTERNET: www.sec.gov
98
APPENDIX A
BOND RATINGS
Moody's Investors Service, Inc.
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
A-1
Caa--Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Absence of Rating--When no rating has been assigned or where a
rating has been suspended or withdrawn, it may be for reasons
unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the
following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are unrated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed, in which case the rating
is not published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory
analysis; if there is no longer available reasonable up-to-date
data to permit a judgment to be formed; if a bond is called for
redemption; or for other reasons.
Note--Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
STANDARD & POOR'S RATINGS SERVICES
AAA--Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A-2
A--Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB--Debt rated BBB normally exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than
in higher rated categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC or C is regarded as
having significant speculative characteristics. BB indicates the
lowest degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.
BB--Debt rated BB is less vulnerable to nonpayment than other
speculative debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to an inadequate capacity to pay interest and
repay principal.
B--Debt rated B is more vulnerable to nonpayment than debt rated
BB, but there is capacity to pay interest and repay principal.
Adverse business, financial or economic conditions will likely
impair the capacity or willingness to pay principal or repay
interest.
CCC--Debt rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic
conditions to pay interest and repay principal. In the event of
adverse business, financial or economic conditions, there is not
likely to be capacity to pay interest or repay principal.
CC--Debt rated CC is currently highly vulnerable to nonpayment.
C--The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been
taken, but payments are being continued.
D--The D rating, unlike other ratings, is not prospective;
rather, it is used only where a default has actually occurred.
Plus (+) or Minus (-)--The ratings from AA to CCC may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
NR--Not rated.
A-3
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA+,AA, AA- --High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of
economic conditions.
A+, A, A- --Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic
stress.
BBB+, BBB, BBB- --Below average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+, BB, BB- --Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company
fortunes. Overall quality may move up or down frequently within
this category.
B+, B, B- --Below investment grade and possessing risk that
obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into a
higher or lower rating grade.
CCC--Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can
be substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP--Preferred stock with dividend arrearages.
FITCH IBCA, INC.
AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated AAA. Because bonds rated in the AAA and AA categories are
A-4
not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F- 1+.
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
BB--Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC--Bonds have certain identifiable characteristics which, if
not remedied, may lead to default.
The ability to meet obligations requires an advantageous business
and economic environment.
CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C--Bonds are in imminent default in payment of interest or
principal.
DDD, DD, D--Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. DDD represents the
highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) Minus (-)--Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the
A-5
rating category. Plus and minus signs, however, are not used in
the AAA, DDD, DD or D categories.
NR--Indicates that Fitch does not rate the specific issue.
A-6
APPENDIX B
General Information
About Canada, Mexico
and Argentina
GENERAL INFORMATION ABOUT CANADA
Canada consists of a federation of ten Provinces and two federal
territories (which generally fall under federal authority) with a
constitutional division of powers between the federal and
Provincial governments. The Parliament of Canada has jurisdiction
over all areas not assigned exclusively to the Provincial
legislatures, and has jurisdiction over such matters as the
federal public debt and property, the regulation of trade and
commerce, currency and coinage, banks and banking, national
defense, the postal services, navigation and shipping and
unemployment insurance.
The Canadian economy is based on the free enterprise system, with
business organizations ranging from small owner-operated
businesses to large multinational corporations. Manufacturing and
resource industries are large contributors to the country's
economic output, but as in many other highly developed countries,
there has been a gradual shift from a largely goods-producing
economy to a predominantly service-based one. Agriculture and
other primary production play a small but key role in the
economy. Canada is also an exporter of energy to the United
States in the form of natural gas (of which Canada has
substantial reserves) and hydroelectric power, and has
significant mineral resources.
Canadian Dollars are fully exchangeable into U.S. Dollars without
foreign exchange controls or other legal restriction. Since the
major developed-country currencies were permitted to float freely
against one another, the range of fluctuation in the U.S.
Dollar/Canadian Dollar exchange rate generally has been narrower
than the range of fluctuation between the U.S. Dollar and most
other major currencies. Since 1991, Canada generally has
experienced a weakening of its currency. The Canadian Dollar
reached an all-time low of 1.5770 Canadian Dollars per U.S.
Dollar on August 27, 1998. On October 13, 1998 the Canadian
Dollar-U.S. Dollar exchange rate was 1.5510:1. The range of
fluctuation that has occurred in the past is not necessarily
indicative of the range of fluctuation that will occur in the
future. Future rates of exchange cannot be accurately predicted.
B-1
GENERAL INFORMATION ABOUT THE UNITED MEXICAN STATES
The United Mexican States ("Mexico") is a nation formed by 31
states and a Federal District (Mexico City). The Political
Constitution of Mexico, which took effect on May 1, 1917,
established Mexico as a Federal Republic and provides for the
separation of executive, legislative and judicial branches. The
President and the members of the General Congress are elected by
popular vote.
Prior to 1994, when Mexico experienced an economic crisis that
led to the devaluation of the Peso in December 1994, the Mexican
economy experienced improvement in a number of areas, including
growth in gross domestic product and a substantial reduction in
the rate of inflation and in the public sector financial deficit.
Much of the past improvement in the Mexican economy was due to a
series of economic policy initiatives intended to modernize and
reform the Mexican economy, control inflation, reduce the
financial deficit, increase public revenues through the reform of
the tax system, establish a competitive and stable currency
exchange rate, liberalize trade restrictions and increase
investment and productivity, while reducing the government's role
in the economy. In this regard, the Mexican government launched a
program for privatizing certain state owned enterprises,
developing and modernizing the securities markets, increasing
investment in the private sector and permitting increased levels
of foreign investment.
In 1994 Mexico faced internal and external conditions that
resulted in an economic crisis that continues to affect the
Mexican economy adversely. Growing trade and current account
deficits, which could no longer be financed by inflows of foreign
capital, were factors contributing to the crisis. A weakening
economy and unsettling political and social developments caused
investors to lose confidence in the Mexican economy. This
resulted in a large decline in foreign reserves followed by a
sharp and rapid devaluation of the Mexican Peso. The ensuing
economic and financial crisis resulted in higher inflation and
domestic interest rates, a contraction in real gross domestic
product and a liquidity crisis.
In response to the adverse economic conditions that developed at
the end of 1994, the Mexican government instituted a new economic
program; and the government and the business and labor sectors of
the economy entered into a new accord in an effort to stabilize
the economy and the financial markets. To help relieve Mexico's
liquidity crisis and restore financial stability to Mexico's
economy, the Mexican government also obtained financial
assistance from the United States, other countries and certain
international agencies conditioned upon the implementation and
continuation of the economic reform program.
B-2
In October 1995, and again in October 1996, the Mexican
government announced new accords designed to encourage economic
growth and reduce inflation. While it cannot be accurately
predicted whether these accords will continue to achieve their
objectives, the Mexican economy has stabilized since the economic
crisis of 1994, and the high inflation and high interest rates
that continued to be a factor after 1994 have subsided as well.
After declining for five consecutive quarters beginning with the
first quarter of 1995, Mexico's gross domestic product began to
grow in the second quarter of 1996. That growth was sustained in
1996 and 1997, resulting in increases of 5.2% and 7.0%,
respectively. The growth rate for the first half of 1998 was
5.4%. In addition, inflation dropped from a 52% annual rate in
1995 to a 27.7% annual rate in 1996 and a 15.7% annual rate in
1997. For the first eight months of 1998, the inflation rate
fluctuated between 15.0% and 15.5% on an annualized basis.
Mexico's economy is influenced by international economic
conditions, particularly those in the United States, and by world
prices for oil and other commodities. The recovery of the economy
will require continued economic and fiscal discipline as well as
stable political and social conditions. In addition, there is no
assurance that Mexico's economic policy initiatives will be
successful or that succeeding administrations will continue these
initiatives.
Under economic policy initiatives implemented on and after
December 1987, the Mexican government introduced a series of
schedules allowing for the gradual devaluation of the Mexican
Peso against the U.S. Dollar. These gradual devaluations
continued until December 1994. On December 22, 1994, the Mexican
government announced that it would permit the Peso to float
freely against other currencies, resulting in a precipitous
decline against the U.S. Dollar. By December 31, 1996, the Peso-
Dollar exchange rate had decreased approximately 40% from that on
December 22, 1994. After dropping approximately 55% from 1994
through 1996, in 1997, the average annual Peso-Dollar exchange
rate decreased approximately 4% from that in 1996. At the end of
the first nine months of 1998, the Peso-Dollar exchange rate
decreased approximately 25% from the end of 1997.
Mexico has in the past imposed strict foreign exchange controls.
There is no assurance that future regulatory actions in Mexico
would not affect the Fund's ability to obtain U.S. Dollars in
exchange for Mexican Pesos.
GENERAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
The Republic of Argentina ("Argentina") consists of 23 provinces
and the federal capital of Buenos Aires. Its federal constitution
provides for an executive branch headed by a President, a
legislative branch and a judicial branch. Each province has its
B-3
own constitution, and elects its own governor, legislators and
judges, without the intervention of the federal government.
The military has intervened in the political process on several
occasions since 1930 and has ruled the country for 22 of the past
68 years. The most recent military government ruled the country
from 1976 to 1983. Four unsuccessful military uprisings have
occurred since 1983, the most recent in December 1990.
Shortly after taking office in 1989, the country's current
President adopted market-oriented and reformist policies,
including an aggressive privatization program, a reduction in the
size of the public sector and an opening of the economy to
international competition.
In the decade prior to the announcement of a new economic plan in
March 1991, the Argentine economy was characterized by low and
erratic growth, declining investment rates and rapidly worsening
inflation. Despite its strengths, which include a well-balanced
natural resource base and a high literacy rate, the Argentine
economy failed to respond to a series of economic plans in the
1980's. The 1991 economic plan represented a pronounced departure
from its predecessors in calling for raising revenues, cutting
expenditures and reducing the public deficit. The extensive
privatization program commenced in 1989 was accelerated, the
domestic economy deregulated and opened up to foreign trade and
the frame-work for foreign investment reformed. As a result of
the economic stabilization reforms, gross domestic product has
increased each year since 1991, with the exception of 1995.
During 1997, gross domestic product increased an estimated 8.4%
from 1996. Preliminary data indicate that during the first
quarter of 1998 gross domestic product increased 6.9% from the
first quarter of 1997. The rate of inflation is generally viewed
to be under control. Significant progress was also made between
1991 and 1994 in rescheduling Argentina's debt with both external
and domestic creditors, which improved fiscal cash flows in the
medium term and allowed a return to voluntary credit markets.
There is no assurance that Argentina's economic policy
initiatives will be successful or that succeeding administrations
will continue these initiatives.
In 1995 economic policy was directed toward the effects of the
Mexican currency crisis. The Mexican currency crisis led to a run
on Argentine bank deposits, which was brought under control by a
series of measures designed to strengthen the financial system.
The measures included the "dollarization" of banking reserves,
the establishment of two trust funds and strengthening bank
reserve requirements.
In 1991 the Argentine government enacted currency reforms, which
required the domestic currency to be fully backed by
B-4
international reserves, in an effort to make the Argentine Peso
fully convertible into the U.S. Dollar at a rate of one to one.
The Argentine Peso has been the Argentine currency since
January 1, 1992. Since that date, the rate of exchange from the
Argentine Peso to the U.S. Dollar has remained approximately one
to one. The fixed exchange rate has been instrumental in
stabilizing the economy, but has not reduced pressures from high
rates of unemployment. It is not clear that the government will
be able to resist pressure to devalue the currency. However, the
historic range is not necessarily indicative of fluctuations that
may occur in the exchange rate over time and future rates of
exchange cannot be accurately predicted. The Argentine foreign
exchange market was highly controlled until December 1989, when a
free exchange rate was established for all foreign currency
transactions. Argentina has eliminated restrictions on foreign
direct investment and capital repatriation. In 1993, legislation
was adopted abolishing previous requirements of a three-year
waiting period for capital repatriation. Under the legislation,
foreign investors are permitted to remit profits at any time.
B-5
ALLIANCE BOND FUND, INC.
-CORPORATE BOND PORTFOLIO
(LOGO)(R)
____________________________________________________________
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) 227-4681
____________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
____________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the current
Prospectus for the Corporate Bond Portfolio (the "Portfolio") of
the Alliance Bond Fund, Inc. (the "Fund") that offers Class A,
Class B and Class C shares of the Portfolio and, if the Portfolio
begins to offer Advisor Class shares, the Prospectus that offers
the Advisor Class shares of the Portfolio (the "Advisor Class
Prospectus" and, together with any Prospectus that offers the
Class A, Class B, and Class C shares, the "Prospectus(es)"). The
Portfolio currently does not offer Advisor Class shares. Copies
of the Prospectus(es) of the Portfolio 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 Portfolio..........................
Management of the Fund................................
Purchase of Shares....................................
Redemption and Repurchase of Shares...................
Shareholder Services..................................
Net Asset Value.......................................
Portfolio Transactions................................
Taxes.................................................
General Information...................................
Financial Statements and Report of
Independent Auditors................................
Appendix A: Certain Employee Benefit Plans............ A-1
(R) This is a registered service mark used under license from
the owner, Alliance Capital Management L.P.
_____________________________________________________________
DESCRIPTION OF THE PORTFOLIO
_____________________________________________________________
INTRODUCTION TO THE FUND
Alliance Bond Fund, Inc. (the "Fund") is a diversified,
open-end management investment company commonly known as a
"mutual fund" whose shares are offered in separate series
referred to as portfolios. Each portfolio is a separate pool of
assets constituting, in effect, a separate fund with its own
investment objectives and policies. A shareholder in the
portfolio will be entitled to his or her pro-rata share of all
dividends and distributions arising from that portfolio's assets
and, upon redeeming shares of that portfolio, the shareholder
will receive the then current net asset value of that portfolio
represented by the redeemed shares. (See "Purchase of Shares"
and "Redemption and Repurchase of Shares," in the Portfolio's
Prospectus.) The Fund is empowered to establish, without
shareholder approval, additional portfolios which may have
different investment objectives.
The Fund currently has two portfolios: the Corporate
Bond Portfolio (the "Portfolio"), which is described in this
Statement of Additional Information and the U.S. Government
Portfolio which is described in a separate Statement of
Additional Information. Copies of the U.S. Government
Portfolio's Prospectus and Statement of Additional 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.
THE CORPORATE BOND PORTFOLIO
Except as otherwise indicated, the Portfolio's
investment policies are not designated "fundamental policies"
and, therefore, may be changed by the Board of Directors without
a shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. The Portfolio's investment objectives may not be
changed without shareholder approval. There can be, of course,
no assurance that the Portfolio will achieve its investment
objectives.
INVESTMENT OBJECTIVE
GENERAL. The primary investment objective of the
Portfolio is to maximize income over the long term consistent
with providing reasonable safety in the value of each
shareholder's investment. As a secondary objective, the
2
Portfolio will attempt to increase its capital through
appreciation of its investments in order to preserve and, if
possible, increase the purchasing power of each shareholder's
investment.
HOW THE PORTFOLIO PURSUES ITS OBJECTIVES
In pursuing these objectives, the Portfolio's policy is
to invest in readily marketable securities which give promise of
relatively attractive yields, but which do not involve
substantial risk of loss of capital. The Portfolio follows a
policy of maintaining at least 65% of its net assets invested in
debt securities. Such objectives and policies cannot be changed
without the approval of the holders of a majority of the
Portfolio's voting securities. The Portfolio also follows a
policy of maintaining at least 65% of its net assets invested in
corporate bonds. Moreover, the Portfolio intends to manage its
portfolio actively by taking advantage of such trading
opportunities as swaps to higher yielding bonds of similar
quality and swaps to different types of bonds which are more
attractive investments due to distortions in normal yield
differentials.
There is no minimum rating requirement applicable to the
Portfolio's investments in fixed-income securities. Currently,
the Portfolio believes its objectives and policies may best be
implemented by investing at least 65% of its total assets in
fixed-income securities considered investment grade or higher
(securities rated at least Baa by Moody's Investors Services,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Services
("S&P")). During the fiscal year ended June 30, 1998, the
Portfolio did not invest in securities rated below B by Moody's,
or if unrated by Moody's, considered by Alliance Capital
Management L.P. (the "Investment Adviser") to be of equivalent
quality to such a rating. Securities rated Ba or below by Moody's
or BB or below by S&P are often referred to as junk bonds. (See
"Special Risk Considerations" below). The Portfolio expects that
it will not retain a security which is downgraded below B, or if
unrated, determined by the Investment Adviser to have undergone
similar credit quality deterioration subsequent to purchase.
During this period, the Portfolio has continued to hold its
position in certain 8.25% notes issued by Grupo Mexicano de
Desarollo ("GMD") which have been downgraded below B following
GMD's default on its coupon payments on these notes. A number of
GMD noteholders, including the Fund, have commenced litigation
against GMD and have been awarded a judgment for the full amounts
due them on the Notes. The noteholders are seeking to obtain
enforcement of this judgment in Mexico and, concurrently, are in
negotiations with GMD and its other creditors in an effort to
arrive at a consensual restructuring of the Notes. There can be
no assurance at this time that the Fund will be able to obtain
3
enforcement of its judgment against GMD or that the parties can
arrive at a consensual restructuring.
The Portfolio will not invest more than 5% of its total
assets in the securities of any one issuer, excepting U.S.
Government obligations. Further, the Portfolio will not own more
than 10% of the outstanding voting securities of any issuer. The
Portfolio has complete flexibility as to the types of securities
in which it will invest and the relative proportions thereof, and
the Portfolio plans to vary the proportions of its holdings of
long- and short-term fixed-income securities (including debt
securities, convertible debt securities, U.S. Government (full
faith and credit) obligations) and of common and preferred stocks
in order to reflect its assessment of prospective cyclical
changes even if such action may adversely affect current income.
However, substantially all of the Portfolio's investments will be
income producing. (See "Investment Restrictions", below, for
additional restrictions which are fundamental policies of the
Portfolio and which cannot be changed without shareholder
approval).
The Portfolio may invest up to 50% of the value of its
total assets in foreign debt securities which will consist
primarily of corporate fixed-income securities and instruments
issued or guaranteed by foreign governments ("Sovereign Debt
Obligations"). Sovereign Debt Obligations may include, as
described below, securities issued in connection with foreign
government debt restructurings as well as foreign government loan
participations and assignments. Not more than 15% of the
Portfolio's total assets may be invested in Sovereign Debt
Obligations in the form of foreign government loan participations
and assignments, substantially all of which may be high-yield,
high-risk debt securities that are low-rated (i.e. below
investment grade) or of comparable quality and unrated, and that
are considered to be predominantly speculative as regards the
issuer's capacity to pay interest and repay principal. Investors
should be aware that there are risks associated with investment
by the Portfolio in foreign securities. See "Special Risk
Considerations."
BRADY BONDS. The Portfolio may invest in certain debt
obligations customarily referred to as "Brady Bonds," which are
created through the exchange of existing commercial bank loans to
foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings totaling more than $120
billion have been implemented to date in Argentina, Bolivia,
Brazil, Costa Rica, The Dominican Republic, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest
4
proportion of Brady Bonds having been issued to date by
Argentina, Brazil, Mexico and Venezuela.
Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Certain Brady Bonds are collateralized in full as to principal
due at maturity by zero coupon obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities having
the same maturity ("Collateralized Brady Bonds").
Dollar-denominated, Collateralized Brady Bonds may be
fixed rate bonds or floating rate bonds. Interest payments on
Brady Bonds are often collateralized by cash or securities in an
amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate
at that time and is adjusted at regular intervals thereafter.
Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation
components: (i) collateralized repayment of principal at final
maturity; (ii) collateralized interest payments; (iii)
uncollateralized interest payments; and (iv) any uncollateralized
repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a
default with respect to Collateralized Brady Bonds as a result of
which the payment obligations of the issuer are accelerated, the
U.S. Treasury zero coupon obligations held as collateral for the
payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will
equal the principal payments which would have been due on the
Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
STRUCTURED SECURITIES. The Portfolio may invest in
interests in entities organized and operated solely for the
purpose of restructuring the investment characteristics of
Sovereign Debt Obligations and loan participations and
assignments. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of
5
specified instruments (such as commercial bank loans or Brady
Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different
investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the
payments made with respect to Structured Securities is dependent
on the extent of the cash flow on the underlying instruments.
Because Structured Securities of the type in which the Portfolio
anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to
that of the underlying instruments.
The Portfolio is permitted to invest in a class of
Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields
and present greater risks than unsubordinated Structured
Securities.
Certain issuers of Structured Securities may be deemed
to be "investment companies" as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"). As a result, the
Portfolio's investment in these Structured Securities may be
limited by the restrictions contained in the 1940 Act.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Portfolio may
invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer of Sovereign Debt
Obligations and one or more financial institutions ("Lenders").
The Portfolio's investments in Loans are expected in most
instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans
("Assignments") from third parties. The Portfolio may invest up
to 15% of its total assets in Participations and Assignments.
The government that is the borrower on the Loan will be
considered by the Portfolio to be the issuer of a Participation
or Assignment for purposes of the Portfolio's fundamental
investment policy that it will not invest 25% or more of its
total assets in securities of issuers conducting their principal
business activities in the same industry (i.e., foreign
government). The Portfolio's investment in Participations
typically will result in the Portfolio having a contractual
relationship only with the Lender and not with the borrower. The
Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the
Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. The Portfolio will
acquire Participations only if the Lender interpositioned between
6
the Portfolio and the borrower is a Lender having total assets of
more than $25 billion and whose senior unsecured debt is rated
investment grade or higher (i.e., Baa or higher by Moody's or BBB
or higher by S&P).
In connection with purchasing Participations, the
Portfolio generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the
Portfolio may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a
result, the Portfolio may be subject to the credit risk of both
the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor
of the Lender and may not benefit from any set-off between the
Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of
Participations being subject to the credit risk of the Lender
with respect to the Participation, but even under such a
structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the
assignability of the Participation impaired.
When the Portfolio purchases Assignments from Lenders it
will acquire direct rights against the borrower on the Loan.
Because Assignments are arranged through private negotiations
between potential assignees and potential assignors, however, the
rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those
held by the assigning Lender.
The Portfolio may have difficulty disposing of
Assignments and Participations because to do so it will have to
assign such securities to a third party. Because there is no
liquid market for such securities, the Portfolio anticipates that
such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market
may have an adverse impact on the value of such securities and
the Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet the Portfolio's liquidity
needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations
also may make it more difficult for the Portfolio to assign a
value to these securities for purposes of valuing the Portfolio
and calculating its net asset value. Further, the assignability
of certain Sovereign Debt Obligations is restricted by the
governing documentation as to the nature of the assignee such
that the only way in which the Portfolio may acquire an interest
in a Loan is through a Participation and not an Assignment.
7
OPTIONS. The Portfolio may purchase put and call
options written by others and write covered put and call options
overlying the types of securities in which the Portfolio may
invest. A put option (sometimes called a "standby commitment")
gives the purchaser of the 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 (sometimes called a "reverse standby commitment")
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. The
Portfolio will not purchase any option if, immediately
thereafter, the aggregate cost of all outstanding options
purchased by the Portfolio would exceed 2% of the value of its
total assets; the Portfolio will not write any option if,
immediately thereafter, the aggregate value of the Portfolio's
securities subject to outstanding options would exceed 15% of its
total assets.
The Portfolio may purchase put and call options to
provide protection against adverse price or yield effects from
anticipated changes in prevailing interest rates. For instance
in periods of rising interest rates and falling bond prices, the
Portfolio might purchase a put option to limit its exposure to
falling prices. In periods of falling interest rates and rising
bond prices, the Portfolio might purchase a call option. In
purchasing a call option, the Portfolio would be in a position to
realize a gain if, during the option period, the price of the
security increased by an amount in excess of the premium paid.
It would realize a loss if the price of the security declined or
remained the same or did not increase during the period by more
than the amount of the premium. By purchasing a put option, the
Portfolio would be in a position to realize a gain if, during the
option period, the price of the security declined by an amount in
excess of the premium paid. It would realize a loss if the price
of the 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 Portfolio were
permitted to expire without being sold or exercised, its premium
would represent a loss to the Portfolio.
When the Portfolio writes a put option it must either
own at all times during the option period an offsetting put
option on the same security or maintain in a segregated account
cash or liquid assets in an amount adequate to purchase the
underlying security should the put be exercised. When the
Portfolio writes a call option it must own at all times during
the option period either the underlying securities or an
offsetting call option on the same securities. If a put option
written by the Portfolio were exercised the Portfolio would be
obligated to purchase the underlying security at the exercise
8
price. If a call option written by the Portfolio were exercised
the Portfolio would be obligated to sell the underlying security
at the exercise price.
The risk involved in writing a put option is that there
could be a decrease in the market value of the underlying
security caused by rising interest rates or other factors. If
this occurred, the option could be exercised and the underlying
security would then be sold to the Portfolio at a higher price
than its current market value. The risk involved in writing a
call option is that there could be an increase in the market
value of the underlying security caused by declining interest
rates or other factors. If this occurred, the option could be
exercised and the underlying security would then be sold by the
Portfolio at a lower price than its current market value. These
risks could be reduced by entering into a closing transaction as
described below. The Portfolio retains the premium received from
writing a put or call option whether or not the option is
exercised.
The Portfolio may also write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
it is designed to provide a hedge against a decline in value in
another security which the Portfolio owns or has the right to
acquire. In such circumstances, the Portfolio collateralizes the
option by maintaining, in a segregated account with the
Custodian, liquid assets in an amount not less than the market
value of the underlying security, marked to market daily.
The Portfolio may dispose of an option which it has
purchased by entering into a "closing sale transaction" with the
writer of the option. A closing sale transaction terminates the
obligation of the writer of the option and does not result in the
ownership of an option. The Portfolio realizes a profit or loss
from a closing sale transaction if the premium received from the
transaction is more than or less than the cost of the option.
The Portfolio may terminate its obligation to the holder
of an option written by the Portfolio through a "closing purchase
transaction." The Portfolio may not, however, effect a closing
purchase transaction with respect to such an option after it has
been notified of the exercise of such option. The Portfolio
realizes a profit or loss from a closing purchase transaction if
the cost of the transaction is more than or less than the premium
received by the Portfolio from writing the option.
The Portfolio generally purchases or writes options in
negotiated transactions. The Portfolio effects such transactions
only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions)
deemed creditworthy by the Investment Adviser. The Investment
9
Adviser has also adopted procedures for monitoring the
creditworthiness of such entities. Options purchased or written
by the Portfolio in negotiated transactions are illiquid and it
may not be possible for the Portfolio to effect a closing
purchase transaction at a time when the Investment Adviser
believes it would be advantageous to do so.
INTEREST RATE TRANSACTIONS. In order to attempt to
protect the value of the Portfolio's investments from interest
rate fluctuations, the Portfolio may enter into various hedging
transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Portfolio expects to
enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio.
The Portfolio may also enter into these transactions to protect
against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio intends to
use these transactions as a hedge and not as a speculative
investment. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling
such interest rate floor.
The Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis
depending on whether it is hedging its assets or its liabilities,
and will only be entered into on a net basis, i.e., the two
payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered
into for good faith hedging purposes, the Investment Adviser and
the Portfolio believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject
to its borrowing restrictions. The net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily
basis and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be
maintained in a segregated account by the Custodian. The
Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-
paying ability of the other party thereto is then rated in the
highest rating category of at least one nationally recognized
10
rating organization at the time of entering into such
transaction. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies
pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation.
As a result, the swap market has become well established and
provides a degree of liquidity. Caps and floors are more recent
innovations for which documentation is not as standardized and,
accordingly, they are less liquid than swaps.
U.S. GOVERNMENT SECURITIES. U.S. Government securities
may be backed by the full faith and credit of the United States,
supported only by the right of the issuer to borrow from the U.S.
Treasury or backed only by the credit of the issuing agency
itself. These securities include: (i) the following U.S.
Treasury securities, which are backed by the full faith and
credit of the United States and differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less with no interest paid and hence
issued at a discount and repaid at full face value upon
maturity), U.S. Treasury notes (maturities of one to ten years
with interest payable every six months) and U.S. Treasury bonds
(generally maturities of greater than ten years with interest
payable every six months); (ii) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities that are
supported by the full faith and credit of the U.S. Government,
such as securities issued by the Government National Mortgage
Association ("GNMA"), the Farmers Home Administration, the
Department of Housing and Urban Development, the Export-Import
Bank, the General Services Administration and the Small Business
Administration; and (iii) obligations issued or guaranteed by
U.S. government agencies and instrumentalities that are not
supported by the full faith and credit of the U.S. Government,
such as securities issued by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"), and governmental collateralized mortgage
obligations ("CMOs"). The maturities of the U.S. Government
securities listed in paragraphs (i) and (ii) above usually range
from three months to 30 years. Such securities, except GNMA
certificates, normally provide for periodic payments of interest
in fixed amount with principal payments at maturity or specified
call dates.
U.S. Government securities also include zero coupon
securities and principal-only securities and certain stripped
mortgage-related securities ("SMRS"). In addition, other U.S.
Government agencies and instrumentalities have issued stripped
securities that are similar to SMRS. Such securities include
those that are issued with an interest-only ("I0") class and a
11
principal-only ("PO") class. Although these stripped securities
are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result,
established trading markets have not yet developed and,
accordingly, these securities may be illiquid.
Guarantees of securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of
principal and interest on the securities, and do not guarantee
the securities' yield or value or the yield or value of the
shares of the Fund that holds the securities.
U.S. Government securities are considered among the
safest of fixed-income investments. As a result, however, their
yields are generally lower than the yields available from other
fixed-income securities.
ZERO COUPON SECURITIES. To the extent consistent with
its investment objectives, the Portfolio may invest without limit
in "zero coupon" securities, which are debt securities that have
been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest
to its holder during its life. Its value to an investor consists
of the difference between its face value at the time of maturity
and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred
to as a "deep discount" price). Accordingly, such securities
usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of
comparable maturities that make current distributions of
interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon
securities eliminate reinvestment risk and lock in a rate of
return to maturity. The Portfolio may also invest in "pay-in-
kind" debentures (i.e., debt obligations, the interest on which
may be paid in the form of additional obligations of the same
type rather than cash) which have characteristics similar to zero
coupon securities.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS
PASS-THROUGH SECURITIES. Mortgage-related securities in which
the Portfolio may invest may also include CMOs and multi-class
pass-through securities. CMOs are debt obligations issued by
special purpose entities that are secured by mortgage-backed
certificates, including, in many cases, certificates issued by
governmental and government-related guarantors, including GNMA,
FNMA and FHLMC, together with certain funds and other collateral.
Multi-class pass-through securities are equity interests in a
12
trust composed of mortgage loans or other mortgage-related
securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the CMO or
make scheduled distributions on the multi- class pass-through
security. CMOs and multi-class pass-through securities
(collectively CMOs unless the context indicates otherwise) may be
issued by agencies or instrumentalities of the United States
Government or by private organizations. The issuer of a CMO may
elect to be treated as a Real Estate Mortgage Investment Conduit
("REMIC").
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated
maturity or final distribution date. Principal prepayments on
collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes
of a CMO on a monthly, quarterly or semi-annual basis. The
principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many
ways. Current federal tax law requires that a holder (such as a
Fund) of a zero coupon security accrue a portion of the discount
at which the security was purchased as income each year even
though the holder receives no interest payment in cash on the
security during the year. As a result, in order to make the
distributions necessary for a Fund not to be subject to federal
income or excise taxes, the Fund might be required to pay out as
an income distribution each year an amount, obtained by
liquidation of portfolio securities or borrowings if necessary,
greater than the total amount of cash that the Fund has actually
received as interest during the year. Each Fund believes,
however, that it is highly unlikely that it would be necessary to
liquidate portfolio securities or borrow money in order to make
such required distributions or to meet its investment
objective.
The staff of the Securities and Exchange Commission (the
"Commission") has determined that certain issuers of CMOs are
investment companies for purposes of the 1940 Act. In reliance
on a 1991 staff interpretation, the Portfolio's investments in
certain qualifying CMOs, including REMICs, are not subject to the
1940 Act's limitation on acquiring interests in other investment
companies. In order to be able to rely on the staff's
interpretation, the CMOs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do
not issue redeemable securities, (iii) operate under general
exemptive orders exempting them from all provisions of the 1940
Act, and (iv) are not registered or regulated under the 1940 Act
as investment companies. To the extent that the Portfolio
selects CMOs that do not meet the above requirements, the
13
Portfolio may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting
securities of any single such entity.
LENDING OF PORTFOLIO SECURITIES. Consistent with
applicable regulatory requirements, the Portfolio may loan its
portfolio securities where such loans are continuously secured by
cash collateral equal to no less than the market value,
determined daily, of the securities loaned. In loaning its
portfolio securities, the Portfolio will require that interest or
dividends on securities loaned be paid to the Portfolio. Where
voting or consent rights with respect to loaned securities pass
to the borrower, the Portfolio will follow the policy of calling
the loan, in whole or in part as may be appropriate, to permit it
to exercise such voting or consent rights if the exercise of such
rights involves issues having a material effect on the
Portfolio's investment in the securities loaned. Although the
Portfolio cannot at the present time determine the types of
borrowers to whom it may lend its portfolio securities, the
Portfolio anticipates that such loans will be made primarily to
bond dealers.
ILLIQUID SECURITIES. The Fund will not invest in
securities for which there is no public market (i.e. illiquid
securities). For this purpose, illiquid securities include,
among others, securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual
restriction on resale.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended ("Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
14
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System, which is an
automated system for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers sponsored
by the National Association of Securities Dealers, Inc. (NASD).
The Investment Adviser, acting under the supervision of
the Board of Directors, will monitor the liquidity of restricted
securities in the Fund's portfolio that are eligible for resale
pursuant to Rule 144A. In reaching liquidity decisions, the
Investment Adviser will consider, among others, the following
factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers issuing quotations to
purchase or sell the security; (3) the number of other potential
purchasers of the security; (4) the number of dealers undertaking
to make a market in the security; (5) the nature of the security
(including its unregistered nature) and the nature of the
marketplace for the security (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics
of the transfer); and (6) any applicable Commission
interpretation or position with respect to such type of
securities.
SPECIAL RISK CONSIDERATIONS. Securities rated Baa are
considered by Moody's to have speculative characteristics.
Sustained periods of deteriorating economic conditions or rising
interest rates are more likely to lead to a weakening in the
15
issuer's capacity to pay interest and repay principal than in the
case of higher-rated securities. Securities rated below
investment grade, i.e., Ba or BB and lower, ("lower-rated
securities") are subject to greater risk of loss of principal and
interest than higher-rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic
conditions or rising interest rates. They are also generally
considered to be subject to greater market risk than higher-rated
securities in times of deteriorating economic conditions. In
addition, lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions
than investment grade securities, although the market values of
securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate
levels than do those of higher-rated securities.
The market for lower-rated securities may be thinner and
less active than that for higher-quality securities, which can
adversely affect the prices at which these securities can be
sold. To the extent that there is no established secondary
market for lower-rated securities, the Portfolio may experience
difficulty in valuing such securities and, in turn, the
Portfolio's assets. In addition, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities.
The ratings of fixed-income securities by Moody's, S&P,
Duff & Phelps Credit Rating Co. ("Duff & Phelps") and Fitch IBCA,
Inc. ("Fitch") are a generally accepted barometer of credit risk.
They are, however, subject to certain limitations from an
investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between
the time a rating is assigned and the time it is updated. In
addition, there may be varying degrees of difference in credit
risk of securities within each rating category.
The Investment Adviser will try to reduce the risk
inherent in the Portfolio's investment approach through credit
analysis, diversification and attention to current developments
and trends in interest rates and economic conditions. However,
there can be no assurance that losses will not occur. Since the
risk of default is higher for lower-quality securities, the
Investment Adviser's research and credit analysis are a
correspondingly important aspect of its program for managing the
Portfolio's securities. In considering investments for the
Portfolio, the Investment Adviser will attempt to identify those
high-yielding securities whose financial condition is adequate to
16
meet future obligations, has improved, or is expected to improve
in the future. The Investment Adviser's analysis focuses on
relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience
and managerial strength of the issuer.
Non-rated securities will also be considered for
investment by the Portfolio when the Investment Adviser believes
that the financial condition of the issuers of such securities,
or the protection afforded by the terms of the securities
themselves, limits the risk to the Portfolio to a degree
comparable to that of rated securities which are consistent with
the Portfolio's objectives and policies.
In seeking to achieve the Portfolio's primary objective,
there will be times, such as during periods of rising interest
rates, when depreciation and realization of capital losses on
securities in the portfolio will be unavoidable. Moreover,
medium- and lower-rated securities and non-rated securities of
comparable quality may be subject to wider fluctuations in yield
and market values than higher rated securities under certain
market conditions. Such fluctuations after a security is
acquired do not affect the cash income received from that
security but are reflected in the net asset value of the
Portfolio.
EXTENT OF TRADING. No established secondary markets may
exist for many of the Sovereign Debt Obligations in which the
Portfolio will invest. Reduced secondary market liquidity may
have an adverse effect on the market price and the Portfolio's
ability to dispose of particular instruments when necessary to
meet its liquidity requirements or in response to specific
economic events such as a deterioration in the creditworthiness
of the issuer. Reduced secondary market liquidity for certain
Sovereign Debt Obligations may also make it more difficult for
the Portfolio to obtain accurate market quotations for purposes
of valuing its portfolio. Market quotations are generally
available on many Sovereign Debt Obligations only from a limited
number of dealers and may not necessarily represent firm bids of
those dealers or prices for actual sales.
ECONOMIC AND POLITICAL FACTORS. By investing in
Sovereign Debt Obligations, the Portfolio will be exposed to the
direct or indirect consequences of political, social and economic
change in various countries. Political changes in a country may
affect the willingness of a foreign government to make or provide
for timely payments of its obligations. The country's economic
status, as reflected, among other things, in its inflation rate,
the amount of its external debt and its gross domestic product,
will also affect the government's ability to honor its
obligations.
17
Many countries providing investment opportunities for
the Portfolio have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue
to have adverse effects on the economies and securities of
certain of these countries. In an attempt to control inflation,
wage and price controls have been imposed in certain countries.
Investing in Sovereign Debt Obligations involves
economic and political risks. The Sovereign Debt Obligations in
which the Portfolio will invest in most cases pertain to
countries that are among the world's largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. In recent years,
the governments of some of these countries have encountered
difficulties in servicing their external debt obligations, which
led to defaults on certain obligations and restructuring of
certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance
interest payments. Certain governments have not been able to
make payments of interest on or principal of Sovereign Debt
Obligations as those payments have come due. Obligations arising
from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
Central banks and other governmental authorities which
control the servicing of Sovereign Debt Obligations may not be
willing or able to permit the payment of the principal or
interest when due in accordance with the terms of the
obligations. As a result, the issuers of Sovereign Debt
Obligations may default on their obligations. Defaults on
certain Sovereign Debt Obligations have occurred in the past.
Holders of certain Sovereign Debt Obligations may be requested in
the restructuring and rescheduling of these obligations to extend
further loans to the issuers. The interests of holders of
Sovereign Debt Obligations could be adversely affected in the
course of restructuring arrangements or by certain other factors
referred to below. Furthermore, some of the participants in the
secondary market for Sovereign Debt Obligations may also be
directly involved in negotiating the terms of these arrangements;
and may therefore have access to information not available to
other market participants.
The ability of governments to make timely payments on
their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and
its access to international credits and investments. A country
whose exports are concentrated in a few commodities could be
18
vulnerable to a decline in the international prices of one or
more of those commodities. Increased protectionism on the part
of a country's trading partners could also adversely affect the
country's exports and diminish its trade account surplus, if any.
To the extent that a country receives payments for its exports in
currencies other than dollars, its ability to make debt payments
denominated in dollars could be adversely affected.
To the extent that a country develops a trade deficit,
it will need to depend on continuing loans from foreign
governments, multilateral organizations or private commercial
banks, aid payments from foreign governments and on inflows of
foreign investment. The access of a country to those forms of
external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of a government to
make payments on its obligations. In addition, the cost of
servicing debt obligations can be affected by a change in
international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically
based upon international rates.
Another factor bearing on the ability of a country to
repay Sovereign Debt Obligations is the level of the country's
international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily
available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its
Sovereign Debt Obligations.
Expropriation, confiscatory taxation, nationalization,
political or social instability or other similar developments,
such as military coups, have occurred in the past in countries in
which the Portfolio may invest and could adversely affect the
Portfolio's assets should these conditions or events recur.
INVESTMENT CONTROLS AND REPATRIATION. Foreign
investment in certain Sovereign Debt Obligations is restricted or
controlled to varying degrees. These restrictions or controls
may at times limit or preclude foreign investment in certain
Sovereign Debt Obligations and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio may
invest require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that
may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors.
Certain countries may require governmental approval for
the repatriation of investment income, capital or the proceeds of
19
the sales of securities by foreign investors. In addition, if a
deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital
remittances. The Portfolio could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the
Portfolio of any restrictions on investments. Investing in local
markets may require the Portfolio to adopt special procedures,
seek local government approvals or take other actions, each of
which may involve additional costs to the Portfolio.
OTHER CHARACTERISTICS OF INVESTMENT IN FOREIGN ISSUES.
Foreign securities investments are affected by changes in
currency rates or exchange control regulations as well as by
changes in governmental administration, economic or monetary
policy (in the United States or abroad) and changed circumstances
in dealings between nations. Currency exchange rate movements
will increase or reduce the U.S. dollar value of the Portfolio's
net assets and income attributable to foreign securities. Costs
are incurred in connection with conversion of currencies held by
the Portfolio.
There may be less publicly available information about
foreign issuers than about domestic issuers, and foreign issuers
may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of
domestic issuers. Securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic
issuers, and foreign brokerage commissions are generally higher
than in the United States. Foreign securities markets may be
less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations.
Foreign issuers are subject to accounting, auditing and
financial standards and requirements that differ, in some cases
significantly, from those applicable to U.S. issuers. In
particular, the assets and profits appearing on the financial
statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be
reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio may invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
20
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available about
certain non-U.S. issuers than is available about U.S. issuers.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements with
member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York).
1940 ACT RESTRICTIONS
Under the 1940 Act, the Portfolio is not permitted to
borrow unless immediately after such borrowing there is "asset
coverage," as that term is defined and used in the 1940 Act, of
at least 300% for all borrowings of the Portfolio. In addition,
under the 1940 Act, in the event asset coverage falls below 300%,
the Portfolio must within three days reduce the amount of its
borrowing to such an extent that the asset coverage of its
borrowings is at least 300%. Assuming, for example, outstanding
borrowings representing not more than one-third of the
Portfolio's total assets less liabilities (other than such
borrowings), the asset coverage of the Portfolio's portfolio
would be 300%; while outstanding borrowings representing 25% of
the total assets less liabilities (other than such borrowings),
the asset coverage of the Portfolio's portfolio would be 400%.
The Portfolio will maintain asset coverage of outstanding
borrowings of at least 300% and if necessary will, to the extent
possible, reduce the amounts borrowed by making repayments from
time to time in order to do so. Such repayments could require
the Portfolio to sell portfolio securities at times considered
disadvantageous by the Investment Adviser and such sales could
cause the Portfolio to incur related transaction costs and to
realize taxable gains.
Under the 1940 Act, the Portfolio may invest not more
than 10% of its total assets in securities of other investment
companies. In addition, under the 1940 Act the Portfolio may not
own more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the
Portfolio's total assets may be invested in the securities of any
investment company. If the Portfolio acquires shares in
investment companies, shareholders would bear both their
proportionate shares of expenses in the Portfolio (including
management and advisory fees) and, indirectly, the expenses of
such investment companies (including the management and advisory
fees).
21
FUNDAMENTAL INVESTMENT POLICIES. The following
restrictions supplement those already discussed. These
restrictions may not be changed without shareholder approval
which means the vote of (1) 67% or more of the shares of the
Portfolio represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the
outstanding shares of the Portfolio, whichever is less.
The following restrictions provide that the Portfolio
may not:
1. Invest more than 5% of its total assets in the
securities of any one issuer, other than United States Government
securities;
2. Own more than 10% of the outstanding voting
securities of any issuer;
3. Purchase the securities of any other investment
company except in a regular transaction in the open market or as
part of a merger, consolidation or purchase of assets;
4. Invest more than 5% of the value of its total assets
in the securities of any issuer, the business of which has been
in continuous operation for less than three years;
5. Purchase or retain the securities of any issuer if
those officers and directors of the Fund or of the Investment
Adviser beneficially owning individually more than 1/2 of 1% of
the securities of such issuer together beneficially own more than
5% of the securities of such issuer;
6. Invest in other companies for the purpose of
exercising control of management;
7. Purchase securities on margin, except that the
Portfolio may borrow in an amount up to 10% of its total assets
to meet redemption requests and for the clearance of purchases
and sales of portfolio securities (this borrowing provision is
not for investment leverage but solely to facilitate management
of the Portfolio to enable the Portfolio to meet redemption
requests where the liquidation of portfolio securities is deemed
to be disadvantageous or inconvenient and to obtain such short-
term credits as may be necessary for the clearance of purchases
and sales of portfolio securities; all borrowings at any time
outstanding will be repaid before any additional investments are
made; the Portfolio will not mortgage, pledge or hypothecate any
assets in connection with any such borrowing in excess of 15% of
the Portfolio's total assets) or sell securities short;
22
8. Borrow money except as previously set forth in 6
above;
9. Make loans to other persons except loans of
securities collateralized in cash at 100% each business day (the
acquisition of publicly distributed bonds, debentures and other
debt securities is not considered a loan);
10. Purchase any security (other than United States
Government securities) if as a result more than 25% of the value
of its total assets would be invested in any one industry;
11. Underwrite securities issued by other persons;
12. Purchase any securities as to which it would be
deemed a statutory underwriter under the Securities Act, or any
securities having no public market;
13. Purchase or sell commodities or commodity
contracts;
14. Purchase or sell real estate, except that the
Portfolio may invest in marketable securities secured by real
estate or interests therein or issued by companies including real
estate investment trusts, which deal in real estate or interests
therein;
15. Participate in a joint, or a joint and several,
trading account in securities;
16. Invest in interests in oil, gas or other mineral
leases exploration or development programs;
17. Issue any securities senior to the capital stock
offered hereby; or
18. Invest in warrants (other than warrants acquired by
the Portfolio as a part of a unit or attached to securities at
the time of purchase) if, as a result, such warrants valued at
the lower of cost or market would exceed 5% of the value of the
Portfolio's net assets at the time of purchase provided that not
more than 2% of the Portfolio's net assets at the time of
purchase may be invested in warrants not listed on the New York
Stock Exchange or the American Stock Exchange.
The foregoing percentage limitations will apply at the
time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of an acquisition of such
security.
23
PORTFOLIO TURNOVER. Because the Portfolio will actively
use trading to benefit from yield disparities among different
issues of fixed-income securities or otherwise to achieve its
investment objective and policies, the Portfolio may be subject
to a greater degree of turnover and, thus, a higher incidence of
short-term capital gain taxable as ordinary income than might be
expected from investment companies which invest substantially all
of their funds on a long-term basis and, correspondingly, larger
mark-up charges can be expected to be borne by the Portfolio in
such cases. Management anticipates that the annual turnover in
the Portfolio may be in excess of 600% in future years but is not
expected to exceed 700%. An annual turnover rate of 600% occurs,
for example, when all of the securities in the Portfolio are
replaced six times in a period of one year.
The value of the Portfolio's shares will be influenced
by the factors which generally affect securities, such as the
economic and political outlook, earnings, dividends and the
supply and demand for various classes of securities. There can
be, of course, no assurance that the Portfolio's investment
objectives will be achieved.
____________________________________________________________
MANAGEMENT OF THE FUND
____________________________________________________________
DIRECTORS AND OFFICERS
The Directors and principal officers of the Fund, their
ages and their primary occupations during the past five years are
set forth below. Each such Director and officer is also a
director, trustee or officer of other registered investment
companies sponsored by the Investment Adviser. Unless otherwise
specified, the address of each of such persons is 1345 Avenue of
the Americas, New York, New York 10105.
DIRECTORS
JOHN D. CARIFA,* 53, Chairman of the Board, is the
President, Chief Operating Officer and a Director of ACMC, with
which he has been associated since prior to 1993.
RUTH BLOCK, 67, was formerly an Executive Vice President
and the Chief Insurance Officer of Equitable. She is a Director
of Ecolab Incorporated (specialty chemicals) and Amoco
____________________
* An "interested person" of the Fund as defined in the 1940
Act.
24
Corporation (oil and gas). Her address is P.O. Box 4623,
Stamford, Connecticut 06903.
DAVID H. DIEVLER, 69, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 56, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1993.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, JR., 66, is an Investment Adviser and
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 1993. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1993. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, New
Jersey 08540.
CLIFFORD L. MICHEL, 59, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1993. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 64, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe and was formerly a senior
partner and a member of the Executive Committee of that firm. He
was also a Trustee of the Museum of the City of New York from
1977 to 1995. His address is 98 Hell's Peak Road, Weston,
Vermont 05161.
OFFICERS
JOHN D. CARIFA, CHAIRMAN AND PRESIDENT (see biography,
above).
WAYNE D. LYSKI, SENIOR VICE PRESIDENT, 56, is an
Executive Vice President of ACMC, with which he has been
associated since prior to 1992.
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT, 38, is an
Executive Vice President of ACMC, with which she has been
associated since July 1993. Prior thereto, she headed Equitable
25
Capital Management Corporation's Fixed Income Department since
prior to 1993.
PAUL J. DENOON, VICE PRESIDENT, 34, is a Vice President
of ACMC with which he has been associated since prior to 1993.
EDMUND P. BERGAN, JR., SECRETARY, 48, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS"), with which
he has been associated since prior to 1993.
ANDREW L. GANGOLF, ASSISTANT SECRETARY, 44, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since December 1994. Prior thereto, he was Vice
President and Assistant Secretary of Delaware Management Co.,
Inc.
DOMENICK PUGLIESE, ASSISTANT SECRETARY, 37, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since May 1995. Prior thereto, he was a Vice
President and Counsel of Concord Financial Holding Corporation
since 1994, Vice President and Associate General Counsel of
Prudential Securities since prior to 1993.
EMILIE D. WRAPP, ASSISTANT SECRETARY, 42, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1993.
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER,
47, is a Senior Vice President of AFS, with which he has been
associated since prior to 1993.
JUAN RODRIGUEZ, CONTROLLER, 40, Assistant Controller is
an Assistant Vice President of AFS, with which he has been
associated since prior to 1993.
CARLA LaROSE, ASSISTANT CONTROLLER, 34, is a Manager
of AFS with which she has been associated since prior to 1993.
JOSEPH J. MANTINEO, ASSISTANT CONTROLLER, 38, is a Vice
President of AFS, with which he has been associated since prior
to 1993.
VINCENT S. NOTO, CONTROLLER, 34, is a Vice President
of AFS, with which he has been associated since prior to 1993.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended June 30, 1998, the
aggregate compensation paid to each of the Directors during
calendar year 1998 by all of the funds to which the Investment
Adviser provides investment advisory services (collectively, the
26
"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 fund in the
Alliance Fund Complex provides compensation in the form of
pension or retirement benefits to any of its directors or
trustees. Each of the Directors is a director or trustee of one
or more other registered investment companies in the Alliance
Fund Complex.
Total Number
Total Number of Investment
of Funds in Portfolios
the Alliance Within the
Total Fund Complex, Funds,
Compensation Including the Including the
from the Fund, as to Fund, as to
Aggregate Alliance Fund which the which the
Compensation Complex, Director is a Director is
from Including Director or a Director
Name of Director the Fund the Fund Trustee or Trustee
_________________ _____________ _____________ _____________ _____________
John D. Carifa $ -0- $ -0- ___ ___
Ruth Block $1,777 $___ ___ ___
David H. Dievler $1,777 $___ ___ ___
John H. Dobkin $ 963 $___ ___ ___
William H. Foulk, Jr. $ 960 $___ ___ ___
Dr. James M. Hester $1,771 $___ ___ ___
Clifford L. Michel $1,771 $___ ___ ___
Donald J. Robinson $1,758 $___ ___ ___
As of ____________, 1999, the Directors and officers of
the Fund as a group owned less than 1% of the shares of the
Fund.
INVESTMENT ADVISER
Alliance Capital Management L.P., a Delaware limited
partnership with principal offices at 1345 Avenue of the
Americas, New York, New York 10105, has been retained under an
investment advisory agreement (the "Advisory Agreement") to
provide investment advice and, in general, to conduct the
management and investment program of the Fund under the
supervision of the Fund's Board of Directors (see "Management of
the Fund" in the Prospectus).
27
The Investment Adviser is a leading international
investment manager supervising client accounts with assets as of
__________, 1999, totaling more than $______ billion (of which
more than $107 billion represented the assets of investment
companies). The Investment Adviser's clients are primarily major
corporate employee benefit funds, public employee retirement
systems, investment companies, foundations and endowment funds.
The ___ registered investment companies managed by the Investment
Adviser, comprising ___ separate investment portfolios, currently
have more than ______ million shareholders. As of ____________,
1999, the Investment Adviser and its subsidiaries employed
approximately 2,000 employees who operate out of domestic offices
and the offices of subsidiaries in Bahrain, Bangalore, Cairo,
Chennai, Hong Kong, Istanbul, Johannesburg, London, Luxembourg,
Madrid, Moscow, Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul,
Singapore, Sydney, Tokyo, Toronto, Vienna and Warsaw. As of
____________, 1999, the Investment Adviser was retained as an
investment manager for employee benefit plan assets of ___ of the
FORTUNE 100 companies.
ACMC, the sole general partner of, and the owner of a 1%
general partnership interest in the Investment Adviser, is an
indirect wholly-owned subsidiary of the Equitable Life Assurance
Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States and a wholly-owned
subsidiary of the Equitable Companies Incorporated ("ECI"). ECI
is a holding company controlled by AXA-UAP ("AXA") a French
insurance holding company which at March 1, 1998, beneficially
owned approximately 59% of the outstanding voting shares of ECI.
As of June 30, 1998, ACMC, Inc. and Equitable Capital Management
Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, together with Equitable, owned in the aggregate
approximately 57% of the issued and outstanding units
representing assignments of beneficial ownership of limited
partnership interests in the Investment Adviser.
AXA is a holding company for an international group of
insurance and related financial services companies. AXA's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities
principally in Western Europe, North America and the Asia/Pacific
area. AXA is also engaged in asset management, investment
banking, securities trading, brokerage, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of March 31,
1998, more than 30% of the voting power of AXA was controlled
directly and indirectly by FINAXA, a French holding company. As
of March 31, 1998 approximately 74% of the voting power of FINAXA
28
was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA
Assurances I.A.R.D. Mutuelle, itself controlled directly and
indirectly more than 42% of the voting power of FINAXA. Acting
as a group, the Mutuelles AXA control AXA and FINAXA.
Under the Investment Advisory Contract, the Investment
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
Investment Adviser. The Investment 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 Investment Adviser is, under the Investment Advisory
Contract, responsible for certain expenses incurred by the Fund,
including, for example, office facilities and certain
administrative services, and any expenses incurred in promoting
the sale of Fund shares (other than the portion of the
promotional expenses borne by the Fund in accordance with an
effective plan pursuant to Rule 12b-1 under the 1940 Act, and the
costs of printing Fund prospectuses and other reports to
shareholders and fees related to registration with the Commission
and with state regulatory authorities).
The Fund has, under the Investment Advisory Contract,
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 Investment Adviser, the Fund may
utilize personnel employed by the Investment Adviser or by other
subsidiaries of Equitable. The Fund may employ its own personnel
or contract for services to be provided to the Fund at cost and
the payments specifically approved by the Funds Board of
Directors. The Fund paid to the Investment Adviser a total of
$116,500 in respect of such services during the fiscal year of
the Fund ended in 1998.
For the fiscal years ended June 30, 1996, 1997 and 1998,
the Investment Adviser received under the advisory agreement then
in effect, the amounts of $3,676,819, $4,886,295 and $6,774,012
respectively, as advisory fees from the Portfolio.
The Investment Advisory Contract became effective on
July 22, 1992. The Investment Advisory Contract was approved by
the unanimous vote, cast in person, of the Fund's Directors,
including the Directors who are not parties to the Investment
Advisory Contract or "interested persons" as defined in the 1940
Act of any such party, at a meeting called for such purpose and
held on September 11, 1991. At a meeting held on June 11, 1992,
29
a majority of the outstanding voting securities of the Portfolio
approved the Investment Advisory Contract.
The Investment Advisory Contract continues in effect for
successive twelve-month periods computed from each July 1,
provided that such continuance is specifically approved at least
annually by a vote of a majority of the Portfolio'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 Investment Advisory Contract or interested
persons of any such party. Most recently, continuance of the
Investment Advisory Contract until June 30, 1999 was approved by
vote, cast in person, by the Board of Directors, including a
majority of the Directors who are not "interested persons" as
defined in the 1940 Act, at their meeting held on March 28, 1998.
The Investment Advisory Contract is terminable without
penalty on 60 days' written notice, 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 or by the Investment Adviser on
60 days' written notice, and will automatically terminate in the
event of its assignment. The Investment Advisory Contract
provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Investment Adviser, or of
reckless disregard of its obligations thereunder, the Investment
Adviser shall not be liable for any action or failure to act in
accordance with its duties thereunder.
Certain other clients of the Investment Adviser may have
investment objectives and policies similar to those of the Fund.
The Investment Adviser may, from time to time, make
recommendations which result in the purchase or sale of a
particular security by its other clients simultaneously with the
Fund. If transactions on behalf of more than one client during
the same period increase the demand for securities being
purchased or the supply of securities being sold, there may be an
adverse effect on price or quantity. It is the policy of the
Investment Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the
Investment Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Investment Adviser
(including the Fund) are purchasing or selling the same security
on a given day from the same broker-dealer, such transactions may
be averaged as to price.
The Investment Adviser may act as an investment adviser
to other persons, firms or corporations, including investment
companies, and is the investment adviser to the following
registered investment companies: Alliance Institutional
Reserves, Inc., AFD Exchange Reserves, Inc., The Alliance Fund,
Inc., Alliance All-Asia Investment Fund, Inc., Alliance Balanced
30
Shares, Inc., Alliance Capital Reserves, Alliance Global Dollar
Government Fund, Inc., Alliance Global Environment Fund,
Inc., Alliance Global Small Cap Fund, Inc., Alliance Global
Strategic Income Trust, Inc., Alliance Government Reserves,
Alliance Greater China '97 Fund, Inc., Alliance High Yield Fund,
Inc., Alliance Growth and Income Fund, Inc., Alliance
International Fund, Alliance International Premier Growth Fund,
Inc., Alliance Institutional Funds, Inc., Alliance Limited
Maturity Government Fund, Inc., Alliance Money Market Fund,
Alliance Mortgage Securities Income Fund, Inc., Alliance Multi-
Market Strategy Trust, Inc., Alliance Municipal Income Fund,
Inc., Alliance Municipal Income Fund II, Alliance Municipal
Trust, Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Real Estate Investment
Fund, Inc., Alliance/Regent Sector Opportunity Fund, Inc.,
Alliance Select Investor Series, Inc., Alliance Technology Fund,
Inc., Alliance Utility Income Fund, Inc., Alliance Variable
Products Series Fund, Inc., Alliance Worldwide Privatization
Fund, Inc., The Alliance Portfolios and The Hudson River Trust,
all registered open-end investment companies; and to ACM
Government Income Fund, Inc., ACM Government Securities Fund,
Inc., ACM Government Spectrum Fund, Inc., ACM Government
Opportunity Fund, Inc., ACM Managed Dollar Income Fund, Inc., ACM
Managed Income Fund, Inc., ACM Municipal Securities Income Fund,
Inc., Alliance All-Market Advantage Fund, 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.
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 Portfolio's shares and to permit the Fund to pay distribution
services fees to defray expenses associated with the distribution
of its Class A shares, Class B shares and Class C shares in
accordance with a plan of distribution which is included in the
Agreement and has been duly adopted and approved in accordance
with Rule 12b-1 adopted by the Commission under the 1940 Act (the
"Rule 12b-1 Plan").
Rule 12b-1 permits an investment company to pay expenses
associated with the distribution of its shares in accordance with
the duly adopted Rule 12b-1 Plan. Pursuant to the Rule 12b-1
Plan. Pursuant to the Rule 12b-1 Plan, the Portfolio pays to AFD
a Rule 12b-1 distribution services fee, which may not exceed an
annual rate of .30% of the Portfolio's aggregate average daily
31
net assets attributable to the Class A shares, 1.00% of the
Portfolio's aggregate average daily net assets attributable to
the Class B shares and 1.00% of the Portfolio's aggregate average
daily net assets attributable to the Class C shares, for
distribution expenses. The Rule 12b-1 Plan provides that a
portion of the distribution services fee in an amount not to
exceed .25% of the aggregate average daily net assets of the
Portfolio attributable to each class of shares constitutes a
service fee used for personal service and/or the maintenance of
shareholder accounts.
During the Portfolio's fiscal year ended June 30, 1998,
with respect to Class A shares, the distribution services fees
for expenditure payable to the Principal Underwriter amounted to
$1,328,326, which constituted .30 of 1% of the Portfolio's
average daily net assets attributable to Class A shares during
the fiscal year, and the Investment Adviser made payments from
its own resources aggregating $1,296,760. Of the $2,625,086 paid
by the Portfolio and the Investment Adviser under the Plan with
respect to Class A shares, $93,012 was spent on advertising,
$42,752 on the printing and mailing of prospectuses for persons
other than current shareholders, $1,238,645 for compensation to
broker-dealers and other financial intermediaries (including
$185,768 to the Fund's Principal Underwriter), $644,956 for
compensation to sales personnel, and $605,721 was spent on
printing of sales literature, travel, entertainment, due
diligence and other promotional expenses.
During the Portfolio's fiscal year ended June 30, 1998,
with respect to Class B shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to
$5,773,033, which constituted 1% of the Portfolio's average daily
net assets attributable to Class B shares during such fiscal
year, and the Investment Adviser made payments from its own
resources aggregating $4,392,207. Of the $10,165,240 paid by the
Portfolio and the Investment Adviser under the Plan with respect
to Class B shares, $128,994 was spent on advertising, $61,203 on
the printing and mailing of prospectuses for persons other than
current shareholders, $8,463,841 for compensation to broker-
dealers and other financial intermediaries (including $266,913 to
the Fund's Principal Underwriter), $522,380 for compensation paid
to sales personnel, and $374,271 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses and $614,551 was spent on financing of
interest relating to Class B shares.
During the Portfolio's fiscal year ended June 30, 1998,
with respect to Class C shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to
$2,097,236, which constituted 1% of the Portfolio's average daily
net assets attributable to Class C shares during such fiscal
32
year, and the Investment Adviser made payments from its own
resources aggregating $783,036. Of the $2,880,272 paid by the
Portfolio and the Investment Adviser under the Plan with respect
to Class C shares, $59,977 was spent on advertising, $30,939 on
the printing and mailing of prospectuses for persons other than
current shareholders, $2,150,417 for compensation to broker-
dealers and other financial intermediaries (including $129,864 to
the Fund's Principal Underwriter), $234,999 for compensation paid
to sales personnel, and $182,987 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses, and $220,953 was spent on financing of
interest relating to Class C shares.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Portfolio as accrued.
The distribution services fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge, and at the same time to permit the
Principal Underwriter to compensate broker-dealers in connection
with the sale of such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and
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
provide for the financing of the distribution of the relevant
class of the Portfolio's shares.
The Rule 12b-1 Plan provides that AFD will use the
distribution services fee received from the Fund in its entirety
for payments (i) to compensate broker-dealers or other persons
for providing distribution assistance, (ii) to otherwise promote
the sale of shares of the Portfolio and (iii) to compensate
broker-dealers, depository institutions and other financial
intermediaries for providing administrative, accounting and other
services with respect to the Portfolio's shareholders. In this
regard, some payments under the Rule 12b-1 Plan are used to
compensate financial intermediaries with trail or maintenance
commissions in an amount equal to .25%, annualized, with respect
to Class A shares and Class B shares, and 1.00%, annualized, with
respect to Class C shares, of the assets maintained in the
Portfolio by its customers. Distribution services fees received
from the Portfolio with respect to Class A shares will not be
used to pay any interest expenses, carrying charges or other
financing costs or allocation of overhead of AFD. Distribution
services fees received from the Portfolio, with respect to Class
B and Class C shares, may be used for these purposes. The Rule
12b-1 Plan also provides that the Adviser may use its own
resources to finance the distribution of the Portfolio's shares.
The Fund is not obligated under the Rule 12b-1 Plan to pay any
33
distribution services fee in excess of the amounts set forth
above. With respect to Class A shares of the Portfolio,
distribution expenses accrued by AFD in one fiscal year may not
be paid from distribution services fees received from the
Portfolio 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 Portfolio's most recently completed fiscal year, and
carried over for reimbursement in future years in respect of the
Class B and Class C shares for the Portfolio, were, as of that
time $________ (___% as a percentage of Net Assets of Class B
Shares) and $_________ (___% as a percentage of Net Assets of
Class C Shares), respectively.
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.
Under the Agreement, the Treasurer of the Fund reports
the amounts expended under the Rule 12b-1 Plan and the purposes
for which such expenditures were made to the Directors of the
Fund for their review on a quarterly basis. Also, the Agreement
provides that the selection and nomination of disinterested
Directors (as defined in the 1940 Act) are committed to the
discretion of such disinterested Directors then in office.
The Agreement became effective on July 22, 1992 with
respect to Class A and Class B shares, and was amended as of
April 30, 1993 to permit the distribution of Class C shares, and
September 30, 1996 to permit the distribution of Advisor Class
shares.
34
The Investment Adviser may, from time to time and from
its own funds or such other resources as may be permitted by
rules of the Commission make payments for distribution services
to the Principal Underwriter; the latter may in turn pay part or
all of such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect for successive
twelve-month periods (computed from each July 1) with respect to
each class of the Fund, 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 this 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 the Directors approved
the continuance of the Agreement until June 30, 1999 at their
meeting held on March 28, 1998.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class, and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
All material amendments to the Agreement must be
approved by a vote of the Directors or the holders of the Fund's
outstanding voting securities, voting separately by class, and in
either case, by a majority of the disinterested Directors, cast
in person at a meeting called for the purpose of voting on such
approval; and the Agreement may not be amended in order to
increase materially the costs that the Portfolio may bear
pursuant to the Agreement without the approval of a majority of
holders of the outstanding voting shares of the class or classes
affected. The Agreement may be terminated (a) by the Fund
without penalty at any time by a majority vote of the holders of
the outstanding voting securities of the Portfolio, voting
separately by class or by a majority vote of the disinterested
Directors as defined in the 1940 Act, or (b) by the Principal
Underwriter. To terminate the Agreement, any party must give the
other party 60 days' written notice; to terminate the Rule 12b-1
Plan only, the Fund is not required to give prior written notice
35
to the Principal Underwriter. The Agreement will terminate
automatically in the event of its assignment.
The Glass-Steagall Act and other applicable laws may
limit the ability of a bank or other depository institution to
become an underwriter or distributor of securities. However, in
the opinion of the Portfolio's management, based on the advice of
counsel, these laws do not prohibit such depository institutions
from providing services for investment companies such as the
administrative, accounting and other services referred to in the
Agreement. In the event that a change in these laws prevented a
bank from providing such services, it is expected that other
service arrangements would be made and that shareholders would
not be adversely affected.
TRANSFER AGENCY AGREEMENT
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Investment Adviser, located at 500 Plaza Drive,
Secaucus, New Jersey 07094, acts as the Portfolio's registrar,
transfer agent and dividend-disbursing agent for a fee based upon
the number of account holders for each of the Class A, Class B,
Class C shares and Advisor Class shares of the Portfolio, plus
reimbursement for out-of-pocket expenses. The transfer agency
fee with respect to the Class B shares and Class C shares is
higher than the transfer agency fee with respect to the Class A
shares and Advisor Class shares. For the fiscal year ended June
30, 1998, the Fund paid Alliance Fund Services, Inc.
$1,186,735 for transfer agency services.
PURCHASE OF SHARES
The following information supplements that set forth in
the Portfolio's Prospectus under the heading "Purchase and Sale
of Shares."
GENERAL
Shares of the Portfolio are offered on a continuous
basis at a price equal to their net asset value plus an initial
sales charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares"), 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 Portfolio that are offered subject to a sales charge are
36
offered through (i) investment dealers that are members of NASD
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"), or (iii) the
Principal Underwriter.
Advisor Class shares of the Portfolio may be purchased
and hold 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, or (iii) by the
categories of investors described in clauses (i) through (iv)
below under "--Sales at Net Asset Value" (other than officers,
directors and present and full-time employees of selected dealers
or agents, or relatives of such person, or any trust, individual
retirement account or retirement plan account for the benefit of
such relative, none of whom is eligible on the basis solely of
such status to purchase and hold Advisor Class shares) or (iv) by
directors and present or retired full-time employees of CB
Richard Ellis, Inc. Generally, a fee-based program must charge
an asset-based or other similar fee and must invest at least
$250,000 in Advisor Class shares of the Fund in order to be
approved by the Principal Underwriter for investment in Advisor
Class shares.
Investors may purchase shares of the Fund either through
selected broker-dealers, agents, financial intermediaries or
other financial representatives, or directly through the
Principal Underwriter. A transaction, service, administrative or
other similar fee may be charged by your broker-dealer, agent,
financial intermediary or other financial representative with
respect to the purchase, sale or exchange of Class A, Class B,
Class C or Advisor Class shares made through such financial
representative. Such financial representative may also impose
requirements with respect to the purchase, sale or exchange of
shares that are different from, or in addition to, those imposed
by the Fund, including requirements as to the minimum initial and
subsequent investment amounts. Sales personnel of selected
dealers and agents distributing the Fund's shares may receive
differing compensation for selling Class A, Class B, Class C or
Advisor Class shares.
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of the
Portfolio's shares to the public in response to conditions in the
securities markets or for other reasons.
37
The public offering price of shares of the Portfolio is
their net asset value, plus, in the case of Class A shares, a
sales charge which will vary depending on the purchase
alternative chosen by the investor, as shown in the table below
under "--Class A Shares." On each Fund business day on which a
purchase or redemption order is received by the Fund and trading
in the types of securities in which the Portfolio invests might
materially affect the value of Portfolio shares, the per share
net asset value is computed in accordance with the Fund's
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
Portfolio's total assets, less its liabilities, by the total
number of its shares then outstanding. A Fund business day is any
on which the Exchange is open for trading.
The respective per share net asset values of the
Class A, Class B, Class C and Advisor Class shares are expected
to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class B and
Class C shares may be lower than the per share net asset value of
the Class A shares 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. For purposes of this computation, the
securities in the Portfolio are valued at their current market
value determined on the basis of market quotations. If such
accurate quotations are not readily available, securities will be
valued at such other methods as the Directors believe would
accurately reflect fair market value.
The Fund will accept unconditional orders for 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
38
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
representative, as applicable, receives the order after the close
of regular trading on the Exchange, the price will be based on
the net asset value determined as of the close of regular trading
on the Exchange on the next day it is open for trading.
Following the initial purchase of Portfolio shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate
portion of the Subscription Application or an "Autobuy"
application obtained by calling the "For Literature" telephone
number shown on the cover of this Statement of Additional
Information. Except with respect to certain omnibus accounts,
telephone purchase 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 Portfolio. Such
additional amounts may be utilized, in whole or in part, to
provide additional compensation to registered representatives who
39
sell shares of the Portfolio. On some occasions, cash or other
incentives will be conditioned upon the sale of a specified
minimum dollar amount of the shares of the Portfolio and/or other
Alliance Mutual Funds, as defined below, during a specific period
of time. On some occasions, such cash or other incentives may
take the form of payment for attendance at seminars, meals,
sporting events or theater performances, or payment for travel,
lodging and entertainment incurred in connection with travel
taken by persons associated with a dealer or agent to urban or
resort locations within or outside the United States. Such
dealer or agent may elect to receive cash incentives of
equivalent amount in lieu of such payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of the
Portfolio, have the same rights and are identical in all
respects, except that (i) Class A shares bear the expense of the
initial sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of
the deferred sales charge, (ii) Class B shares and Class C shares
each bear the expense of a higher distribution services fee than
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 Portfolio
submits to a vote of the Class A shareholders, an amendment to
the Rule 12b-1 Plan that would materially increase the amount to
be paid thereunder with respect to the Class A shares, then such
amendment will also be submitted to the Class B and Advisor Class
shareholders and the Class A shareholders, the Class B
shareholders and the Advisor Class shareholders will vote
separately by class, and (v) Class B and Advisor Class shares
are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service
options available.
The 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
40
The alternative purchase arrangements available with
respect to Class A shares, Class B shares, and Class C shares
permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length
of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Fund, the accumulated
distribution services fee and contingent deferred sales charges
on Class B shares prior to conversion, or the accumulated
distribution services fee and contingent deferred sales charges
on Class C shares, would be less than the initial sales charge
and accumulated distribution services fee on Class A shares
purchased at the same time, and to what extent such differential
would be offset by the higher return of Class A shares. Class A
shares will normally be more beneficial than Class B shares to
the investor who qualifies for reduced initial sales charges on
Class A shares, as described below. In this regard, the
Principal Underwriter will reject any order (except orders from
certain retirement plans and certain employee benefit plans) for
more than $250,000 for Class B shares. (See Appendix A 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 three-
year and one-year period, respectively. For example, based on
41
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.
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Portfolio shares
for the three-year period during which Class B shares are subject
to a contingent deferred sales charge may find it more
advantageous to purchase Class C shares.
During the Fund's fiscal years ended June 30, 1998, 1997
and 1996, the aggregate amount of underwriting commission payable
with respect to shares of the Portfolio in each year was
$6,503,230, $3,387,102, and $2,039,062, respectively. Of that
amount, the Principal Underwriter received amounts of $211,204,
$112,211, and $66,987 , respectively, representing that portion
of the sales charges paid on shares of the Portfolio sold during
the year which was not reallowed to selected dealers (and was,
accordingly, retained by the Principal Underwriter). During the
Fund's fiscal years ended in 1998, 1997 and 1996, the Principal
Underwriter received contingent deferred sales charges of
$21,508, $668, and $-0-, respectively, on Class A shares,
$570,591, $463,689, and $396,376, respectively, on Class B
shares, and $77,109, $49,841, and $-0-, respectively, on Class C
shares.
CLASS A SHARES
The public offering price of Class A shares is the
net asset value plus a sales charge, as set forth below.
42
Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
________ ________ ________ ____________
Less than
$100,000 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000 3.36 3.25 3.00
$250,000 but
less than
$500,000 2.30 2.25 2.00
$500,000 but
less than
$1,000,000* 1.78 1.75 1.50
___________________
*There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The
contingent deferred sales charge on Class A shares will be waived
on certain 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
43
of compensation to selected dealers or agents for selling Class A
shares. With respect to purchases of $1,000,000 or more made
through selected dealers or agents, the Investment Adviser may,
pursuant to the Agreement described above, pay such dealers or
agents from its own resources a fee of up to .25 of 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 Portfolio receives the entire net
asset value of its Class A shares sold to investors. The
Principal Underwriter's commission is the sales charge shown
above less any applicable discount or commission "reallowed" to
selected dealers and agents. The Principal Underwriter will
reallow discounts to selected dealers and agents in the amounts
indicated in the table above. In this regard, the Principal
Underwriter may elect to reallow the entire sales charge to
selected dealers and agents for all sales with respect to which
orders are placed with the Principal Underwriter. A selected
dealer who receives reallowance in excess of 90% of such a sales
charge may be deemed to be an "underwriter" under the Securities
Act.
Set forth below is an example of the method of computing
the offering price of the Class A shares. The example assumes a
purchase of Class A shares of the Portfolio aggregating less than
$100,000 subject to the schedule of sales charges set forth above
at a price based upon the net asset value of Class A shares of
the Portfolio on JDecember 31, 1998.
44
Net Asset Value per Class A Share
at December 31, 1998 $____
Per Share Sales Charge - 4.25%
of offering price (4.44%) ____
of net asset value per share)
Class A Per Share Offering Price
to the Public $____
======
Investors choosing the initial sales charge alternative
may under certain circumstances be entitled to pay (i) no initial
sales charge (but subject in most such cases to a contingent
deferred sales charge) or (ii) a reduced initial sales charge.
The circumstances under which investors may pay a reduced initial
sales charge are described below.
COMBINED PURCHASE PRIVILEGE. Certain persons may
qualify for the sales charge reductions indicated in the schedule
of such charges above by combining purchases of shares of the
Portfolio into a single "purchase," if the resulting "purchase"
totals at least $100,000. The term "purchase" refers to: (i) a
single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed
amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares of the Portfolio for
his, her or their own account(s); (ii) a single purchase by a
trustee or other fiduciary purchasing shares for a single trust,
estate or single fiduciary account although more than one
beneficiary is involved; or (iii) a single purchase for the
employee benefit plans of a single employer. The term "purchase"
also includes purchases by any "company," as the term is defined
in the 1940 Act, but does not include purchases by any such
company which has not been in existence for at least six months
or which has no purpose other than the purchase of shares of the
Portfolio or shares of other registered investment companies at a
discount. The term "purchase" does not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit card holders of a company, policy
holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase"
may also include shares, purchased at the same time through a
single selected dealer or agent, of any other "Alliance Mutual
Fund." Currently, the Alliance Mutual Funds include:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
45
-Corporate Bond Portfolio
-U.S. Government Portfolio
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Premier Growth Fund, Inc.
Alliance International Fund
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
The Alliance Portfolios
- Alliance Growth Fund
- Alliance Conservative Investors Fund
- Alliance Growth Investors Fund
- Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services,
Inc. at the address or the "For Literature" telephone number
shown on the front cover of this Statement of Additional
Information.
46
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). An
investor's purchase of additional Class A shares of the Portfolio
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business
on the previous day) of (a) all shares of the
Portfolio held by the investor and (b) all
shares of any other Alliance Mutual Fund held
by the investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder
eligible to combine his or her purchase with
that of the investor into a single "purchase"
(see above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Portfolio
worth an additional $100,000, the initial 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 Portfolio, 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 Portfolio or any
other Alliance Mutual Fund. Each purchase of shares under a
Statement of Intention will be made at the public offering price
or prices applicable at the time of such purchase to a single
transaction of the dollar amount indicated in the Statement of
Intention. At the investor's option, a Statement of Intention
may include purchases of shares of the Portfolio or any other
Alliance Mutual Fund made not more than 90 days prior to the date
that the investor signs a 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.
47
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 Portfolio, the investor
and the investor's spouse each purchase shares of the Portfolio
worth $20,000 (for a total of $40,000), it will only be necessary
to invest a total of $60,000 during the following 13 months in
shares of the Portfolio or any other Alliance Mutual Fund, to
qualify for the 3.25% sales charge on the total amount being
invested (the sales charge applicable to an investment of
$100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5%
of such amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed shares will
be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Portfolio shares, are not subject to
escrow. When the full amount indicated has been purchased, the
escrow will be released. To the extent that an investor
purchases more than the dollar amount indicated on the Statement
of Intention and qualifies for a further reduced sales charge,
the sales charge will be adjusted for the entire amount purchased
at the end of the 13-month period. The difference in the sales
charge will be used to purchase additional shares of the
Portfolio 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 Portfolio should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
CERTAIN RETIREMENT PLANS. Multiple participant payroll
deduction retirement plans may also purchase shares of the
Portfolio 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 Portfolio will be that
normally applicable, under the schedule of the sales charges set
forth in this Statement of Additional Information, to an
48
investment 13 times larger than such initial purchase. The sales
charge applicable to each succeeding monthly purchase will be
that normally applicable, under such schedule, to an investment
equal to the sum of (i) the total purchase previously made during
the 13-month period and (ii) the current month's purchase
multiplied by the number of months (including the current month)
remaining in the 13-month period, and (ii) the total purchase
previously made during 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
Portfolio to be redeemed or repurchased may reinvest all or any
portion of the redemption or repurchase proceeds in Class A
shares of the Portfolio at net asset value without any sales
charge, provided that (i) such reinvestment is made within 120
calendar days after the redemption or repurchase date, and (ii)
for Class B shares, a contingent deferred sales charge has been
paid and the Principal Underwriter has approved, at its
discretion, the reinvestment of such shares. Shares are sold to
a reinvesting shareholder at the net asset value next determined
as described above. A reinstatement pursuant to this privilege
will not cancel the redemption or repurchase transaction;
therefore, any gain or loss so realized will be recognized for
Federal income tax purposes except that no loss will be
recognized to the extent that the proceeds are reinvested in
shares of the Portfolio 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 Portfolio 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 Investment 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 Investment Adviser; present or retired
full-time employees of the Investment Adviser, the Principal
Underwriter, Alliance Fund Services, Inc. and their affiliates;
officers and directors of ACMC, the Principal Underwriter,
Alliance Fund Services, Inc. and their affiliates; officers,
directors and present and full-time employees of selected dealers
or agents; or the spouse, sibling, direct ancestor or direct
descendant (collectively "relatives") of any such person; or any
trust, individual retirement account or retirement plan account
for the benefit of any such person or relative; or the estate of
any such person or relative, if such shares are purchased for
49
investment purposes (such shares may not be resold except to the
Fund); (iii) the Investment Adviser, Principal Underwriter,
Alliance Fund Services, Inc. and their affiliates; certain
employee benefit plans for employees of the Investment Adviser,
the Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; (iv) registered investment advisers or other
financial intermediaries who charge a management, consulting or
other fee for their service and who purchase shares through a
broker or agent approved by the Principal Underwriter and clients
of such registered investment advisers or financial
intermediaries whose accounts are linked to the master account of
such investment adviser or financial intermediary on the books of
such approved broker or agent; (v) persons participating in a
fee-based program, sponsored and maintained by a registered
broker-dealer or other financial intermediary and approved by the
Principal Underwriter, pursuant to which such persons pay an
asset-based fee to such broker- dealer or financial intermediary,
or its affiliate or agent, for services in the nature of
investment advisory or administrative services; (vi) persons who
establish to the Principal Underwriter's satisfaction that they
are investing, within such time period as may be designated by
the Principal Underwriter, proceeds of redemption of shares of
such other registered investment companies as may be designated
from time to time by the Principal Underwriter; and (vii)
employer-sponsored qualified pension or profit-sharing plans
(including Section 401(k) plans), custodial accounts maintained
pursuant to Section 403(b)(7) retirement plans and individual
retirement accounts (including individual retirement accounts to
which simplified employee pension (SEP) contributions are made),
if such plans or accounts are established or administered under
programs sponsored by administrators or other persons that have
been approved by the Principal Underwriter.
CLASS B SHARES
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of
a sales charge at the time of purchase. The Class B shares are
sold without an initial sales charge so that the Portfolio 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 Portfolio in connection with the sale of the
Class B shares, such as the payment of compensation to selected
dealers and agents for selling Class B shares. The combination
of the contingent deferred sales charge and the distribution
services fee enables the Portfolio to sell the Class B shares
50
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 three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares
(proceeds of $600), 10 Class B shares will not be subject to
charge because of dividend reinvestment. With respect to the
remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase as set forth
below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred
Sales Charge as
a % of
Year Dollar Amount
Since Purchase Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
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
51
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. Six years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose
of the conversion feature is to reduce the distribution services
fee paid by holders of Class B shares that have been outstanding
long enough for the Principal Underwriter to have been
compensated for distribution expenses incurred in the sale of
such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time
any Class B shares in the shareholder's account (other than those
in the sub-account) convert to Class A, an equal pro-rata portion
of the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income
tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
52
continue to be subject to the higher distribution services fee
for an indefinite period which may extend beyond the period
ending six years after the end of the calendar month in which the
shareholder's purchase order was accepted.
CLASS C SHARES
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of
a sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that the
Portfolio will receive the full amount of the investor's purchase
payment and, as long as the shares are held for one year or more,
without a contingent deferred sales charge so that the investor
will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution
services fee enables the Portfolio to sell Class C shares without
either an initial or contingent deferred sales charge, as long as
the shares are held for one year or more. Class C shares do not
convert to any other class of shares of the Portfolio and incur
higher distribution services fees than Class A shares, and will
thus have a higher expense ratio and pay correspondingly lower
dividends than Class A shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions. The contingent deferred sales charge on Class C
shares will be waived on certain redemptions, as described above
under "--Class B Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the
time they are subject to the sales charge.
Proceeds from the contingent deferred sales charge are
paid to the Principal Underwriter and are used by the Principal
Underwriter to defray the expenses of the Principal Underwriter
53
related to providing distribution-related services to the
Portfolio 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 Portfolio to sell the Class C shares without a sales charge
being deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
CONVERSION OF ADVISOR CLASS SHARES TO CLASS A SHARES
Advisor Class shares may be held solely through the fee-
based program accounts, employee benefit plans and registered
investment advisory or other financial intermediary
relationships described above under "Purchase of Shares--
General," and by investment advisory clients of, and by certain
other persons associated with, the Investment 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 and without notice to the shareholder, other than
the notice contained in the Advisor Class Prospectus and this
Statement of Additional Information, to Class A shares of the
Fund during the calendar month following the month in which the
Fund is informed of the occurrence of the Conversion Event. The
failure of a shareholder or a fee-based program to satisfy the
minimum investment requirements to purchase Advisor Class shares
will not constitute a Conversion Event. The conversion would
occur on the basis of the relative net asset values of the two
classes and without the imposition of any sales load, fee or
other charge. Class A shares currently bear a .30% distribution
services fee and have a higher expense ratio than Advisor Class
shares. As a result, Class A shares may pay correspondingly
lower dividends and have a lower net asset value than Advisor
Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
54
that event, the Advisor Class shareholder would be required to
redeem his or her Advisor Class shares, which would constitute a
taxable event under federal income tax law.
REDEMPTION AND REPURCHASE OF SHARES
The following information supplements that set forth in
the Portfolio's Prospectus(es) under "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 Portfolio 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 of the Portfolio tendered to it, as described below, at a
redemption price equal to their net asset value as next computed
following the receipt of shares tendered for redemption in proper
form. Except for any contingent deferred sales charge which may
be applicable to Class A shares, Class B shares and 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 Portfolio of securities owned by
it is not reasonably practicable or as a result of which it is
not reasonably practicable for the Portfolio 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 Portfolio.
55
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 Portfolio's
portfolio securities at the time of such redemption or
repurchase. Redemption proceeds on Class A, Class B and Class C
shares will reflect the deduction of the contingent deferred
sales charge, if any. Payment (either in cash or in portfolio
securities) received by a shareholder upon redemption or
repurchase of his or her shares, assuming the shares constitute
capital assets in his or her hands, will result in long-term or
short-term capital gains (or loss) depending upon the
shareholder's holding period and basis in respect of the shares
redeemed.
To redeem shares of the Portfolio for which no share
certificates have been issued, the registered owner or owners
should forward a letter to the Portfolio 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 Portfolio represented by stock
certificates, the investor should forward the appropriate stock
certificate or certificates, endorsed in blank or with blank
stock powers attached, to the Portfolio with the request that the
shares represented thereby, or a specified portion thereof, be
redeemed. The stock assignment form on the reverse side of each
stock certificate surrendered to the Portfolio for redemption
must be signed by the registered owner or owners exactly as the
registered name appears on the face of the certificate or,
alternatively, a stock power signed in the same manner may be
attached to the 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
Portfolio shareholder is entitled to request redemption by
electronic fund transfer of shares for which no share
certificates have been issued by telephone at (800) 221-5672 by a
shareholder who has completed the appropriate portion of the
Subscription Application or, in the case of an existing
shareholder, an "Autosell" application obtained from Alliance
Fund Services, Inc. A telephone redemption by electronic funds
transfer may not exceed $100,000 (except for certain omnibus
accounts), and must be made by 4:00 p.m. Eastern time on a Fund
business day as defined above. Proceeds of telephone redemptions
will be sent by electronic funds transfer to a shareholder's
56
designated bank account at a bank selected by the shareholder
that is a member of the NACHA.
TELEPHONE REDEMPTION BY CHECK. Each Portfolio
shareholder is eligible to request redemption by check of
Portfolio shares for which no stock certificate have been issued
by telephone at (800) 221-5672 before 4:00 p.m. Eastern time on a
Fund business day in an amount not exceeding $50,000. Proceeds
of such redemptions are remitted by check to the shareholder's
address of record. A shareholder otherwise eligible for
telephone redemption by check may cancel the privilege by written
instruction to Alliance Fund Services, Inc., or by checking the
appropriate box on the Subscription Application found in the
Prospectus.
TELEPHONE REDEMPTIONS - GENERAL. During periods of
drastic economic or market developments, such as the market break
of October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information. The
Fund reserves the right to suspend or terminate its telephone
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 Investment 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 Portfolio 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,
57
if any, with respect to the Class A, Class B and Class C shares),
except that requests placed through selected dealers or agents
before the close of regular trading on the Exchange on any day
will be executed at the net asset value determined as of such
close of regular trading on that day if received by the Principal
Underwriter prior to its close of business on that day (normally
5:00 p.m. Eastern time). The financial intermediary or selected
dealer or agent is responsible for transmitting the request to
the Principal Underwriter by 5:00 p.m. Eastern time (certain
selected dealers, agents or financial representatives may enter
into operating agreements permitting them to transmit purchase
information to the Principal Underwriter after 5:00 p.m. Eastern
time and receive that day's net asset value). If the financial
intermediary or selected dealer or agent fails to do so, the
shareholder's right to receive that day's closing price must be
settled between the shareholder and the dealer or agent. A
shareholder may offer shares of the Portfolio to the Principal
Underwriter either directly or through a selected dealer or
agent. Neither the Fund nor the Principal Underwriter charges a
fee or commission in connection with the repurchase of shares
(except for the contingent deferred sales charge, if any, with
respect to Class A, Class B and Class C shares). Normally, if
shares of the Portfolio are offered through a financial
intermediary or selected dealer or agent, the repurchase is
settled by the shareholder as an ordinary transaction with or
through the selected dealer or agent, who may charge the
shareholder for this service. The repurchase of shares of the
Portfolio as described above is a voluntary service of the Fund
and the Fund may suspend or terminate this practice at any time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of the Portfolio recently purchased by check, redemption proceeds
will not be made available until the Fund is reasonably assured
that the check has cleared, normally up to 15 calendar days
following the purchase date.
SHAREHOLDER SERVICES
The following information supplements that set forth in
the Portfolio's Prospectus(es) under "Purchase and Sale of Shares
- --Shareholder Services." The shareholder services set forth
58
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 Portfolio that are different from those described herein.
A transaction fee may be charged by your financial representative
with respect to the purchase, sale or exchange of Advisor Class
shares made through such financial representative.
AUTOMATIC INVESTMENT PROGRAM
Investors may purchase shares of the Portfolio through
an automatic investment program utilizing electronic fund
transfer drawn on the investor's own bank account. Under such a
program, pre-authorized monthly drafts for a fixed amount (at
least $25) are used to purchase shares through the selected
dealer or selected agent designated by the investor at the public
offering price next determined after the Principal Underwriter
receives the proceeds from the investor's bank. In electronic
form, drafts can be made on or about a date each month selected
by the shareholder. Investors wishing to establish an automatic
investment program in connection with their initial investment
should complete the appropriate portion of the Subscription
Application found in the Prospectus. Current shareholders should
contact Alliance Fund Services, Inc. at the address or telephone
numbers shown on the cover of this Statement of Additional
Information to establish an automatic investment program.
EXCHANGE PRIVILEGE
You may exchange your investment in the Portfolio for
shares of the same class of other Alliance Mutual Funds
(including AFD Exchange Reserves, a money market fund managed by
the Investment Adviser). In addition, (i) present officers and
full-time employees of the Investment Adviser, (ii) present
Directors or Trustees of any Alliance Mutual Fund and
(iii) certain employee benefit plans for employees of the
Investment Adviser, the Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates may, on a tax-free basis,
exchange Class A shares of the Portfolio for Advisor Class shares
of the Portfolio. Exchanges of shares are made at the net asset
value next determined and without sales or service charges.
Exchanges may be made by telephone or written request. Telephone
exchange requests must be received by Alliance Fund Services,
Inc. by 4:00 p.m. Eastern time on a Fund business day in order to
receive that day's net asset value.
Shares will continue to age without regard to exchanges
for purposes of determining the CDSC, if any, upon redemption
and, in the case of Class B shares, for the purpose of conversion
59
to Class A shares. After an exchange, your Class B shares will
automatically convert to Class A shares in accordance with the
conversion schedule applicable to the Class B shares of the
Alliance Mutual Fund you originally purchased for cash ("original
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request.
Call Alliance Fund Services, Inc. at (800) 221-5672 to exchange
uncertificated shares. Except with respect to exchanges of Class
A shares of the Portfolio for Advisor Class shares of the
Portfolio, exchanges of shares as described above in this section
are taxable transactions for federal tax purposes. The exchange
service may be changed, suspended, or terminated on 60 days
written notice.
All exchanges are subject to the minimum investment
requirements and any other applicable terms set forth in the
Prospectus for the Alliance Mutual Fund whose shares are being
acquired. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being
acquired at their respective net asset values as next determined
following receipt by the Alliance Mutual Fund whose shares are
being exchanged of (i) proper instructions and all necessary
supporting documents as described in such fund's Prospectus, or
(ii) a telephone request for such exchange in accordance with the
procedures set forth in the following paragraph. Exchanges
involving the redemption of shares recently purchased by check
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 Portfolio shareholder, and the shareholder's
selected dealer, agent or financial representative, as
applicable, are authorized to make telephone requests for
exchanges unless Alliance Fund Services, Inc. receives written
instruction to the contrary from the shareholder, or the
shareholder declines the privilege by checking the appropriate
box on the Subscription Application found in the Prospectus.
Such telephone requests cannot be accepted with respect to shares
then represented by stock certificates. Shares acquired pursuant
to a telephone request for exchange will be held under the same
account registration as the shares redeemed through such
exchange.
Eligible shareholders desiring to make an exchange
should telephone Alliance Fund Services, Inc. with their account
60
number and other details of the exchange, at (800) 221-5672
before 4:00 p.m., Eastern time, on a Fund business day as defined
above. Telephone requests for exchange received before 4:00 p.m.
Eastern time on a Fund business day will be processed as of the
close of business on that day. During periods of drastic
economic or market developments, such as the market break of
October 1987, it is possible that shareholders would have
difficulty in reaching Alliance Fund Services, Inc. by telephone
(although no such difficulty was apparent at any time in
connection with the 1987 market break). If a shareholder were to
experience such difficulty, the shareholder should issue written
instructions to Alliance Fund Services, Inc. at the address shown
on the cover of this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares
of another Alliance Mutual Fund. Auto Exchange transactions
normally occur on the 12th day of each month, or the Fund
business day prior thereto.
None of the Alliance Mutual Funds, the Investment
Adviser, the Principal Underwriter or Alliance Fund Services,
Inc. will be responsible for the authenticity of telephone
requests for exchanges that the Fund reasonably believes to be
genuine. The Fund will employ reasonable procedures in order to
verify that telephone requests for exchanges are genuine,
including, among others, recording such telephone instructions
and causing written confirmations of the resulting transactions
to be sent to shareholders. If the Fund did not employ such
procedures, it could be liable for losses arising from
unauthorized or fraudulent telephone instructions. Selected
dealers, agents or financial representatives, as applicable, may
charge a commission for handling telephone requests for
exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
RETIREMENT PLANS
The Portfolio 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 Portfolio has available
forms of such plans pursuant to which investments can be made in
the Portfolio and other Alliance Mutual Funds. Persons desiring
information concerning these plans should contact Alliance Fund
61
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, N.J. 07096-1520
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"). Individuals who
receive compensation, including earnings from self-employment,
are entitled to establish and make contributions to an IRA.
Taxation of the income and gains paid to an IRA by the Portfolio
is deferred until distribution from the IRA. An individual's
eligible contributions 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 the qualified plan reaches $1
million on or before December 15 in any year, all Class B or C
shares of the Portfolio held by the plan can be exchanged, at the
Plans request without any sales charge, for Class A shares of the
Portfolio.
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.
62
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 Portfolio.
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.
SYSTEMATIC WITHDRAWAL PLAN
GENERAL. Any shareholder who owns or purchases shares
of the Portfolio having a current net asset value of at least
$4,000 (for quarterly or less frequent payments), $5,000 (for bi-
monthly payments) or $10,000 (for monthly payments) may establish
a systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less
than $50 on a selected date. Systematic withdrawal plan
participants must elect to have their dividends and distributions
from the Portfolio automatically reinvested in additional shares
of the Portfolio.
Shares of the Portfolio owned by a participant in the
Fund's systematic withdrawal plan will be redeemed as necessary
to meet withdrawal payments and such payments will be subject to
any taxes applicable to redemptions and, except as discussed
below, any applicable contingent deferred sales charge. Shares
acquired with reinvested dividends and distributions will be
liquidated first to provide such withdrawal payments and
thereafter other shares will be liquidated to the extent
necessary, and depending upon the amount withdrawn, the
investor's principal may be depleted. A systematic withdrawal
plan may be terminated at any time by the shareholder or the
Portfolio.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level.
Therefore, redemptions of shares under the plan may reduce or
even liquidate a shareholder's account and may subject the
shareholder to the Portfolio's involuntary redemption provisions.
See "Redemption and Repurchase of Shares--General." Purchases of
additional shares concurrently with withdrawals are undesirable
because of sales charges 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.
63
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 Portfolio should complete the appropriate portion
of the Subscription Application found in the Prospectus, while
current Portfolio shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at
the address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information.
CDSC Waiver for Class B Shares 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 these limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
DIVIDEND DIRECTION PLAN
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Portfolio
accounts, a Class A, Class B, Class C or Advisor Class account
with one or more other Alliance Mutual Funds may direct that
income dividends and/or capital gains paid on his or her Class A,
Class B, Class C or Advisor Class Portfolio shares be
automatically reinvested, in any amount, without the payment of
any sales or service charges, in shares of the same class of such
other Alliance Mutual Fund(s). Further information can be
obtained by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information. Investors
wishing to establish a dividend direction plan in connection with
their initial investment should complete the appropriate section
of the Subscription Application found in the Prospectus. Current
64
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
STATEMENTS AND REPORTS
Each shareholder of the Portfolio receives semi-annual
and annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a confirmation of each purchase and redemption. By
contacting his or her broker or Alliance Fund Services, Inc., a
shareholder can arrange for copies of his or her account
statements to be sent to another person.
____________________________________________________________
NET ASSET VALUE
____________________________________________________________
The per share net asset value is computed in accordance
with the Fund's Articles of Incorporation and By-Laws at the next
close of regular trading on the Exchange (ordinarily 4:00 p.m.
Eastern time) following receipt of a purchase or redemption order
by the Fund on each Fund business day on which such an order is
received and on such other days as the Board of Directors of the
Fund deems appropriate or necessary in order to comply with Rule
22c-1 under the 1940 Act. The Fund's per share net asset value
is calculated by dividing the value of the Fund's total assets,
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 Investment 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 on the business day as of which such value is being
determined. If there has been no sale on such day, the
securities are valued at the quoted bid prices on such day. If
no bid prices are quoted on such day, then the security is valued
at the mean of the bid and asked prices at the close of the
Exchange on such day as obtained from one or more dealers
regularly making a market in such security. Where a bid and
65
asked price can be obtained from only one such dealer, such
security is valued at the mean of the bid and asked price
obtained from such dealer unless it is determined that such price
does not represent current market value, in which case the
security shall be valued in good faith at fair value by, or
pursuant to procedures established by, the Board of Directors.
Securities for which no bid and asked price quotations are
readily available are valued in good faith at fair value by, or
in accordance with procedures established by, the Board of
Directors. Readily marketable securities not listed on the
Exchange or on a foreign securities exchange are valued in like
manner. Portfolio securities traded on the Exchange and on one
or more other foreign or other national securities exchanges, and
portfolio securities not traded on the Exchange but traded on one
or more foreign or other national securities exchanges are valued
in accordance with these procedures by reference to the principal
exchange on which the securities are traded.
Readily marketable securities traded only in the over-
the-counter market, securities listed on a foreign securities
exchange whose operations are similar to those of the United
States over-the-counter market, and debt securities listed on a
U.S. national securities exchange whose primary market is
believed to be over-the-counter, are valued at the mean of the
bid and asked prices at the close of the Exchange on such day as
obtained from two or more dealers regularly making a market in
such security. Where a bid and asked price can be obtained from
only one such dealer, such security is valued at the mean of the
bid and asked price obtained from such dealer unless it is
determined that such price does not represent current market
value, in which case the security shall be valued in good faith
at fair value by, or in accordance with procedures established
by, the Board of Directors.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be Valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be
valued using the closing settlement price or, in the absence of
such a price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last
available closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
66
(unless in either case the Board of Directors determines that
this method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups-
of securities and any developments related to specific
securities.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
Trading in securities on Far Eastern and European
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each Fund business
day. In addition, trading in foreign markets may not take place
on all Fund business days. Furthermore, trading may take place
in various foreign markets on days that are not Fund business
days. The Fund's calculation of the net asset value per share,
therefore, does not always take place contemporaneously with the
most recent determination of the prices of portfolio securities
in these markets. Events affecting the values of these portfolio
securities that occur between the time their prices are
determined in accordance with the above procedures and the close
of the Exchange will not be reflected in the Fund's calculation
of net asset value unless these prices do not reflect current
market value, in which case the securities will be valued in good
faith at fair value by, or in accordance with procedures
established by, the Board of Directors.
The Board of Directors may suspend the determination of
the Fund's net asset value (and the offering and sales of
shares), subject to the rules of the Commission and other
governmental rules and regulations, at a time when: (1) the
Exchange is closed, other than customary weekend and holiday
closings, (2) an emergency exists as a result of which it is not
reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly the value of its net assets,
or (3) for the protection of shareholders, the Commission by
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
67
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.
____________________________________________________________
PORTFOLIO TRANSACTIONS
____________________________________________________________
Subject to the general supervision of the Board of
Directors of the Fund, the Investment Adviser is responsible for
the investment decisions and the placing of the orders for
portfolio transactions for the Portfolio. The Portfolio's
portfolio transactions occur primarily with issuers, underwriters
or major dealers acting as principals. Such transactions are
normally on a net basis which do not involve payment of brokerage
commissions. The cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to
the underwriter; transactions with dealers normally reflect the
spread between bid and asked prices. Premiums are paid with
respect to options purchased by the Portfolio and brokerage
commissions are payable with respect to transactions in exchange-
traded interest rate futures contracts.
The Investment Adviser makes the decisions for the
Portfolio and determines the broker or dealer to be used in each
specific transaction. Most transactions for the Portfolio,
including transactions in listed securities, are executed in the
over-the-counter market by approximately fifteen (15) principal
market maker dealers with whom the Investment Adviser maintains
regular contact. Most transactions made by the Portfolio will be
principal transactions at net prices and the Portfolio will incur
little or no brokerage costs. Where possible, securities will be
purchased directly from the issuer or from an underwriter or
market maker for the securities unless the Investment Adviser
believes a better price and execution is available elsewhere.
Purchases from underwriters of newly-issued securities for
inclusion in the Portfolio usually will include a concession paid
to the underwriter by the issuer and purchases from dealers
serving as market makers will include the spread between the bid
and asked price.
68
Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Portfolio may consider sales of its
shares as a factor in the selection of dealers to enter into
portfolio transactions with the Portfolio. The Portfolio has no
obligation to enter into transactions in securities with any
broker, dealer, issuer, underwriter or other entity. In placing
orders, it is the policy of the Fund to obtain the best price and
execution for its transactions. Where best price and execution
may be obtained from more than one broker or dealer, the
Investment Adviser may, in its discretion, purchase and sell
securities through brokers and dealers who provide research,
statistical and other information to the Investment Adviser.
Such services may be used by the Investment Adviser for all of
its investment advisory accounts and, accordingly, not all such
services may be used by the Investment Adviser in connection with
the Portfolio. There may be occasions where the transaction cost
charged by a broker may be greater than that which another broker
may charge if the Fund determines in good faith that the amount
of such transaction cost is reasonable in relationship to the
value of the brokerage and research and statistical services
provided by the executing broker. During the fiscal years ended
June 30, 1996, 1997 and 1998, the Portfolio incurred no brokerage
commissions.
____________________________________________________________
TAXES
____________________________________________________________
The Fund advises the Portfolio's shareholders annually
as to the Federal income tax status of dividends and
distributions made to the Portfolio's shareholders during each
calendar year.
GENERAL. The Portfolio intends for each taxable year to
qualify to be taxed as a "regulated investment company" under the
Code . To so qualify, the Portfolio must, among other things,
(i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or
securities or foreign currency, or certain other income
(including, but not limited to, gains from options, futures and
forward contracts) derived with respect to its business of
investing in stock, securities or currency; and (ii) diversify
its holdings so that, at the end of each quarter of its taxable
year, the following two conditions are met: (a) at least 50% of
the value of the Portfolio's assets is represented by cash, cash
items, U.S. Government Securities, securities of other regulated
investment companies and other securities with respect to which
the Portfolio's investment is limited, in respect of any one
69
issuer, to an amount not greater than 5% of the Portfolio's total
assets and 10% of the outstanding voting securities of such
issuer and (b) not more than 25% of the value of the Portfolio's
assets is invested in securities of any one issuer (other than
U.S. Government Securities or securities of other regulated
investment companies). These requirements, among other things,
may limit the Portfolio's ability to write and purchase options,
to enter into interest rate swaps and to purchase or sell
interest rate caps or floors.
If the Portfolio qualifies as a regulated investment
company for any taxable year and makes timely distributions to
its shareholders of 90% or more of its net investment income for
that year (calculated without regard to its net capital gain,
i.e., the excess of its net long-term capital gain over its net
short-term capital loss), it will not be subject to federal
income tax on the portion of its taxable income for the year
(including any net capital gain) that it distributes to
shareholders.
The Portfolio 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
shareholders equal to the sum of (i) 98% of its ordinary income
for such year, (ii) 98% of its capital gain net income and
foreign currency gains for the twelve-month period ending on
October 31 of such year, and (iii) any ordinary income or capital
gain net income from the preceding calendar year that was not
distributed during such year. For this purpose, income or gain
retained by the Portfolio that is subject to corporate income tax
will be considered to have been distributed by the Portfolio 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 but actually paid during the
following January will be treated as if paid by the Portfolio on
December 31 of such 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 information set forth in the following discussion
relates solely to the significant United States federal income
tax consequences of dividends and distributions by the Portfolio
and of sales or redemptions of Portfolio shares, and assumes that
the Portfolio qualifies to be taxed as a regulated investment
company. Investors should consult their own tax counsel with
respect to the specific tax consequences of their being
shareholders of the Portfolio, including the effect and
applicability of federal, state and local tax laws to their own
particular situation and the possible effects of changes therein.
70
DIVIDENDS AND DISTRIBUTIONS. The Portfolio intends to
make timely distributions of the Portfolio's taxable income
(including any net capital gain) so that the Portfolio will not
be subject to federal income and excise taxes. Dividends of the
Portfolio's net ordinary income and distributions of any net
realized short-term capital gain are taxable to shareholders as
ordinary income. The investment objective of the Portfolio is
such that only a small portion, if any, of the Portfolio's
distributions is expected to qualify for the dividends-received
deduction for corporate shareholders.
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 Portfolio will have the effect of
reducing the net asset value of such shares by the amount of such
dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of such shares by a
shareholder, although in effect a return of capital to that
particular shareholder, would be taxable to him as described
above. Dividends are taxable in the manner discussed regardless
of whether they are paid to the shareholder in cash or are
reinvested in additional shares of the Portfolio.
A dividend or capital gains distribution with respect to
shares of the Portfolio 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.
After the end of the taxable year, the Portfolio will
notify shareholders of the federal income tax status of any
distributions made by the Portfolio to shareholders during such
year.
SALES AND REDEMPTIONS. Any gain or loss arising from a
sale or redemption of Portfolio shares generally will be capital
gain or loss except in the case of a dealer or a financial
institution, and will be long-term capital gain or loss if such
shareholder has held such shares for more than one year at the
time of the sale or redemption; otherwise it will be short-term
capital gain or loss. If a shareholder has held shares in the
Portfolio 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
71
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 Portfolio will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the shares are
sold or exchanged. For this purpose, acquisitions pursuant to
the Dividend Reinvestment Plan would constitute a replacement if
made within the period. If disallowed, the loss will be
reflected in an upward adjustment to the basis of the shares
acquired.
BACKUP WITHHOLDING. The Portfolio may be required to
withhold United States federal income tax at the rate of 31% of
all taxable distributions payable to shareholders who fail to
provide the Portfolio with their correct taxpayer identification
numbers or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to
backup withholding. Corporate shareholders and certain other
types of 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
United States 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 Portfolio with respect to
the determination of its "investment company taxable income" each
year. This discussion assumes that the Portfolio will be taxed
as a regulated investment company for each of its taxable years.
PASSIVE FOREIGN INVESTMENT COMPANIES. Certain of the
Portfolio's investments in Structured Securities may constitute,
for federal income tax purposes, investments in shares of foreign
corporations. If the Portfolio owns shares in a foreign
corporation that constitutes a "passive foreign investment
company" (a "PFIC") for federal income tax purposes and the
Portfolio does not elect to treat the foreign corporation as a
"qualified electing fund" within the meaning of the Code, the
Portfolio may be subject to United States federal income taxation
on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares,
even if such income is distributed as a taxable dividend by the
Portfolio to its United States shareholders. The Portfolio may
also be subject to additional interest charges in respect of
deferred taxes arising from such distributions or gains. Any tax
paid by the Portfolio as a result of its ownership of shares in a
PFIC will not give rise to any deduction or credit to the
Portfolio or to any shareholder. A PFIC means any foreign
72
corporation if, for the taxable year involved, either (i) it
derives at least 75% of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties,
rents and annuities), or (ii) on average, at least 50% of the
value (or adjusted tax basis, if elected) of the assets held by
the corporation produce "passive income." The Portfolio could
elect to "mark-to-market" stock in a PFIC. Under such an
election, the Portfolio would include in income each year an
amount equal to the excess, if any, of the fair market value of
the PFIC stock as of the close of the taxable year over the
Portfolio's adjusted basis in the PFIC stock. The Portfolio
would be allowed a deduction for the excess, if any, of the
adjusted basis of the PFIC stock over the fair market value of
the PFIC stock as of the close of the taxable year, but only to
the extent of any net mark-to-market gains included by the
Portfolio for prior taxable years. The Portfolio's adjusted
basis in the PFIC stock would be adjusted to reflect the amounts
included in, or deducted from, income under this election.
Amounts included in income pursuant to this election, as well as
gain realized on the sale or other disposition of the PFIC stock,
would be treated as ordinary income. The deductible portion of
any mark-to-market loss, as well as loss realized on the sale or
other disposition of the PFIC stock to the extent that such loss
does not exceed the net mark-to-market gains previously included
by the Portfolio, would be treated as ordinary loss. The
Portfolio generally would not be subject to the deferred tax and
interest charge provisions discussed above with respect to PFIC
stock for which a mark-to- market election has been made. If the
Portfolio purchases shares in a PFIC and the Portfolio does elect
to treat the foreign corporation as a "qualified electing fund"
under the Code, the Portfolio may be required to include in its
income each year a portion of the ordinary income and net capital
gains of the foreign corporation, even if this income is not
distributed to the Portfolio. Any such income would be subject
to the 90% and calendar year distribution requirements described
above.
DISCOUNT OBLIGATIONS. Under current federal tax law,
the Portfolio will include in income interest each year, in
addition to stated interest received on obligations held by the
Portfolio, amounts attributable to the Portfolio from holding (i)
securities which were initially issued at discounts from their
face values ("Discount Obligations") and (ii) securities
(including many Brady Bonds) purchased by the Portfolio at a
price less than their stated face amount or, in the case of
Discount Obligations, at a price less than their issue price plus
the portion of "original issue discount" previously accrued
thereon, i.e., purchased at a "market discount." Current federal
tax law requires that a holder (such as the Portfolio) of a
Discount Obligation accrue as income each year a portion of the
discount at which the obligation was purchased by the Portfolio
73
even though the Portfolio does not receive interest payments in
cash on the security during the year which reflect the accrued
discount. The Portfolio will elect to likewise accrue and
include in income each year a portion of the market discount with
respect to a Discount Obligation or other obligation even though
the Portfolio does not receive interest payments in cash on the
securities which reflect that accrued discount.
As a result of the applicable rules, in order to make
the distributions necessary for the Portfolio not to be subject
to federal income or excise taxes, the Portfolio may be required
to pay out as an income distribution each year an amount
significantly greater than the total amount of cash which the
Portfolio has actually received as interest during the year.
Such distributions will be made from the cash assets of the
Portfolio, from borrowings or by liquidation of portfolio
securities, if necessary. If a distribution of cash necessitates
the liquidation of portfolio securities, the Investment Adviser
will select which securities to sell. The Portfolio may realize
a gain or loss from such sales. In the event the Portfolio
realizes net capital gains from such sales, its shareholders may
receive a larger capital gain distribution, if any, than they
would have in the absence of such sales.
OPTIONS. Certain listed options are considered "section
1256 contracts" for federal income tax purposes. Section 1256
contracts held by the Portfolio at the end of each taxable year
will be "marked to market" and treated for federal income tax
purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by the
Portfolio on section 1256 contracts generally will be considered
60% long-term and 40% short-term capital gain or loss.
With respect to options traded over-the-counter or on
certain foreign exchanges, gain or loss realized by the Portfolio
upon the lapse or sale of such options held by the Portfolio will
be either long-term or short-term capital gain or loss depending
upon the Portfolio's holding period with respect to such option.
However, gain or loss realized upon the lapse or closing out of
such options that are written by the Portfolio will be treated as
short-term capital gain or loss. In general, if the Portfolio
exercises an option, or an option that the Portfolio has written
is exercised, gain or loss on the option will not be separately
recognized but the premium received or paid will be included in
the calculation of gain or loss upon disposition of the property
underlying the option.
TAX STRADDLES. Any option or other position entered
into or held by the Portfolio in conjunction with any other
position held by the Portfolio may constitute a "straddle" for
federal income tax purposes. In general, straddles are subject
74
to certain rules that may affect the character and timing of the
Portfolio's gains and losses with respect to straddle positions.
CURRENCY FLUCTUATIONS. For Federal income tax purposes,
gains or losses attributable to fluctuations in exchange rates
which occur between the time the Portfolio accrues interest or
other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or
losses from the disposition of debt securities 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 gain or loss.
OTHER TAXES. Income received by the Portfolio also may
be subject to state, local and foreign income taxes, including
taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries which entitle the
Portfolio to a reduced rate of such taxes or exemption from taxes
on such income. It is impossible to determine the effective rate
of foreign tax in advance since the amount of the Portfolio's
assets to be invested within various countries is not known.
TAXATION OF FOREIGN STOCKHOLDERS. The foregoing
discussion relates only to U.S. Federal income tax law as it
affects shareholders who are U.S. residents or U.S. corporations.
The effects of Federal income tax law on shareholders who are
non-resident aliens or foreign corporations may be substantially
different. Foreign investors should consult their counsel for
further information as to the U.S. tax consequences of receipt of
income from the Fund.
____________________________________________________________
GENERAL INFORMATION
____________________________________________________________
The Fund is a Maryland corporation organized in 1973.
The Portfolio is formally designated in the Charter of the Fund
as the Monthly Income Portfolio. Class A shares of the Portfolio
are classified in the Charter of the Fund as shares of Monthly
Income Portfolio Common Stock, Class B shares of the Portfolio
are classified in the Charter of the Fund as shares of Monthly
Income Portfolio Class B Common Stock and Class C shares of the
Portfolio are classified in the Charter of the Fund as shares of
Monthly Income Portfolio Class C Common Stock. The Portfolio
began conducting business as the Corporate Bond Portfolio as of
January 4, 1993.
75
CAPITALIZATION
All shares of each Portfolio participate equally in
dividends and distributions from that Portfolio, including any
distributions in the event of a liquidation and upon redeeming
shares will receive the then current net asset value of the
Portfolio represented by the redeemed shares less any applicable
CDSC. Each share of the Portfolio is entitled to one vote for
all purposes. Shares of both Portfolios vote for the election of
Directors and on any other matter that affects both Portfolios in
substantially the same manner as a single class, except as
otherwise required by law. 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 class. There are no
conversion or preemptive rights in connection with any shares of
the Portfolio. All shares of the Portfolio when duly issued will
be fully paid and non-assessable.
The authorized capital stock of the Fund consists of
1,800,000,000 shares of Common Stock having a par value of $.001
per share. The authorized capital stock of the Portfolio
currently consists of 250,000,000 shares of Class A Common Stock,
250,000,000 shares of Class B Common Stock, 250,000,000 shares of
Class C Common Stock, and 250,000,000 shares of Advisor Class
Common Stock, each having a par value of $.001 per share Class A,
Class B and Class C shares each represent interests in the assets
of the Portfolio and have identical voting, dividend, liquidation
and other rights on the same terms and conditions, except that
expenses related to the distribution of each class and transfer
agency expenses of each class are borne solely by each class and
each class of shares has exclusive voting rights with respect to
provisions of the Fund's Rule 12b-1 distribution plan which
pertain to a particular class and other matters for which
separate class voting is appropriate under applicable law,
provided that, if the Fund submits to a vote of both the Class A
shareholders and the Class B shareholders an amendment to the
Rule 12b-1 distribution plan that would materially increase the
amount to be paid thereunder with respect to the Class A shares,
the Class A shareholders and the Class B shareholders will vote
separately by class.
The Fund's Board of Directors may, without shareholder
approval, increase or decrease the number of authorized but
unissued shares of the Portfolio's Class A, Class B, Class C and
Advisor Class Common Stock.
The Board of Directors is authorized to reclassify and
issue any unissued shares to any number of additional series and
classes without shareholder approval. Accordingly, the Directors
in the future, for reasons such as the desire to establish one or
76
more additional portfolios with different investment objectives,
policies or restrictions, may create additional series of
shares. Any issuance of shares of another series would be
governed by the 1940 Act and the laws 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 for the election of Directors and on any other matter 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 separate 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.
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, are available to shareholders of
the Fund. Meetings of shareholders may be called by 10% of the
Fund's outstanding shareholders. 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.
As of the close of business on _________, 1999, there
were __________ shares of common stock of the Portfolio
outstanding. Of this amount, __________ shares were Class A,
__________ shares were Class B and __________ shares were Class C
shares. To the knowledge of the Portfolio, the following persons
owned of record or beneficially, 5% or more of the outstanding
shares the Portfolio as of __________, 1999:
NO. OF % of % of % of
NAME AND ADDRESS SHARES CLASS A CLASS B CLASS C
CUSTODIAN
State Street Bank and Trust Company "State Street," 225
Franklin Street, Boston, Massachusetts 02110, acts as the Funds
Custodian for the assets of the Fund but plays no part in
deciding on the purchase or sale of portfolio securities. Subject
to the supervision of the Fund's Directors, State Street may
enter into subcustodial agreements for the holding of the Fund's
foreign securities.
77
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., an indirect wholly-
owned subsidiary of the Investment Adviser, located at 1345
Avenue of the Americas, New York, New York 10105, is the
principal underwriter of shares of the Portfolio, and as such may
solicit orders from the public to purchase shares of the
Portfolio. 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
shares of the Fund offered hereby are passed upon by Seward &
Kissel, New York, New York. Seward & Kissel has relied upon the
opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland,
for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
PERFORMANCE INFORMATION
From time to time, the Portfolio advertises its "yield"
and "total return," which are computed separately for Class A,
Class B and Class C shares. The Portfolio's yield for any 30-day
(or one-month) period is computed by dividing the net investment
income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then
annualizing such 30-day (or one-month) yield in accordance with a
formula prescribed by the Commission which provides for
compounding on a semi-annual basis. The Portfolio may also state
in sales literature an "actual distribution rate" for each class
which is computed in the same manner as yield except that actual
income dividends declared per share during the period in question
are substituted for net investment income per share. The actual
distribution rate is computed separately for Class A, Class B and
Class C shares. Advertisements of the Portfolio's total return
disclose its average annual compounded total return for the
periods prescribed by the Commission. The Portfolio'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 purpose of computing total return,
income dividends and capital gains distributions paid on shares
78
of the Portfolio are assumed to have been reinvested when paid
and the maximum sales charges applicable to purchases and
redemptions of the Portfolio's shares are assumed to have been
paid. The Portfolio's advertisements may quote performance
rankings or ratings of the Portfolio by financial publications or
independent organizations such as Lipper Analytical Services,
Inc. and Morningstar, Inc. or compare the Portfolio's performance
to various indices.
The yield for the month ended December 31,
1998 for Class A shares of the Portfolio was 6.63%, for Class B
shares was 6.21% and for Class C shares was 6.21%. The actual
distribution rate for such period for the Portfolio for Class A
shares was 7.75%, for Class B shares was 7.42% and for Class C
shares was 7.42%.
The average annual total return based on net asset value
for each class of shares for the one-, five- and ten-year periods
ended December 31, 1998 (or since inception through that date, as
noted) was as follows:
12 Months
Ended 5 Years Ended 10 Years Ended
12/31/98 12/31/98 12/31/98
_________ _____________ ______________
Class A ______% ______% ______%
Class B ______% ______% ______%*
Class C ______% ______% ______%*
*Inception Dates: Class B - January 3, 1993
Class C - May 3, 1993
The Portfolio's yield and total return are not fixed and
will fluctuate in response to prevailing market conditions or as
a function of the type and quality of the securities held by the
Portfolio, its average portfolio maturity and its expenses.
Yield and total return information is useful in reviewing the
Portfolio's performance and such information may provide a basis
for comparison with other investments. Such other investments
may include certificates of deposit, money market funds and
corporate debt securities. However, an investor should know that
investment return and principal value of an investment in the
Portfolio will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. In
addition, the Portfolio's shares are not insured or guaranteed by
the U.S. Government. In comparison, certificates of deposit are
guaranteed and pay a fixed rate of return; money market funds
79
seek a stable net asset value; and corporate debt securities may
provide a higher yield than those available from the Portfolio.
Advertisements quoting performance rankings or ratings
of the Fund's Portfolio as measured by financial publications or
by independent organizations such as Lipper Analytical Services,
Inc. ("Lipper") and Morningstar, Inc. and advertisements
presenting the historical record payments of income dividends by
the Portfolio 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. The Portfolio has been ranked by Lipper in
the category known as "corporate debt bonds BBB rated funds."
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the
shareholder's broker or other financial adviser 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.
80
____________________________________________________________
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS
____________________________________________________________
81
____________________________________________________________
APPENDIX A:
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
A-1
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."
A-2
(LOGO) ALLIANCE BOND FUND, INC. -
U.S. GOVERNMENT PORTFOLIO
_______________________________________________________________
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
March 1, 1999
_______________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the current
Prospectus for the U.S. Government Portfolio (the "Portfolio") of
the Alliance Bond Fund, Inc. (the "Fund") that offers Class A,
Class B and Class C shares of the Portfolio and, if the
Portfolios begins to offer Advisor Class shares, the Prospectus
that offers the Advisor Class shares of the Portfolio (the
"Advisor Class Prospectus" and, together with any Prospectus that
offers the Class A, Class B, and Class C shares, the
"Prospectus(es)"). Copies of the Prospectus(es) of the Portfolio
may be obtained by contacting Alliance Fund Services, Inc., at
the address or the "For Literature" telephone number shown above.
The Portfolio currently does not offer Advisor Class shares.
TABLE OF CONTENTS
Page
Description of the Portfolio..........................
Management of the Fund................................
Expenses of the Fund..................................
Purchase of Shares....................................
Redemption and Repurchase of Shares...................
Shareholder Services..................................
Net Asset Value.......................................
Portfolio Transactions................................
Taxes.................................................
General Information...................................
Financial Statements and Report of Independent
Auditors............................................
Appendix A: Certain Employee Benefit Plans............ A-1
________________________________
(R) This is a registered service mark used under license from the
owner, Alliance Capital Management L.P.
_______________________________________________________________
DESCRIPTION OF THE PORTFOLIO
_______________________________________________________________
INTRODUCTION TO THE FUND
Alliance Bond Fund, Inc. (the "Fund") is a diversified,
open-end management investment company whose shares are offered
in separate series referred to as Portfolios. Each portfolio is
a separate pool of assets constituting, in effect, a separate
fund with its own investment objective policies. A shareholder
in the portfolio will be entitled to his or her pro-rata share of
all dividends and distributions arising from that portfolio's
assets and, upon redeeming shares of that portfolio, the
shareholder will receive the then current net asset value of that
portfolio represented by the redeemed shares. (See "Purchase of
Shares" and "Redemption and Repurchase of Shares," in the
Portfolio's Prospectus.) The Fund is empowered to establish,
without shareholder approval, additional portfolios which may
have different investment objectives.
The Fund currently has two portfolios: the U.S.
Government Portfolio (the "Portfolio"), which is described in
this Statement of Additional Information, and the Corporate Bond
Portfolio, which is described in a separate Statement of
Additional Information. Copies of the Corporate Bond Portfolio's
Prospectus and Statement of Additional 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.
THE U.S. GOVERNMENT PORTFOLIO
Except as otherwise indicated, the Portfolio's
investment policies are not designated "fundamental policies"
and, therefore, may be changed by the Board of Directors without
a shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. The Portfolio's investment objective may not be
changed without shareholder approval. There can be, of course,
no assurance that the Portfolio will achieve its investment
objective.
INVESTMENT OBJECTIVE
The investment objective of the Portfolio is to seek as
high a level of current income as is consistent with safety of
principal. As a matter of fundamental policy, which cannot be
changed without approval of the Portfolio's shareholders, the
Portfolio pursues its objective by investing solely in securities
2
that are issued or guaranteed by the U.S. Government or its
instrumentalities and backed by the full faith and credit of the
United States ("U.S. Government Securities").
The Board of Directors of the Fund has approved, and has
recommended to the Shareholders of the Portfolio for their
approval, changes to the Portfolio's investment objectives and
policies. These proposed changes are more fully described in the
Prospectus.
HOW THE PORTFOLIO PURSUES ITS OBJECTIVE
The Portfolio pursues its investment objective by
investing in U.S. Government Securities.
U.S. GOVERNMENT SECURITIES. U.S. Government
securities may be backed by the full faith and credit of the
United States, supported only by the right of the issuer to
borrow from the U.S. Treasury or backed only by the credit of the
issuing agency itself. These securities include: (i) the
following U.S. Treasury securities, which are backed by the full
faith and credit of the United States and differ only in their
interest rates, maturities and times of issuance: U.S. Treasury
bills (maturities of one year or less with no interest paid and
hence issued at a discount and repaid at full face value upon
maturity), U.S. Treasury notes (maturities of one to ten years
with interest payable every six months) and U.S. Treasury bonds
(generally maturities of greater than ten years with interest
payable every six months); (ii) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities that are
supported by the full faith and credit of the U.S. Government,
such as securities issued by the Government National Mortgage
Association ("GNMA"), the Farmers Home Administration, the
Department of Housing and Urban Development, the Export-Import
Bank, the General Services Administration and the Small Business
Administration; and (iii) obligations issued or guaranteed by
U.S. government agencies and instrumentalities that are not
supported by the full faith and credit of the U.S. Government,
such as securities issued by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, and
governmental collateralized mortgage obligations ("CMOs"). The
maturities of the U.S. Government securities listed in paragraphs
(i) and (ii) above usually range from three months to 30 years.
Such securities, except GNMA certificates, normally provide for
periodic payments of interest in fixed amount with principal
payments at maturity or specified call dates.
U.S. Government securities also include zero coupon
securities and principal-only securities and certain stripped
mortgage-related securities ("SMRS"). In addition, other U.S.
Government agencies and instrumentalities have issued stripped
3
securities that are similar to SMRS. Such securities include
those that are issued with an interest-only ("IO") class and a
principal-only ("PO") class. Although these stripped securities
are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result,
established trading markets have not yet developed and,
accordingly, these securities may be illiquid.
Guarantees of securities by the U.S. Government or its
agencies or instrumentalities guarantee only the payment of
principal and interest on the securities, and do not guarantee
the securities' yield or value or the yield or value of the
shares of the Fund that holds the securities.
U.S. Government securities are considered among the
safest of fixed-income investments. As a result, however, their
yields are generally lower than the yields available from other
fixed-income securities.
Securities issued by GNMA ("GNMA Certificates") differ
in certain respects from other U.S. Government securities, which
normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call
dates. GNMA Certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans. These
loans -- issued by lenders such as mortgage bankers, commercial
banks and savings and loan-associations -- are either insured by
the Federal Housing Administration or guaranteed by the Veterans
Administration. A "pool" or group of such mortgages is assembled
and, after being approved by GNMA, is offered to investors
through securities dealers. Once approved by GNMA, the timely
payment of interest and principal on each mortgage is guaranteed
by the full faith and credit of the United States. GNMA
Certificates also differ from other U.S. Government securities in
that principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA
Certificates are called "pass-through" securities because both
interest and principal payments (including pre-payments) are
passed through to the holder of the Certificate. Upon receipt,
principal payments are used by the Portfolio to purchase
additional U.S. Government securities.
The Portfolio may invest in zero coupon Treasury
securities, which consist of Treasury bills or the principal
components of U.S. Treasury bonds or notes. The Portfolio may
also invest in zero coupon securities issued by U.S. Government
agencies or instrumentalities that are supported by the full
faith and credit of the United States, which consist of the
principal components of securities of U.S. Government agencies or
instrumentalities. A zero coupon security pays no interest to
4
its holder during its life. An investor acquires a zero coupon
security at a price which is generally an amount based upon its
present value, and which, depending upon the time remaining until
maturity, may be significantly less than its face value
(sometimes referred to as a "deep discount" price). Upon
maturity of the zero coupon security, the investor receives the
face value of the security.
Currently, the only U.S. Treasury security issued
without coupons is the Treasury bill. The zero coupon securities
purchased by the Portfolio may consist of principal components
held in STRIPS form issued through the U.S. Treasury's STRIPS
program, which permits the beneficial ownership of the component
to be recorded directly in the Treasury book-entry system. In
addition, in the last few years a number of banks and brokerage
firms have separated ("stripped") the principal portions
("corpus") from the coupon portions of the U.S. Treasury bonds
and notes and sold them separately in the form of receipts or
certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a
custodial or trust account). The staff of the Securities and
Exchange Commission (the "Commission") has indicated that, in its
view, these receipts or certificates should be considered as
securities issued by the bank or brokerage firm involved and,
therefore, unlike those obligations issued under the U.S.
Treasury's STRIPS program, should not be included in the Fund's
categorization of U.S. Government Securities. The Fund disagrees
with the staff's interpretation but has undertaken that it will
not invest in such securities until final resolution of the
issue. However, if such securities are deemed to be U.S.
Government Securities, the Portfolio will not be subject to any
limitations on their purchase.
Zero coupon securities do not entitle the holder to any
periodic payments of interest prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face
or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic
distributions of interest.
Current federal tax law requires that a holder (such as
the Portfolio) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year
even though the holder receives no interest payment in cash on
the security during the year. As a result, in order to make the
distributions necessary for the Portfolio not to be subject to
federal income or excise taxes, the Portfolio might be required
to pay out as an income distribution each year an amount,
obtained by liquidation of portfolio securities or borrowings if
necessary, greater than the total amount of cash that the
5
Portfolio has actually received as interest during the year. The
Portfolio believes, however, that it is highly unlikely that it
would be necessary to liquidate portfolio securities or borrow
money in order to make such required distributions or to meet its
investment objective.
The Portfolio may invest in SMRS which are derivative
multi-class mortgage- related securities. The Portfolio will
only invest in SMRS that are issued by the U.S. Government, its
agencies or instrumentalities and supported by the full faith and
credit of the United States. SMRS in which the Portfolio may
invest are usually structured with two classes that receive
different proportions of the interest and principal distributions
on a pool of GNMA Certificates ("Mortgage Assets"). A common
type of SMRS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder
of the principal. In the most extreme case, one class will
receive all of the interest (the IO class), while the other class
will receive all of the principal (the PO class). The yield to
maturity on an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related
underlying Mortgage Assets, and a rapid rate of principal
prepayments may have a material adverse effect on the yield to
maturity of the IO class. The rate of principal prepayment will
change as the general level of interest rates fluctuates. If the
underlying Mortgage Assets experience greater than anticipated
principal prepayments, the Portfolio may fail to fully recoup its
initial investment in these securities. Due to their structure
and underlying cash flows, SMRS, may be more volatile than
mortgage-related securities that are not stripped.
In addition, other U.S. Government agencies and
instrumentalities have issued stripped securities that are
similar to SMRS. Such securities include those that are issued
with an IO class and a PO class. Although these stripped
securities are purchased and sold by institutional investors
through several investment banking firms acting as brokers or
dealers, these securities were only recently developed. As a
result, established trading markets have not yet developed and,
accordingly, these securities may be illiquid. However, these
securities will be treated as liquid provided they are so
determined by, or under procedures approved by, the Board of
Directors.
SECURITIES RATINGS. The ratings of fixed-income
securities by S&P, Moody's, Duff & Phelps Credit Rating Co.
("Duff & Phelps") and Fitch IBCA, Inc. ("Fitch") are a generally
accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of
an issuer is heavily weighted by past developments and does not
6
necessarily reflect probable future conditions. There is
frequently a lag between the time a rating is assigned and the
time it is updated. In addition, there may be varying degrees of
difference in credit risk of securities within each rating
category.
ILLIQUID SECURITIES. The Fund will not invest in
illiquid securities if immediately after such investment more
than 15% of the Fund's total assets (taken at market value) would
be invested in such securities. In addition, the Fund will not
maintain more than 15% of its net assets in illiquid securities.
For this purpose, illiquid securities include, among others,
(a) direct placements or other securities which are subject to
legal or contractual restrictions on resale or for which there is
no readily available market (e.g., trading in the security is
suspended or, in the case of unlisted securities, market makers
do not exist or will not entertain bids or offers), (b) options
purchased by the Fund over-the-counter and the cover for options
written by the Fund over-the-counter, and (c) repurchase
agreements not terminable within seven days. See "Additional
Investment Policies and Practices," below. Securities that have
legal or contractual restrictions on resale but have a readily
available market are not deemed illiquid for purposes of this
limitation.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
7
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at reasonable
prices. Rule 144A has already produced enhanced liquidity for
many restricted securities, and market liquidity for such
securities may continue to expand as a result of this regulation
and the consequent inception of the PORTAL System, which is an
automated system for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers sponsored
by the National Association of Securities Dealers, Inc. (NASD).
Alliance Capital Management L.P., the Fund's investment
adviser (the "Investment Adviser"), acting under the supervision
of the Board of Directors, will monitor the liquidity of
restricted securities in the Fund's portfolio that are eligible
for resale pursuant to Rule 144A. In reaching liquidity
decisions, the Investment Adviser will consider, among others,
the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers issuing quotations to
purchase or sell the security; (3) the number of other potential
purchasers of the security; (4) the number of dealers undertaking
to make a market in the security; (5) the nature of the security
(including its unregistered nature) and the nature of the
marketplace for the security (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics
of the transfer); and (6) any applicable Commission
interpretation or position with respect to such type of
securities.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements with
member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York).
8
PORTFOLIO TURNOVER. Because the Portfolio will actively
use trading to benefit from yield disparities among different
issues of U.S. Government Securities or otherwise to achieve its
investment objective and policies, the Portfolio may be subject
to a greater degree of turnover and, thus, a higher incidence of
short-term capital gains taxable as ordinary income than might be
expected from investment companies which invest substantially all
of their funds on a long-term basis, and correspondingly larger
mark-up charges can be expected to be borne by the Portfolio.
Management anticipates that the annual turnover in the Portfolio
may be in excess of 400% in future years (but is not expected to
exceed 500%). An annual turnover rate of 400% occurs, for
example, when all of the securities in the Portfolio are replaced
four times in a period of one year.
The value of the Portfolio's shares will be influenced
by the factors which generally affect securities, such as the
economic and political outlook, earnings, dividends and the
supply and demand for various classes of securities. There can
be, of course, no assurance that the Portfolio's investment
objective will be achieved.
1940 ACT RESTRICTIONS
Under the 1940 Act, the Portfolio is not permitted to
borrow unless immediately after such borrowing there is "asset
coverage," as that term is defined and used in the 1940 Act, of
at least 300% for all borrowings of the Portfolio. In addition,
under the 1940 Act, in the event asset coverage falls below 300%,
the Portfolio must within three days reduce the amount of its
borrowing to such an extent that the asset coverage of its
borrowings is at least 300%. Assuming, for example, outstanding
borrowings representing not more than one-third of the
Portfolio's total assets less liabilities (other than such
borrowings), the asset coverage of the Portfolio's portfolio
would be 300%; while outstanding borrowings representing 25% of
the total assets less liabilities (other than such borrowings),
the asset coverage of the Portfolio's portfolio would be 400%.
The Portfolio will maintain asset coverage of outstanding
borrowings of at least 300% and if necessary will, to the extent
possible, reduce the amounts borrowed by making repayments from
time to time in order to do so. Such repayments could require
the Portfolio to sell portfolio securities at times considered
disadvantageous by Alliance and such sales could cause the
Portfolio to incur related transaction costs and to realize
taxable gains.
Under the 1940 Act, the Portfolio may invest not more
than 10% of its total assets in securities of other investment
companies. In addition, under the 1940 Act the Portfolio may not
own more than 3% of the total outstanding voting stock of any
9
investment company and not more than 5% of the value of the
Portfolio's total assets may be invested in the securities of any
investment company.
FUNDAMENTAL INVESTMENT POLICIES
The following restrictions supplement those set forth in
the Prospectus for the Portfolio. These restrictions may not be
changed without shareholder approval which means the vote of (1)
67% or more of the shares of the Portfolio represented at a
meeting at which more than 50% of the outstanding shares are
represented or (2) more than 50% of the outstanding shares of the
Portfolio, whichever is less.
The following restrictions provide that the Portfolio
may not:
1. Invest in companies for the purpose of
exercising control of management;
2. Issue any senior securities as defined in the
Investment Company Act of 1940, as amended (the "1940
Act"), (except to the extent that when-issued securities
transactions, forward commitments or stand- by
commitments may be considered senior securities);
3. Participate on a joint or a joint and several
basis in any trading account in securities;
4. Effect a short sale of any security;
5. Purchase securities on margin, but it may
obtain such short-term credits as may be necessary for
the clearance of purchase and sales of securities;
6. Invest in the securities of any other
investment company except in connection with a merger,
consolidation, acquisition of assets or other
reorganization approved by the Fund's shareholders; or
7. Write, purchase or sell puts, calls or
combinations thereof;
To maintain portfolio diversification and reduce
investment risk, as a matter of fundamental policy, the Portfolio
may not: (i) borrow money except from banks for temporary or
emergency purposes and then only in an amount not exceeding 5% of
the value of its total assets at the time the borrowing is made;
(ii) make loans to other persons; (iii) effect a short sale of
any security; (iv) purchase securities on margin, but it may
obtain such short-term credits as may be necessary for the
10
clearance of purchases and sales of securities; or (v) write,
purchase or sell puts, calls or combinations thereof.
In addition to the restrictions set forth above in
connection with the qualification of its shares for sale in
certain states, the following restrictions apply and provide that
the Portfolio may not:
1. Invest more than 15% of average net assets at
the time of purchase in securities which are not readily
marketable including restricted securities;
2. Invest in warrants (other than warrants
acquired by the Portfolio as a part of a unit or
attached to securities at the time of purchase) if, as a
result such warrants valued at the lower of cost or
market would exceed 5% of the value of the Portfolio's
net assets provided that not more than 2% of the
Portfolio's net assets may be in warrants not listed on
the New York or American Stock Exchanges;
3. Engage in the purchase of real estate
(including limited partnership interests) excluding
readily marketable interests in real estate investment
trusts or readily marketable securities of companies
which invest in real estate;
4. Invest in oil, gas or other mineral leases; or
5. Invest more than 15% of the Portfolio's total
assets in securities of issuers which together with any
predecessors have a record of less than three years
continuous operation or securities of issuers which are
restricted as to disposition.
The foregoing percentage limitations will apply at the
time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of an acquisition of such
security.
_______________________________________________________________
MANAGEMENT OF THE FUND
_______________________________________________________________
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their ages and
their principal occupations during the past five years are set
forth below. Each such Director and officer is also a trustee,
11
director or officer of other registered investment companies
sponsored by the Investment Adviser. Unless otherwise specified,
the address of each such person is 1345 Avenue of the Americas,
New York, New York 10105.
DIRECTORS
JOHN D. CARIFA,** 53, Chairman of the Board, is the
President, Chief Operating Officer and a Director of ACMC, with
which he has been associated since prior to 1993.
RUTH BLOCK, 67, was formerly an Executive Vice President
and the Chief Insurance Officer of Equitable. She is a Director
of Ecolab Incorporated (specialty chemicals) and Amoco
Corporation (oil and gas). Her address is P.O. Box 4623,
Stamford, Connecticut 06903.
DAVID H. DIEVLER, 69, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 56, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1993.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, JR., 66, is an Investment Adviser and
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 1993. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1993. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, New
Jersey 08540.
CLIFFORD L. MICHEL, 59, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1993. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
____________________
** An "interested person" of the Fund as defined in the 1940
Act.
12
DONALD J. ROBINSON, 64, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe and was formerly a senior
partner and a member of the Executive Committee of that firm. He
was also a Trustee of the Museum of the City of New York from
1977 to 1995. His address is 98 Hell's Peak Road, Weston,
Vermont 05161.
JOHN D. CARIFA,*** 53, 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 1993.
RUTH BLOCK, 67, was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable Life Assurance
Society of the United States. She is a Director of Ecolab
Incorporated (specialty chemicals) and Amoco Corporation (oil and
gas). Her address is P.O. Box 4623, Stamford, Connecticut 06903.
DAVID H. DIEVLER, 69, is an independent consultant. He
was formerly a Senior Vice President of ACMC until December 1994.
His address is P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 56, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1993.
Previously, he was Director of the National Academy of Design.
His address is 150 White Plains Road, Tarrytown, New York 10591.
WILLIAM H. FOULK, JR., 66, is an Investment Adviser and
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 1993. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 74, is President of the Harry Frank
Guggenheim Foundation, with which he has been associated since
prior to 1993. He was formerly President of New York University,
the New York Botanical Garden and Rector of the United Nations
University. His address is 25 Cleveland Lane, Princeton, New
Jersey 08540.
CLIFFORD L. MICHEL, 59, is a member of the law firm of
Cahill Gordon & Reindel, with which he has been associated since
prior to 1993. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
____________________
*** An "interested person" of the Fund as defined in the 1940
Act.
13
DONALD J. ROBINSON, 64, is Senior Counsel to the law
firm of Orrick, Herrington & Sutcliffe and was formerly a senior
partner and a member of the Executive Committee of that firm. He
was also a Trustee of the Museum of the City of New York from
1977 to 1995. His address is 98 Hell's Peak Road, Weston,
Vermont 05161.
OFFICERS
JOHN D. CARIFA, CHAIRMAN AND PRESIDENT (see biography,
above).
WAYNE D. LYSKI, SENIOR VICE PRESIDENT, 56, is an
Executive Vice President of ACMC, with which he has been
associated since prior to 1992.
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT, 38, is an
Executive Vice President of ACMC, with which she has been
associated since July 1993. Prior thereto, she headed Equitable
Capital Management Corporation's Fixed Income Department since
prior to 1993.
PATRICIA J. YOUNG, SENIOR VICE PRESIDENT, 43, is a
Senior Vice President of ACMC, with which she has been associated
since 1993.
JEFFREY S. PHLEGAR, VICE PRESIDENT, 31, is a Vice
President of ACMC with which he has been associated since prior
to 1993.
EDMUND P. BERGAN, JR., SECRETARY, 48, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS") with which
he has been associated since prior to 1993.
DOMENICK PUGLIESE, ASSISTANT SECRETARY, 37, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since May 1995. Prior thereto, he was a Vice
President and Counsel of Concord Financial Holding Corporation
since 1994, Vice President and Associate General Counsel of
Prudential Securities since prior to 1993.
ANDREW L. GANGOLF, ASSISTANT SECRETARY, 44, is a Vice
President and Assistant General Counsel of AFD, with which he has
been associated since December 1994. Prior thereto, he was Vice
President and Assistant Secretary of Delaware Management Co.,
Inc.
EMILIE D. WRAPP, ASSISTANT SECRETARY, 42, is a Vice
President and Assistant General Counsel of AFD, with which she
has been associated since prior to 1993.
14
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER,
48, is a Senior Vice President of Alliance Fund Services, Inc.
("AFS"), with which he has been associated since prior to 1993.
JUAN RODRIGUEZ, CONTROLLER, 40, is an Assistant Vice
President of AFS, with which he has been associated since prior
to 1993.
CARLA LaROSE, ASSISTANT CONTROLLER, 34, is a Manager
of AFS, with which she has been associated since prior to 1993.
JOSEPH J. MANTINEO, ASSISTANT CONTROLLER, 38, is a Vice
President of AFS, with which he has been associated since prior
to 1993.
VINCENT S. NOTO, CONTROLLER, 33, is a Vice President
of AFS, with which he has been associated since prior to 1993.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended June 30, 1998, the
aggregate compensation paid to each of the Directors during
calendar year 1998 by all of the funds to which the Investment
Adviser provides investment advisory services (collectively, the
"Alliance Fund Complex"), and the total number of registered
investment companies (and separate investment portfolios within
the 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 fund in the Alliance
Fund Complex provides compensation in the form of pension or
retirement benefits to any of its directors or trustees. Each of
the Directors is a director or trustee of one or more other
registered investment companies in the Alliance Fund Complex.
15
Total Number
Total Number of Investment
of Funds in Portfolios
Total the Alliance Within the
Compensation Fund Complex, Funds,
From the Including the Including the
Alliance Fund, as to Fund, as to
Fund which the which the
Aggregate Complex, Director is a Director is a
Compensation Including Director or Director or
Name of Director from the Fund the Fund Trustee Trustee
________________ _____________ ____________ _____________ _____________
John D. Carifa $ -0- $ -0- ___ ___
Ruth Block $1,777 $______ ___ ___
David H. Dievler $1,777 $______ ___ ___
John H. Dobkin $ 963 $______ ___ ___
William H. Foulk, Jr. $ 960 $______ ___ ___
Dr. James M. Hester $1,771 $______ ___ ___
Clifford L. Michel $1,771 $______ ___ ___
Donald J. Robinson $1,758 $______ ___ ___
As of __________, 1999, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
INVESTMENT ADVISER
Alliance Capital Management L.P., a Delaware limited
partnership with principal offices at 1345 Avenue of the Americas,
New York, New York 10105, has been retained under an investment
advisory agreement (the "Advisory Agreement") to provide
investment advice and, in general, to conduct the management and
investment program of the Fund under the supervision of the Fund's
Board of Directors (see "Management of the Fund" in the
Prospectus).
The Investment Adviser is a leading international
investment manager supervising client accounts with assets as of
____________, 1999, totaling more than $_____ billion (of which
more than $_____ billion represented the assets of investment
companies). The Investment Adviser's clients are primarily major
corporate employee benefit funds, public employee retirement
systems, investment companies, foundations and endowment funds.
The ___ registered investment companies managed by the Investment
Adviser, comprising ____ separate investment portfolios, currently
have more than ____ million shareholders. As of __________, 1999,
the Investment Adviser and its subsidiaries employed approximately
2,000 employees who operate out of domestic offices and the
offices of subsidiaries in Bahrain, Bangalore, Cairo, Chennai,
Hong Kong, Istanbul, Johannesburg, London, Luxembourg, Madrid,
Moscow, Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul,
16
Singapore, Sydney, Tokyo, Toronto, Vienna and Warsaw. As of
__________, 1999, the Investment Adviser was retained as an
investment manager for employee benefit plan assets of ___ of the
FORTUNE 100 companies.
ACMC, the sole general partner of, and the owner of a 1%
general partnership interest in the Investment Adviser, is an
indirect wholly-owned subsidiary of the Equitable Life Assurance
Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States and a wholly-owned
subsidiary of the Equitable Companies Incorporated ("ECI"). ECI
is a holding company controlled by AXA-UAP ("AXA") a French
insurance holding company which at March 1, 1998, beneficially
owned approximately 59% of the outstanding voting shares of ECI.
As of June 30, 1998, ACMC, Inc. and Equitable Capital Management
Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, together with Equitable, owned in the aggregate
approximately 57% of the issued and outstanding units representing
assignments of beneficial ownership of limited partnership
interests in the Investment Adviser.
AXA is a holding company for an international group of
insurance and related financial services companies. AXA's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities principally
in Western Europe, North America and the Asia/Pacific area. AXA
is also engaged in asset management, investment banking,
securities trading, brokerage, real estate and other financial
services activities principally in the United States, as well as
in Western Europe and the Asia/Pacific area.
Based on information provided by AXA, as of March 31,
1998, more than 30% of the voting power of AXA was controlled
directly and indirectly by FINAXA, a French holding company. As
of March 31, 1998 approximately 74% of the voting power of FINAXA
was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA
Assurances I.A.R.D. Mutuelle, itself controlled directly and
indirectly more than 42% of the voting power of FINAXA. Acting as
a group, the Mutuelles AXA control AXA and FINAXA.
Under the Investment Advisory Contract, the Investment
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 Investment
Adviser. The Investment 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.
17
The Investment Adviser is, under the Investment Advisory
Contract, responsible for certain expenses incurred by the Fund,
including, for example, office facilities and certain
administrative services, and any expenses incurred in promoting
the sale of Fund shares (other than the portion of the promotional
expenses borne by the Fund in accordance with an effective plan
pursuant to Rule 12b-1 under the 1940 Act, and the costs of
printing Fund prospectuses and other reports to shareholders and
fees related to registration with the Commission and with state
regulatory authorities).
The Fund has, under the Investment Advisory Contract,
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 Investment Adviser, the Fund may
utilize personnel employed by the Investment Adviser or by other
subsidiaries of Equitable. The Fund may employ its own personnel
or contract for services to be provided to the Fund at cost and
the payments specifically approved by the Fund's Board of
Directors. The Fund paid to the Investment Adviser a total of
$116,256 in respect of such services during the fiscal year of the
Fund ended in 1998.
For the fiscal years ended June 30, 1996, 1997 and 1998,
the Investment Adviser received under the advisory agreement,
$7,041,367, $5,646,070 and $4,949,100, respectively, as advisory
fees from the Portfolio.
The Investment Advisory Contract became effective on
July 22, 1992. The Investment Advisory Contract continues in
effect for successive twelve-month periods computed from each
July 1, provided that such continuance is specifically approved at
least annually by a vote of a majority of the Portfolio's
outstanding voting securities or by the Fund's Board of Directors,
and in either case, by a majority of the Directors who are not
parties to the Investment Advisory Contract or interested persons
of any such party. Most recently, continuance of the Investment
Advisory Contract until June 30, 1999 was approved by vote, cast
in person, by the Board of Directors, including a majority of the
Directors who are not "interested persons" as defined in the 1940
Act, at their meeting held on March 28, 1998.
The Investment Advisory Contract is terminable without
penalty on 60 days' written notice, 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 or by the Investment Adviser on 60 days'
written notice, and will automatically terminate in the event of
its assignment. The Investment Advisory Contract provides that in
the absence of willful misfeasance, bad faith or gross negligence
on the part of the Investment Adviser, or of reckless disregard of
its obligations thereunder, the Investment Adviser shall not be
18
liable for any action or failure to act in accordance with its
duties thereunder.
Certain other clients of the Investment Adviser may have
investment objectives and policies similar to those of the Fund.
The Investment Adviser may, from time to time, make
recommendations which result in the purchase or sale of a
particular security by its other clients simultaneously with the
Fund. If transactions on behalf of more than one client during
the same period increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse
effect on price or quantity. It is the policy of the Investment
Adviser to allocate advisory recommendations and the placing of
orders in a manner which is deemed equitable by the Investment
Adviser to the accounts involved, including the Fund. When two or
more of the clients of the Investment Adviser (including the Fund)
are purchasing or selling the same security on a given day from
the same broker-dealer, such transactions may be averaged as to
price.
The Investment Adviser may act as an investment adviser
to other persons, firms or corporations, including investment
companies, and is the investment adviser to the following
registered investment companies: Alliance Institutional Reserves,
Inc., AFD Exchange Reserves, The Alliance Fund, Inc., Alliance
All-Asia Investment Fund, Inc., Alliance Balanced Shares, Inc.,
Alliance Capital Reserves, Alliance Global Dollar Government Fund,
Inc., Alliance Global Environment Fund, Inc., Alliance Global
Small Cap Fund, Inc., Alliance Global Strategic Income Trust,
Inc., Alliance Government Reserves, Alliance Greater China '97
Fund, Inc., Alliance Growth and Income Fund, Inc., Alliance High
Yield Fund, Inc., Alliance International Fund, Alliance
International Premier Growth Fund, Inc., Alliance Institutional
Funds, Inc., Alliance Limited Maturity Government Fund, Inc.,
Alliance Money Market Fund, Alliance Mortgage Securities Income
Fund, Inc., Alliance Multi-Market Strategy Trust, Inc., Alliance
Municipal Income Fund, Inc., Alliance Municipal Income Fund II,
Alliance Municipal Trust, Alliance New Europe Fund, Inc., Alliance
North American Government Income Trust, Inc., Alliance Premier
Growth Fund, Inc., Alliance Quasar Fund, Inc., Alliance Real
Estate Investment Fund, Inc., Alliance/Regent Sector Opportunity
Fund, Inc., Alliance Select Investor Series, Inc., Alliance
Technology Fund, Inc., Alliance Utility Income Fund, Inc.,
Alliance Variable Products Series Fund, Inc., Alliance Worldwide
Privatization Fund, Inc., The Alliance Portfolios and The Hudson
River Trust, all registered open-end investment companies; and to
ACM Government Income Fund, Inc., ACM Government Securities Fund,
Inc., ACM Government Spectrum Fund, Inc., ACM Government
Opportunity Fund, Inc., ACM Managed Dollar Income Fund, Inc., ACM
Managed Income Fund, Inc., ACM Municipal Securities Income Fund,
Inc., Alliance All-Market Advantage Fund, Inc., Alliance World
19
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 Portfolio's
shares and to permit the Fund to pay distribution services fees to
defray expenses associated with the distribution of its Class A
shares, Class B shares and Class C shares in accordance with a
plan of distribution which is included in the Agreement and has
been duly adopted and approved in accordance with Rule 12b-1
adopted by the Commission under the 1940 Act (the "Rule 12b-1
Plan"). Rule 12b-1 permits an investment company to pay expenses
associated with the distribution of its shares in accordance with
the duly adopted Rule 12b-1 Plan. Pursuant to the Rule 12b-1
Plan, the Portfolio pays to AFD a Rule 12b-1 distribution services
fee, which may not exceed an annual rate of .30% of the
Portfolio's aggregate average daily net assets attributable to the
Class A shares, 1.00% of the Portfolio's aggregate average daily
net assets attributable to the Class B shares and 1.00% of the
Portfolio's aggregate average daily net assets attributable to the
Class C shares, for distribution expenses. The Rule 12b-1 Plan
provides that a portion of the distribution services fee in an
amount not to exceed .25% of the aggregate average daily net
assets of the Portfolio attributable to each class of shares
constitutes a service fee used for personal service and/or the
maintenance of shareholder accounts.
During the Portfolio's fiscal year ended June 30, l998,
with respect to Class A shares, the distribution services fees for
expenditure payable to the Principal Underwriter amounted to
$1,061,547, which constituted .30 of 1.00% of the Portfolio's
average daily net assets attributable to Class A shares during the
fiscal year, and the Investment Adviser made payments from its own
resources aggregating $453,091. Of the $1,514,638 paid by the
Portfolio and the Investment Adviser under the Plan with respect
to Class A shares, $68,403 was spent on advertising, $11,830 on
the printing and mailing of prospectuses for persons other than
current shareholders, $1,021,799 for compensation to broker-
dealers and other financial intermediaries (including $147,956 to
the Fund's Principal Underwriter), $93,719 for compensation to
20
sales personnel, and $318,887 was spent on printing of sales
literature, travel, entertainment, due diligence and other
promotional expenses.
During the Portfolio's fiscal year ended June 30, 1998
with respect to Class B shares, the distribution services fees for
expenditures payable to the Principal Underwriter amounted to
$4,316,412, which constituted 1% of the Portfolio's average daily
net assets attributable to Class B shares during the fiscal year,
and the Investment Adviser made payments from its own resources
aggregating $-0-. Of the $2,928,267 paid by the Portfolio and the
Investment Adviser under the Plan with respect to Class B shares,
$85,374 was spent on advertising, $13,007 on the printing and
mailing of prospectuses for persons other than current
shareholders, $2,043,341 for compensation to broker- dealers and
other financial intermediaries (including $190,377 to the Fund's
Principal Underwriter), $71,465 for compensation paid to sales
personnel, $265,680 was spent on printing of sales literature,
travel, entertainment, due diligence and other promotional
expenses, $449,400 was spent on the financing of interest relating
to Class B shares, and $1,388,145 was used to offset the
distribution service fees paid in prior years.
During the Portfolio's fiscal year ended June 30, 1998,
with respect to Class C shares, distribution services fees for
expenditures payable to the Principal Underwriter amounted to
$1,161,590, which constituted 1% of the Portfolio's average daily
net assets attributable to Class C shares during the fiscal year,
and the Investment Adviser made payments from its own resources
aggregating $590,824. Of the $1,752,414 paid by the Portfolio and
the Investment Adviser under the Plan with respect to Class C
shares, $65,262 was spent on advertising, $10,530 on the printing
and mailing of prospectuses for persons other than current
shareholders, $1,333,292 for compensation to broker-dealers and
other financial intermediaries (including $126,483 to the Fund's
Principal Underwriter), $46,440 for compensation paid to sales
personnel, $175,003 was spent on printing of sales literature,
travel, entertainment, due diligence, other promotional expenses,
and $121,887 was spent on the financing of interest relating to
Class C shares.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Portfolio as accrued.
The distribution services fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of an
initial sales charge, and at the same time to permit the Principal
Underwriter to compensate broker-dealers in connection with the
sale of such shares. In this regard, the purpose and function of
the combined contingent deferred sales charge and distribution
services fee on the Class B shares and Class C shares are the same
21
as those of the initial sales charge and distribution services fee
with respect to the Class A shares in that in each case the sales
charge and distribution services fee provide for the financing of
the distribution of the relevant class of the Portfolio's shares.
The Rule 12b-1 Plan provides that AFD will use the
distribution services fee received from the Portfolio in its
entirety for payments (i) to compensate broker-dealers or other
persons for providing distribution assistance, (ii) to otherwise
promote the sale of shares of the Portfolio and (iii) to
compensate broker-dealers, depository institutions and other
financial intermediaries for providing administrative, accounting
and other services with respect to the Portfolio's administrative,
accounting and other services with respect to the Portfolio's
shareholders. In this regard, some payments under the Rule 12b-1
Plan are used to compensate financial intermediaries with trail or
maintenance commissions in an amount equal to .25%, annualized,
with respect to Class A shares and Class B shares, and 1.00%,
annualized, with respect to Class C shares, of the assets
maintained in the Portfolio by its customers. Distribution
services fees received from the Portfolio with respect to Class A
shares will not be used to pay any interest expenses, carrying
charges or other financing costs or allocation of overhead of AFD.
Distribution services fees received from the Portfolio, with
respect to Class B and Class C shares, may be used for these
purposes. The Rule 12b-1 Plan also provides that the Investment
Adviser may use its own resources to finance the distribution of
the Portfolio's shares. The Portfolio is not obligated under the
Rule 12b-1 Plan to pay any distribution services fee in excess of
the amounts set forth above. With respect to Class A shares of
the Portfolio, distribution expenses accrued by AFD in one fiscal
year may not be paid from distribution services fees received from
the Portfolio 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 Portfolio's most recently completed fiscal year, and
carried over for reimbursement in future years in respect of the
Class B and Class C shares for the Portfolio, were, as of that
time $__________ (____% as a percentage of Net Assets of Class B
Shares) and $__________ (____% as a percentage of Net Assets of
Class C Shares), respectively.
22
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.
Under the Agreement, the Treasurer of the Fund reports
the amounts expended under the Rule 12b-1 Plan and the purposes
for which such expenditures were made to the Directors of the Fund
for their review on a quarterly basis. Also, the Agreement
provides that the selection and nomination of disinterested
Directors (as defined in the 1940 Act) are committed to the
discretion of such disinterested Directors then in office.
The Agreement became effective on July 22, 1992 with
respect to Class A and Class B shares, and was amended as of
April 30, 1993 to permit the distribution of Class C shares and
September 30, 1996 to permit the distribution of Advisor Class
shares.
In approving the Agreement, the Directors of the Fund
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders.
Information with respect to distribution services fees and other
revenues and expenses of the Principal Underwriter will be
presented to the Directors each year for their consideration in
connection with their deliberations as to the continuance of the
Agreement. In their review of the Agreement, the Directors will
be asked to take into consideration separately with respect to
each class the distribution expenses incurred with respect to such
class. 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 Investment Adviser may from time to time and from its
own funds or such other resources as may be permitted by rules of
the Commission make payments for distribution services to the
Principal Underwriter; the latter may in turn pay part or all of
such compensation to brokers or other persons for their
distribution assistance.
The Agreement will continue in effect
for successive twelve-month periods (computed from each July 1)
with respect to each class of the Fund, 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
23
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 this 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 the Directors approved
the continuance of the Agreement until June 30, 1999 at their
meeting held on March 28, 1998.
In the event that the Agreement is terminated or not
continued with respect to the Class A shares, Class B shares or
Class C shares, (i) no distribution services fees (other than
current amounts accrued but not yet paid) would be owed by the
Fund to the Principal Underwriter with respect to that class, and
(ii) the Fund would not be obligated to pay the Principal
Underwriter for any amounts expended under the Agreement not
previously recovered by the Principal Underwriter from
distribution services fees in respect of shares of such class or
through deferred sales charges.
All material amendments to the Agreement must be approved
by a vote of the Directors or the holders of the Fund's
outstanding voting securities, voting separately by class, and in
either case, by a majority of the disinterested Directors, cast in
person at a meeting called for the purpose of voting on such
approval; and the Agreement may not be amended in order to
increase materially the costs that the Portfolio may bear pursuant
to the Agreement without the approval of a majority of the holders
of the outstanding voting shares of the Portfolio or the class or
classes of the Portfolio affected. The Agreement may be
terminated (a) by the Fund without penalty at any time by a
majority vote of the holders of the outstanding voting securities,
of the Portfolio, voting separately by class, or by a majority
vote of the disinterested Directors, or (b) by the Principal
Underwriter. To terminate the Agreement, any party must give the
other party 60 days' written notice; to terminate the Rule 12b-1
Plan only, the Fund is not required to give prior written notice
to the Principal Underwriter. The Agreement will terminate
automatically in the event of its assignment.
The Glass-Steagall Act and other applicable laws may
limit the ability of a bank or other depository institution to
become an underwriter or distributor of securities. However, in
the opinion of the Portfolio's management, based on the advice of
counsel, these laws do not prohibit such depository institutions
from providing services for investment companies such as the
administrative, accounting and other services referred to in the
Agreement. In the event that a change in these laws prevented a
bank from providing such services, it is expected that other
24
service arrangements would be made and that shareholders would not
be adversely affected.
TRANSFER AGENCY AGREEMENT
Alliance Fund Services, Inc., an indirect wholly-owned
subsidiary of the Investment Adviser, located at 500 Plaza Drive,
Secaucus, New Jersey 07094, acts as the Portfolio's registrar,
transfer agent and dividend-disbursing agent for a fee based upon
the number of account holders for each of the Class A, Class B,
Class C shares and Advisor Class shares of the Portfolio, plus
reimbursement for out-of-pocket expenses. The transfer agency fee
with respect to the Class B shares and Class C shares is higher
than the transfer agency fee with respect to the Class A shares
and Advisor Class shares. For the fiscal year ended June 30,
1998, the Fund paid Alliance Fund Services, Inc. $820,628 for
transfer agency services.
_______________________________________________________________
PURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Prospectus(es) under "Purchase and Sale of Shares -- How to
Buy Shares."
GENERAL
Shares of the Portfolio are offered on a continuous basis
at a price equal to their net asset value plus an initial sales
charge at the time of purchase ("Class A shares"), with a
contingent deferred sales charge ("Class B shares"), 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
Portfolio that are offered subject to a sales charge are offered
through (i) investment dealers that are members of NASD 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 Portfolio 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
25
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by the
categories of investors described in clauses (i) through
(iv) below under "--Sales at Net Asset Value" (other than
officers, directors and present and full-time employees of
selected dealers or agents, or relatives of such person, or any
trust, individual retirement account or retirement plan account
for the benefit of such relative, none of whom is eligible on the
basis solely of such status to purchase and hold Advisor Class
shares), or (iv) by directors and present or retired full-time
employees of CB Richard Ellis, Inc. Generally, a fee-based
program must charge an asset- based or other similar fee and must
invest at least $250,000 in Advisor Class shares of the Fund in
order to be approved by the Principal Underwriter for investment
in Advisor Class shares.
Investors may purchase shares of the Portfolio either
through selected broker-dealers, agents, financial intermediaries
or other financial representatives, or directly through the
Principal Underwriter. A transaction, service, administrative or
other similar fee may be charged by your broker-dealer, agent,
financial intermediary or other financial representative with
respect to the purchase, sale or exchange of Class A, Class B,
Class C or Advisor Class shares made through such financial
representative. Such financial representative may also impose
requirements with respect to the purchase, sale or exchange of
shares that are different from, or in addition to, those imposed
by the Portfolio, including requirements as to the minimum initial
and subsequent investment amounts. Sales personnel of selected
dealers and agents distributing the Fund's Portfolio shares may
receive differing compensation for selling Class A, Class B,
Class C or Advisor Class shares.
The Portfolio may refuse any order for the purchase of
shares. The Portfolio reserves the right to suspend the sale of
the Portfolio's shares to the public in response to conditions in
the securities markets or for other reasons.
The public offering price of shares of the Portfolio is
their net asset value, plus, in the case of Class A shares, a
sales charge which will vary depending on the purchase alternative
chosen by the investor, as shown in the table below under "--Class
A shares." On each Fund business day on which a purchase or
redemption order is received by the Fund and trading in the types
of securities in which the Portfolio invests might materially
affect the value of Portfolio shares, the per share net asset
value is computed in accordance with the Fund's 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 Portfolio's
26
total assets, less its liabilities, by the total number of its
shares then outstanding. A Fund business day is any day on which
the Exchange is open for trading.
The respective per share net asset values of the Class A,
Class B, Class C and Advisor Class shares are expected to be
substantially the same. Under certain circumstances, however, the
per share net asset values of the Class B and Class C shares may
be lower than the per share net asset values of the Class A shares
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 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 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 representative, as applicable, receives the order after
the close of regular trading on the Exchange, the price will be
based on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of Portfolio shares, a
shareholder may place orders to purchase additional shares by
telephone if the shareholder has completed the appropriate portion
of the Subscription Application or an "Autobuy" application
27
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 Portfolio. Such
additional amounts may be utilized, in whole or in part, to
provide additional compensation to registered representatives who
sell shares of the Portfolio. On some occasions, cash or other
incentives will be conditioned upon the sale of a specified
minimum dollar amount of the shares of the Portfolio and/or other
Alliance Mutual Funds, as defined below, during a specific period
of time. On some occasions, such cash or other incentives may
take the form of payment for attendance at seminars, meals,
sporting events or theater performances, or payment for travel,
lodging and entertainment incurred in connection with travel taken
by persons associated with a dealer or agent to urban or resort
locations within or outside the United States. Such dealer or
agent may elect to receive cash incentives of equivalent amount in
lieu of such payments.
Class A, Class B, Class C and Advisor Class shares each
represent an interest in the same portfolio of investments of the
Portfolio, have the same rights and are identical in all respects,
except that (i) Class A shares bear the expense of the initial
sales charge (or contingent deferred sales charge, when
applicable) and Class B and Class C shares bear the expense of the
28
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 Portfolio submits to a vote
of the Class A shareholders, an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder
with respect to the Class A shares, then such amendment will also
be submitted to the Class B and Advisor Class shareholders, and
the Class A shareholders, the Class B shareholders and the Advisor
Class shareholders will vote separately by class, and (v) Class B
and Advisor Class shares are subject to a conversion feature.
Each class has different exchange privileges and certain different
shareholder service options available.
The 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 the purchase, the length of
time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the
anticipated life of their investment in the Portfolio, the
accumulated distribution services fee and contingent deferred
sales charges on Class B shares prior to conversion, or the
accumulated distribution services fee and contingent deferred
sales charges on Class C shares, would be less than the initial
sales charge and accumulated distribution services fee on Class A
shares purchased at the same time, and to what extent such
differential would be offset by the higher return of Class A
shares. Class A shares will normally be more beneficial than
Class B shares to the investor who qualifies for reduced initial
sales charges on Class A shares, as described below. In this
____________________
**** Advisor Class shares are sold only to investors described
above in this section under "-- General".
29
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 A
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 three-
year and one-year period, respectively. For example, based on
current fees and expenses, an investor subject to the 4.25%
initial sales charge would have to hold his or her investment
approximately seven years for the Class C distribution services
fee to exceed the initial sales charge plus the accumulated
distribution services fee of Class A shares. In this example, an
investor intending to maintain his or her investment for a longer
period might consider purchasing Class A shares. This example
does not take into account the time value of money, which further
reduces the impact of the Class C distribution services fees on
the investment, fluctuations in net asset value or the effect of
different performance assumptions.
Those investors who prefer to have all of their funds
invested initially but may not wish to retain Portfolio shares for
the three-year period during which Class B shares are subject to a
contingent deferred sales charge may find it more advantageous to
purchase Class C shares.
30
During the Fund's fiscal years ended June 30, 1998, 1997
and 1996, the aggregate amount of underwriting commission payable
with respect to shares of the Portfolio in each year was $836,243,
$693,220, and $534,472 , respectively. Of that amount, the
Principal Underwriter received amounts of $21,924, $32,721,
and $26,128 , respectively, representing that portion of the sales
charges paid on shares of the Portfolio sold during the year which
was not reallowed to selected dealers (and was, accordingly,
retained by the Principal Underwriter). During the Fund's fiscal
years ended in 1998, 1997 and 1996, the Principal Underwriter
received contingent deferred sales charges of $10,096, $-0- and $-
0-, respectively, on Class A shares, $291,831, $478,593 and
$1,113,832, respectively, on Class B shares, and $31,629, $19,275
and $-0-, respectively, on Class C shares.
CLASS A SHARES
The public offering price of Class A shares is the net
asset value plus a sales charge, as set forth below.
Sales Charge
Discount or
Commission
As % of to Dealers
As % of the or Agents
Net Public As % of
Amount of Amount Offering Offering
Purchase Invested Price Price
Less than
$100,000....... 4.44% 4.25% 4.00%
$100,000 but
less than
$250,000 ...... 3.36 3.25 3.00
$250,000 but
less than
$500,000....... 2.30 2.25 2.00
$500,000 but
less than
$1,000,000*.... 1.78 1.75 1.50
____________________
* There is no initial sales charge on transactions of $1,000,000
or more.
With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge equal to 1% of the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
31
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 or agents for selling Class A
shares. With respect to purchases of $1,000,000 or more made
through selected dealers or agents, the Investment Adviser may,
pursuant to the Distribution Services Agreement described above,
pay such dealers or agents from its own resources a fee of up to
.25 of 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 Portfolio receives the entire net asset
value of its Class A shares sold to investors. The Principal
Underwriter's commission is the sales charge shown above less any
applicable discount or commission "reallowed" to selected dealers
and agents. The Principal Underwriter will reallow discounts to
selected dealers and agents in the amounts indicated in the table
above. In this regard, the Principal Underwriter may elect to
reallow the entire sales charge to selected dealers and agents for
all sales with respect to which orders are placed with the
Principal Underwriter. A selected dealer who receives reallowance
32
in excess of 90% of such a sales charge may be deemed to be an
"underwriter" under the Securities Act.
Set forth below is an example of the method of computing
the offering price of the Class A shares. The example assumes a
purchase of Class A shares of the Portfolio aggregating less than
$100,000 subject to the schedule of sales charges set forth above
at a price based upon the net asset value of Class A shares of the
Portfolio on December 31, 1998.
Net Asset Value per Class A Share
at December 31, 1998 $___
Per Share Sales Charge - 4.25%
of offering price (4.44% ___
of net asset value per share) _____
Class A Per Share Offering Price
to the Public $____
=====
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 Portfolio
into a single "purchase," if the resulting "purchase" totals at
least $100,000. The term "purchase" refers to: (i) a single
purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of
21 years purchasing shares of the Portfolio for his, her or their
own account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single
fiduciary account although more than one beneficiary is involved;
or (iii) a single purchase for the employee benefit plans of a
single employer. The term "purchase" also includes purchases by
any "company," as the term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Portfolio or shares of other
registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals
whose sole organizational nexus is that the participants therein
are credit card holders of a company, policy holders of an
33
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
-U.S. Government Portfolio
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International Premier Growth Fund, Inc.
Alliance International Fund
Alliance Limited Maturity Government Fund, Inc.
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance Municipal Income Fund, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
34
The Alliance Portfolios
- Alliance Growth Fund
- Alliance Conservative Investors Fund
- Alliance Growth Investors Fund
- Alliance Short-Term U.S. Government Fund
Prospectuses for the Alliance Mutual Funds may be
obtained without charge by contacting Alliance Fund Services, Inc.
at the address or the "For Literature" telephone number shown on
the front cover of this Statement of Additional Information.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). An
investor's purchase of additional Class A shares of the Portfolio
may qualify for a Cumulative Quantity Discount. The applicable
sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all shares of the Portfolio
held by the investor and (b) all shares of any other
Alliance Mutual Fund held by the investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder eligible
to combine his or her purchase with that of the
investor into a single "purchase" (see above).
For example, if an investor owned shares of an Alliance
Mutual Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of the Portfolio worth
an additional $100,000, the sales charge for the $100,000,
purchase would be at the 2.25% rate applicable to a single
$300,000 purchase of shares of the Portfolio, 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 Portfolio or any other
Alliance Mutual Fund. Each purchase of shares under a Statement
of Intention will be made at the public offering price or prices
35
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 Portfolio or any other Alliance Mutual Fund made
not more than 90 days prior to the date that the investor signs a
Statement of Intention; however, the 13-month period during which
the Statement of Intention is in effect will begin on the date of
the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege
described above may purchase shares of the Alliance Mutual Funds
under a single Statement of Intention. For example, if at the
time an investor signs a Statement of Intention to invest at least
$100,000 in Class A shares of the Portfolio, the investor and the
investor's spouse each purchase shares of the Portfolio worth
$20,000 (for a total of $40,000), it will only be necessary to
invest a total of $60,000 during the following 13 months in shares
of the Portfolio or any other Alliance Mutual Fund, to qualify for
the 3.25% sales charge on the total amount being invested (the
sales charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation
upon the investor to purchase the full amount indicated. The
minimum initial investment under a Statement of Intention is 5% of
such amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount
indicated is not purchased, and such escrowed shares will be
involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Portfolio shares, are not subject to
escrow. When the full amount indicated has been purchased, the
escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated on the Statement of
Intention and qualifies for a further reduced sales charge, the
sales charge will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in the sales
charge will be used to purchase additional shares of the Portfolio
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 Portfolio should complete the appropriate portion of the
Subscription Application found in the Prospectus while current
Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting Alliance Fund Services, Inc.
at the address or telephone numbers shown on the cover of this
Statement of Additional Information.
36
CERTAIN RETIREMENT PLANS. Multiple participant payroll
deduction retirement plans may also purchase shares of the
Portfolio 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 Portfolio 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 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
Portfolio to be redeemed or repurchased may reinvest all or any
portion of the redemption or repurchase proceeds in Class A shares
of the Portfolio at net asset value without any sales charge,
provided that (i) such reinvestment is made within 120 calendar
days after the redemption or repurchase date, and (ii) for Class B
shares, a contingent deferred sales charge has been paid and the
Principal Underwriter has approved, at its discretion, the
reinvestment of such shares. Shares are sold to a reinvesting
shareholder at the net asset value next determined as described
above. A reinstatement pursuant to this privilege will not cancel
the redemption or repurchase transaction; therefore, any gain or
loss so realized will be recognized for federal income tax
purposes except that no loss will be recognized to the extent that
the proceeds are reinvested in shares of the Portfolio 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 Portfolio may sell its
Class A shares at net asset value (i.e., without an initial sales
charge) and without a contingent deferred sales charge to certain
categories of investors, including: (i) investment management
clients of the Investment 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 Investment Adviser; present or retired full-time employees of
the Investment Adviser, the Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates; officers and directors of
ACMC, the Principal Underwriter, Alliance Fund Services, Inc. and
their affiliates; officers, directors and present and full-time
37
employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives") of
any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or
relative; or the estate of any such person or relative, if such
shares are purchase for investment purposes (such shares may not
be resold except to the Fund); (iii) the Investment Adviser,
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates; certain employee benefit plans for employees of the
Investment Adviser, the Principal Underwriter, Alliance Fund
Services, Inc. and their affiliates; (iv) registered investment
advisers or other financial intermediaries who charge a
management, consulting or other fee for their service and who
purchase shares through a broker or agent approved by the
Principal Underwriter and clients of such registered investment
advisers or financial intermediaries whose accounts are linked to
the master account of such investment adviser or financial
intermediary on the books of such approved broker or agent;
(v) persons participating in a fee-based program, sponsored and
maintained by a registered broker-dealer or other financial
intermediary and approved by the Principal Underwriter, pursuant
to which such persons pay an asset-based fee to such broker-dealer
or financial intermediary, or its affiliate or agent, for services
in the nature of investment advisory or administrative services;
(vi) persons who establish to the Principal Underwriter's
satisfaction that they are investing, within such time period as
may be designated by the Principal Underwriter, proceeds of
redemption of shares of such other registered investment companies
as may be designated from time to time by the Principal
Underwriter; and (vii) employer-sponsored qualified pension or
profit-sharing plans (including Section 401(k) plans), custodial
accounts maintained pursuant to Section 403(b)(7) retirement plans
and individual retirement accounts (including individual
retirement accounts to which simplified employee pension ("SEP")
contributions are made), if such plans or accounts are established
or administered under programs sponsored by administrators or
other persons that have been approved by the Principal
Underwriter.
CLASS B SHARES
Investors may purchase Class B shares at the public
offering price equal to the net asset value per share of the
Class B shares on the date of purchase without the imposition of a
sales charge at the time of purchase. The Class B shares are sold
without an initial sales charge so that the Portfolio 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
38
Principal Underwriter related to providing distribution-related
services to the Portfolio in connection with the sale of the
Class B shares, such as the payment of compensation to selected
dealers and agents for selling Class B shares. The combination of
the contingent deferred sales charge and the distribution services
fee enables the Portfolio to sell the Class B shares without a
sales charge being deducted at the time of purchase. The higher
distribution services fee incurred by Class B shares will cause
such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
CONTINGENT DEFERRED SALES CHARGE. Class B shares that
are redeemed within three years of purchase will be subject to a
contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price.
In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
To illustrate, assume that an investor purchased 100
Class B shares at $10 per share (at a cost of $1,000) and in the
second year after purchase, the net asset value per share is $12
and, during such time, the investor has acquired 10 additional
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 the
charge because of dividend reinvestment. With respect to the
remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase as set forth
below).
The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of
payment for the purchase of Class B shares until the time of
redemption of such shares.
Contingent Deferred Sales
Year Charge as a % of Dollar
Since Purchase Amount Subject to Charge
First 3.0%
Second 2.0%
Third 1.0%
Thereafter None
39
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 Internal Revenue Code of 1986, as amended (the
"Code"), of a shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who
has attained the age of 70-1/2, (iii) that had been purchased by
present or former Directors of the Fund, by the relative of any
such person, by any trust, individual retirement account or
retirement plan account for the benefit of any such person or
relative, or by the estate of any such person or relative, or
(iv) pursuant to a systematic withdrawal plan (see "Shareholder
Services--Systematic Withdrawal Plan" below).
CONVERSION FEATURE. Six years after the end of the
calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A
shares and will no longer be subject to a higher distribution
services fee. Such conversion will occur on the basis of the
relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of
the conversion feature is to reduce the distribution services fee
paid by holders of Class B shares that have been outstanding long
enough for the Principal Underwriter to have been compensated for
distribution expenses incurred in the sale of such shares.
For purposes of conversion to Class A, Class B shares
purchased through the reinvestment of dividends and distributions
paid in respect of Class B shares in a shareholder's account will
be considered to be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in
the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to
Class A.
The conversion of Class B shares to Class A shares is
subject to the continuing availability of an opinion of counsel to
the effect that the conversion of Class B shares to Class A shares
does not constitute a taxable event under federal income tax law.
The conversion of Class B shares to Class A shares may be
40
suspended if such an opinion is no longer available at the time
such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee for
an indefinite period which may extend beyond the period ending six
years after the end of the calendar month in which the
shareholder's purchase order was accepted.
CLASS C SHARES
Investors may purchase Class C shares at the public
offering price equal to the net asset value per share of the
Class C shares on the date of purchase without the imposition of a
sales charge either at the time of purchase or, as long as the
shares are held for one year or more, upon redemption. Class C
shares are sold without an initial sales charge so that the
Portfolio will receive the full amount of the investor's purchase
payment and, as long as the shares are held for one year or more,
without a contingent deferred sales charge so that the investor
will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution
services fee enables the Portfolio to sell Class C shares without
either an initial or contingent deferred sales charge, as long as
the shares are held one year or more. Class C shares do not
convert to any other class of shares of the Portfolio and incur
higher distribution services fees and transfer agency costs than
Class A shares and Advisor Class shares, and will thus have a
higher expense ratio and pay correspondingly lower dividends than
Class A shares and Advisor Class shares.
Class C shares that are redeemed within one year of
purchase will be subject to a contingent deferred sales charge of
1%, charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial purchase
price. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
The contingent deferred sales charge on Class C shares will be
waived on certain redemptions, as described above under "--Class B
Shares."
In determining the contingent deferred sales charge
applicable to a redemption of Class C shares, it will be assumed
that the redemption is, first, of any shares that are not subject
to a contingent deferred sales charge (for example, because the
shares have been held beyond the period during which the charge
applies or were acquired upon the reinvestment of dividends or
distributions) and, second, of shares held longest during the time
they are subject to the sales charge.
41
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
Portfolio 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 Portfolio to sell the Class C shares without a sales charge
being deducted at the time of purchase. The higher distribution
services fee incurred by Class C shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those
related to Class A shares and Advisor Class shares.
CONVERSION OF ADVISOR CLASS SHARES TO CLASS A SHARES
Advisor Class shares may be held solely through the fee-
based program accounts, employee benefit plans and registered
investment advisory or other financial intermediary relationships
described above under "Purchase of Shares--General," and by
investment advisory clients of, and by certain other persons
associated with, the Investment Adviser and its affiliates or the
Fund. If (i) a holder of Advisor Class shares ceases to
participate in a fee-based program or plan, or to be associated
with the investment adviser or financial intermediary that
satisfies the requirements to purchase shares set forth under
"Purchase of Shares--General" or (ii) the holder is otherwise no
longer eligible to purchase Advisor Class shares as described in
the Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically and
without notice to the shareholder, other than the notice contained
in the Advisor Class Prospectus and this Statement of Additional
Information, to Class A shares of the Fund during the calendar
month following the month in which the Fund is informed of the
occurrence of the Conversion Event. The failure of a shareholder
or a fee-based program to satisfy the minimum investment
requirements to purchase Advisor Class shares will not constitute
a Conversion Event. The conversion would occur on the basis of
the relative net asset values of the two classes and without the
imposition of any sales load, fee or other charge. Class A shares
currently bear a .30% distribution services fee and have a higher
expense ratio than Advisor Class shares. As a result, Class A
shares may pay correspondingly lower dividends and have a lower
net asset value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of counsel
to the effect that the conversion of Advisor Class shares to Class
A shares does not constitute a taxable event under federal income
tax law. The conversion of Advisor Class shares to Class A shares
42
may be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, the Advisor
Class shareholder would be required to redeem his or her Advisor
Class shares, which would constitute a taxable event under federal
income tax law.
_______________________________________________________________
REDEMPTION AND REPURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the Portfolio's Prospectus(es) under "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 Portfolio 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 of the Portfolio tendered to it, as described below, at a
redemption price equal to their net asset value as next computed
following the receipt of shares tendered for redemption in proper
form. Except for any contingent deferred sales charge which may
be applicable to Class A shares, Class B shares or Class C shares,
there is no redemption charge. Payment of the redemption price
will be made within seven days after the Fund's receipt of such
tender for redemption. If a shareholder is in doubt about what
documents are required by his or her fee-based program or employee
benefit plan, the shareholder should contact his or her financial
representative.
The right of redemption may not be suspended or the date
of payment upon redemption postponed for more than seven days
after shares are tendered for redemption, except for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the Commission determines
that trading thereon is restricted, or for any period during which
an emergency (as determined by the Commission) exists as a result
of which disposal by the Portfolio of securities owned by it is
not reasonably practicable or as a result of which it is not
reasonably practicable for the Portfolio 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 Portfolio.
43
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 Portfolio's portfolio
securities at the time of such redemption or repurchase.
Redemption proceeds on Class A, Class B and Class C shares will
reflect the deduction of the contingent deferred sales charge, if
any. Payment (either in cash or in portfolio securities) received
by a shareholder upon redemption or repurchase of his or her
shares, assuming the shares constitute capital assets in his or
her hands, will result in long-term or short-term capital gains
(or loss) depending upon the shareholder's holding period and
basis in respect of the shares redeemed.
To redeem shares of the Portfolio for which no share
certificates have been issued, the registered owner or owners
should forward a letter to the Portfolio 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 Portfolio with the request that the shares
represented thereby, or a specified portion thereof, be redeemed.
The stock assignment form on the reverse side of each stock
certificate surrendered to the Portfolio for redemption must be
signed by the registered owner or owners exactly as the registered
name appears on the face of the certificate or, alternatively, a
stock power signed in the same manner may be attached to the 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
Portfolio shareholder is entitled to request redemption by
electronic funds transfer of shares for which no share
certificates have been issued by telephone at (800) 221-5672 by a
shareholder who has completed the appropriate portion of the
Subscription Application or, in the case of an existing
shareholder, an "Autosell" application obtained from Alliance Fund
Services, Inc. A telephone redemption by electronic funds
transfer may not exceed $100,000 (except for certain omnibus
accounts), and must be made by 4:00 p.m. Eastern time on a Fund
business day as defined above. Proceeds of telephone redemptions
will be sent by Electronic Funds Transfer to a shareholder's
designated bank account at a bank selected by the shareholder that
is a member of the NACHA.
44
TELEPHONE REDEMPTION BY CHECK. Each Portfolio
shareholder is eligible to request redemption by check of
Portfolio shares for which no stock certificates have been issued
by telephone at (800) 221-5672 before 4:00 p.m. Eastern time on a
Fund business day in an amount not exceeding $50,000. 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 Investment 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 Portfolio 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
45
net asset value determined as of such close of regular trading on
that day if received by the Principal Underwriter prior to its
close of business on that day (normally 5:00 p.m. Eastern time).
The financial intermediary or selected dealer or agent is
responsible for transmitting the request to the Principal
Underwriter by 5:00 p.m. Eastern time (certain selected dealers,
agents or financial representatives may enter into operating
agreements permitting them to transmit purchase information to the
Principal Underwriter after 5:00 p.m. Eastern time and receive
that day's net asset value). If the financial intermediary or
selected dealer or agent fails to do so, the shareholder's right
to receive that day's closing price must be settled between the
shareholder and the dealer or agent. A shareholder may offer
shares of the Portfolio to the Principal Underwriter either
directly or through a selected dealer or agent. Neither the Fund
nor the Principal Underwriter charges a fee or commission in
connection with the repurchase of shares (except for the
contingent deferred sales charge, if any, with respect to Class A,
Class B and Class C shares). Normally, if shares of the Portfolio
are offered through a financial intermediary or selected dealer or
agent, the repurchase is settled by the shareholder as an ordinary
transaction with or through the selected dealer or agent, who may
charge the shareholder for this service. The repurchase of shares
of the Portfolio as described above is a voluntary service of the
Fund and the Fund may suspend or terminate this practice at any
time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days written notice to increase the
account value before the account is closed. No contingent
deferred sales charge will be deducted from the proceeds of this
redemption. In the case of a redemption or repurchase of shares
of the Portfolio recently purchased by check, redemption proceeds
will not be made available until the Fund is reasonably assured
that the check has cleared, normally up to 15 calendar days
following the purchase date.
______________________________________________________________
SHAREHOLDER SERVICES
______________________________________________________________
The following information supplements that set forth in
the Portfolio's Prospectus(es) under "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
46
program your fee-based program may impose requirements with
respect to the purchase, sale or exchange of Advisor Class shares
of the Portfolio that are different from those described herein.
A transaction fee may be charged by your financial 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 Portfolio through an
automatic investment program utilizing electronic funds transfer
drawn on the investor's own bank account. Under such a program,
pre-authorized monthly drafts for a fixed amount (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 Investment
Adviser). In addition, (i) present officers and full-time
employees of the Investment Adviser, (ii) present Directors or
Trustees of any Alliance Mutual Fund and (iii) certain employee
benefit plans for employees of the Investment Adviser, the
Principal Underwriter, Alliance Fund Services, Inc. and their
affiliates may, on a tax-free basis, exchange Class A shares of
the Fund for Advisor Class shares of the Fund. Exchanges of
shares are made at the net asset value next determined and without
sales or service charges. Exchanges may be made by telephone or
written request. Telephone exchange requests must be received by
Alliance Fund Services, Inc. by 4:00 p.m. Eastern time on a Fund
business day in order to receive that day's net asset value.
Shares will continue to age without regard to exchanges
for purposes 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
47
shares"). When redemption occurs, the CDSC applicable to the
original shares is applied.
Please read carefully the prospectus of the mutual fund
into which you are exchanging before submitting the request. Call
Alliance Fund Services, Inc. at (800) 221-5672 to exchange
uncertificated shares. Except with respect to exchanges of Class
A shares of the Portfolio for Advisor Class shares of the
Portfolio, 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 Portfolio shareholder, and the shareholder's
selected dealer, agent or financial representative, as applicable,
are authorized to make telephone requests for exchanges unless
Alliance Fund Services, Inc. receives written instruction to the
contrary from the shareholder, or the shareholder declines the
privilege by checking the appropriate box on the Subscription
Application found in the Prospectus. Such telephone requests
cannot be accepted with respect to shares then represented by
stock certificates. Shares acquired pursuant to a telephone
request for exchange will be held under the same account
registration as the shares redeemed through such exchange.
Eligible shareholders desiring to make an exchange should
telephone Alliance Fund Services, Inc. with their account number
and other details of the exchange, at (800) 221-5672 before
4:00 p.m., Eastern time, on a Fund business day as defined above.
Telephone requests for exchange received before 4:00 p.m. Eastern
time on a Fund business day will be processed as of the close of
business on that day. During periods of drastic economic or
48
market developments, such as the market break of October 1987, it
is possible that shareholders would have difficulty in reaching
Alliance Fund Services, Inc. by telephone (although no such
difficulty was apparent at any time in connection with the 1987
market break). If a shareholder were to experience such
difficulty, the shareholder should issue written instructions to
Alliance Fund Services, Inc. at the address shown on the cover of
this Statement of Additional Information.
A shareholder may elect to initiate a monthly "Auto
Exchange" whereby a specified dollar amount's worth of his or her
Fund shares (minimum $25) is automatically exchanged for shares of
another Alliance Mutual Fund. Auto Exchange transactions normally
occur on the 12th day of each month, or the Fund business day
prior thereto.
None of the Alliance Mutual Funds, the Investment
Adviser, the Principal Underwriter or Alliance Fund Services, Inc.
will be responsible for the authenticity of telephone requests for
exchanges that the Fund reasonably believes to be genuine. The
Fund will employ reasonable procedures in order to verify that
telephone requests for exchanges are genuine, including, among
others, recording such telephone instructions and causing written
confirmations of the resulting transactions to be sent to
shareholders. If the Fund did not employ such procedures, it
could be liable for losses arising from unauthorized or fraudulent
telephone instructions. Selected dealers, agents or financial
representatives, as applicable, may charge a commission for
handling telephone requests for exchanges.
The exchange privilege is available only in states where
shares of the Alliance Mutual Funds being acquired may be legally
sold. Each Alliance Mutual Fund reserves the right, at any time
on 60 days' notice to its shareholders, to reject any order to
acquire its shares through exchange or otherwise to modify,
restrict or terminate the exchange privilege.
RETIREMENT PLANS
The Portfolio 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 Portfolio has available
forms of such plans pursuant to which investments can be made in
the Portfolio 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:
49
Alliance Fund Services, Inc.
Retirement Plans
P.O. Box 1520
Secaucus, N.J. 07096-1520
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"). Individuals who
receive compensation, including earnings from self-employment, are
entitled to establish and make contributions to an IRA. Taxation
of the income and gains paid to an IRA by the Portfolio is
deferred until distribution from the IRA. An individual's
eligible contributions 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 the qualified plan reaches $1
million on or before December 15 in any year, all Class B or Class
C shares of the Portfolio held by the plan can be exchanged at the
plan's request, without any sales charge, for Class A shares of
the Portfolio.
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
50
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 Portfolio.
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.
SYSTEMATIC WITHDRAWAL PLAN
GENERAL. Any shareholder who owns or purchases shares of
the Portfolio having a current net asset value of at least $4,000
(for quarterly or less frequent payments), $5,000 (for bi-monthly
payments) or $10,000 (for monthly payments) may establish a
systematic withdrawal plan under which the shareholder will
periodically receive a payment in a stated amount of not less than
$50 on a selected date. Systematic withdrawal plan participants
must elect to have their dividends and distributions from the
Portfolio automatically reinvested in additional shares of the
Portfolio.
Shares of the Portfolio owned by a participant in the
Fund's systematic withdrawal plan will be redeemed as necessary to
meet withdrawal payments and such payments will be subject to any
taxes applicable to redemptions and, except as discussed below,
any applicable contingent deferred sales charge. Shares acquired
with reinvested dividends and distributions will be liquidated
first to provide such withdrawal payments and thereafter other
shares will be liquidated to the extent necessary, and depending
upon the amount withdrawn, the investor's principal may be
depleted. A systematic withdrawal plan may be terminated at any
time by the shareholder or the Portfolio.
Withdrawal payments will not automatically end when a
shareholder's account reaches a certain minimum level. Therefore,
redemptions of shares under the plan may reduce or even liquidate
a shareholder's account and may subject the shareholder to the
Portfolio's involuntary redemption provisions. See "Redemption
and Repurchase of Shares--General." Purchases of additional
shares concurrently with withdrawals are undesirable because of
sales charges when purchases are made. While an occasional lump-
sum investment may be made by a shareholder of Class A shares who
is maintaining a systematic withdrawal plan, such investment
should normally be an amount equivalent to three times the annual
withdrawal or $5,000, whichever is less.
Payments under a systematic withdrawal plan may be made
by check or electronically via the Automated Clearing House
("ACH") network. Investors wishing to establish a systematic
withdrawal plan in conjunction with their initial investment in
51
shares of the Portfolio should complete the appropriate portion of
the Subscription Application found in the Prospectus, while
current Portfolio shareholders desiring to do so can obtain an
application form by contacting Alliance Fund Services, Inc. at the
address or the "For Literature" telephone number shown on the
cover of this Statement of Additional Information.
CDSC Waiver for Class B Shares 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 these limitations will be
subject to any otherwise applicable contingent deferred sales
charge.
DIVIDEND DIRECTION PLAN
A shareholder who already maintains, in addition to his
or her Class A, Class B, Class C or Advisor Class Portfolio
accounts, Class A, Class B, Class C or Advisor Class accounts with
one or more other Alliance Mutual Funds may direct that income
dividends and/or capital gains paid on his or her Class A,
Class B, Class C or Advisor Class Portfolio shares be
automatically reinvested, in any amount, without the payment of
any sales or service charges, in shares of the same class of such
other Alliance Mutual Fund(s). Further information can be
obtained by contacting Alliance Fund Services, Inc. at the address
or the "For Literature" telephone number shown on the cover of
this Statement of Additional Information. Investors wishing to
establish a dividend direction plan in connection with their
initial investment should complete the appropriate section of the
Subscription Application found in the Prospectus. Current
shareholders should contact Alliance Fund Services, Inc. to
establish a dividend direction plan.
52
STATEMENTS AND REPORTS
Each shareholder of the Portfolio receives semi-annual
and annual reports which include a portfolio of investments,
financial statements and, in the case of the annual report, the
report of the Fund's independent auditors, Ernst & Young LLP, as
well as a monthly cumulative dividend statement and a confirmation
of each purchase and redemption. By contacting his or her broker
or Alliance Fund Services, Inc., a shareholder can arrange for
copies of his or her account statements to be sent to another
person.
CHECKWRITING
A new Class A or Class C investor may fill out the
Signature Card which is included in the Prospectus to authorize
the Fund to arrange for a checkwriting service through State
Street Bank and Trust Company (the "Bank") to draw against Class A
or Class C shares of the Portfolio redeemed from the investor's
account. Under this service, checks may be made payable to any
payee in any amount not less than $500 and not more than 90% of
the net asset value of the Class A or Class C shares in the
investor's account (excluding for this purpose the current month's
accumulated dividends and shares for which certificates have been
issued). A Class A or Class C shareholder wishing to establish
this checkwriting service subsequent to the opening of his or her
Portfolio account should contact the Portfolio by telephone or
mail. Corporations, fiduciaries and institutional investors are
required to furnish a certified resolution or other evidence of
authorization. This checkwriting service will be subject to the
Bank's customary rules and regulations governing checking
accounts, and the Portfolio and the Bank each reserve the right to
change or suspend the checkwriting service. There is no charge to
the shareholder for the initiation and maintenance of this service
or for the clearance of any checks.
When a check is presented to the Bank for payment, the
Bank, as the shareholder's agent, causes the Fund to redeem, at
the net asset value next determined, a sufficient number of full
and fractional shares of the Portfolio in the shareholder's
account to cover the check. Because the level of net assets in a
shareholder's account constantly changes due, among various
factors, to market fluctuations, a shareholder should not attempt
to close his or her account by use of a check. In this regard,
the Bank has the right to return checks (marked "insufficient
funds") unpaid to the presenting bank if the amount of the check
exceeds 90% of the assets in the account. Canceled (paid) checks
are returned to the shareholder. The checkwriting service enables
the shareholder to receive the daily dividends declared on the
shares to be redeemed until the day that the check is presented to
the Bank for payment.
53
_______________________________________________________________
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 Investment Adviser certain
of the Board's duties with respect to the following procedures.
Readily marketable securities listed on the Exchange are valued,
except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the Exchange on the business day
as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the quoted bid
prices on such day. If no bid prices are quoted on such day, then
the security is valued at the mean of the bid and asked prices at
the close of the Exchange on such day as obtained from one or more
dealers regularly making a market in such security. Where a bid
and asked price can be obtained from only one such dealer, such
security is valued at the mean of the bid and asked price obtained
from such dealer unless it is determined that such price does not
represent current market value, in which case the security shall
be valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors. Securities for
which no bid and asked price quotations are readily available are
valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors. Readily
marketable securities not listed on the Exchange but listed on
other national securities exchanges, and portfolio securities not
traded on the Exchange but traded on one or more other national
securities exchanges are valued in accordance with these
procedures by reference to the principal exchange on which the
securities are traded.
Readily marketable securities traded only in the over-
the-counter market, and debt securities listed on a U.S. national
securities exchange whose primary market is believed to be over-
54
the-counter, are valued at the mean of the bid and asked prices at
the close of the Exchange on such day as obtained from two or more
dealers regularly making a market in such security. Where a bid
and asked price can be obtained from only one such dealer, such
security is valued at the mean of the bid and asked price obtained
from such dealer unless it is determined that such price does not
represent current market value, in which case the security shall
be valued in good faith at fair value by, or in accordance with
procedures established by, the Board of Directors.
Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that
day, such securities will be Valued at the closing bid prices on
that day.
Open futures contracts and options thereon will be valued
using the closing settlement price or, in the absence of such a
price, the most recent quoted bid price. If there are no
quotations available for the day of valuations, the last available
closing settlement price will be used.
U.S. Government Securities and other debt instruments
having 60 days or less remaining until maturity are valued at
amortized cost if their original maturity was 60 days or less, or
by amortizing their fair value as of the 61st day prior to
maturity if their original term to maturity exceeded 60 days
(unless in either case the Board of Directors determines that this
method does not represent fair value).
Fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed
to reflect the fair market value of such securities. The prices
provided by a pricing service take into account many factors,
including institutional size trading in similar groups-of
securities and any developments related to specific securities.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of Directors.
The Board of Directors may suspend the determination of
the Fund's net asset value (and the offering and sales of shares),
subject to the rules of the Commission and other governmental
rules and regulations, at a time when: (1) the Exchange is closed,
other than customary weekend and holiday closings, (2) an
emergency exists as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the Commission by order permits a
suspension of the right of redemption or a postponement of the
date of payment on redemption.
55
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.
______________________________________________________________
PORTFOLIO TRANSACTIONS
______________________________________________________________
Subject to the general supervision of the Board of
Directors of the Fund, the Investment Adviser is responsible for
the investment decisions and the placing of the orders for
portfolio transactions for the Portfolio. The Portfolio's
portfolio transactions occur primarily with issuers, underwriters
or major dealers acting as principals. Such transactions are
normally on a net basis which do not involve payment of brokerage
commissions. The cost of securities purchased from an underwriter
usually includes a commission paid by the issuer to the
underwriter; transactions with dealers normally reflect the spread
between bid and asked prices. Premiums are paid with respect to
options purchased by the Portfolio, and brokerage commissions are
payable with respect to transactions in exchange- traded interest
rate futures contracts.
The Investment Adviser makes the decisions for the
Portfolio and determines the broker or dealer to be used in each
specific transaction. Most transactions for the Portfolio,
including transactions in listed securities, are executed in the
over-the-counter market by approximately fifteen (15) principal
market maker dealers with whom the Investment Adviser maintains
regular contact. Most transactions made by the Portfolio will be
principal transactions at net prices and the Portfolio will incur
little or no brokerage costs. Where possible, securities will be
purchased directly from the issuer or from an underwriter or
market maker for the securities unless the Investment Adviser
56
believes a better price and execution is available elsewhere.
Purchases from underwriters of newly-issued securities for
inclusion in the Portfolio usually will include a concession paid
to the underwriter by the issuer and purchases from dealers
serving as market makers will include the spread between the bid
and asked price.
Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Portfolio may consider sales of its
shares as a factor in the selection of dealers to enter into
portfolio transactions with the Portfolio. The Portfolio has no
obligation to enter into transactions in securities with any
broker, dealer, issuer, underwriter or other entity. In placing
orders, it is the policy of the Fund to obtain the best price and
execution for its transactions. Where best price and execution
may be obtained from more than one broker or dealer, the
Investment Adviser may, in its discretion, purchase and sell
securities through brokers and dealers who provide research,
statistical and other information to the Investment Adviser. Such
services may be used by the Investment Adviser for all of its
investment advisory accounts and, accordingly, not all such
services may be used by the Investment Adviser in connection with
the Portfolio. There may be occasions where the transaction cost
charged by a broker may be greater than that which another broker
may charge if the Fund determines in good faith that the amount of
such transaction cost is reasonable in relationship to the value
of the brokerage and research and statistical services provided by
the executing broker. During the fiscal years ended June 30,
1996, 1997 and 1998, the Portfolio incurred no brokerage
commissions.
______________________________________________________________
TAXES
______________________________________________________________
The Fund advises the Portfolio's shareholders annually as
to the Federal income tax status of dividends and distributions
made to a Portfolio's shareholders during each calendar year.
GENERAL. The Portfolio intends for each taxable year to
qualify to be taxed as a "regulated investment company" under the
Code. To so qualify, the Portfolio must, among other things,
(i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or
securities or foreign currency, or certain other income
(including, but not limited to, gains from options, futures and
forward contracts) derived with respect to its business of
investing in stock, securities or currency; and (ii) diversify its
57
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 Portfolio's assets is represented by cash, cash
items, U.S. Government Securities, securities of other regulated
investment companies and other securities with respect to which
the Portfolio's investment is limited, in respect of any one
issuer, to an amount not greater than 5% of the Portfolio's total
assets and 10% of the outstanding voting securities of such issuer
and (b) not more than 25% of the value of the Portfolio's assets
is invested in securities of any one issuer (other than U.S.
Government Securities or securities of other regulated investment
companies). These requirements, among other things, may limit the
Portfolio's ability to write and purchase options, to enter into
interest rate swaps and to purchase or sell interest rate caps or
floors.
If the Portfolio qualifies as a regulated investment
company for any taxable year and makes timely distributions to its
shareholders of 90% or more of its net investment income for that
year (calculated without regard to its net capital gain, i.e., the
excess of its net long-term capital gain over its net short-term
capital loss), it will not be subject to federal income tax on the
portion of its taxable income for the year (including any net
capital gain) that it distributes to shareholders.
The Portfolio 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
shareholders equal to the sum of (i) 98% of its ordinary income
for such year, (ii) 98% of its capital gain net income and foreign
currency gains for the twelve-month period ending on October 31 of
such year, and (iii) any ordinary income or capital gain net
income from the preceding calendar year that was not distributed
during such year. For this purpose, income or gain retained by
the Portfolio that is subject to corporate income tax will be
considered to have been distributed by the Portfolio 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 but actually paid during the following
January will be treated as if paid by the Portfolio on December 31
of such 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 information set forth in the following discussion
relates solely to the significant United States federal income tax
consequences of dividends and distributions by the Portfolio and
of sales or redemptions of Portfolio shares, and assumes that the
Portfolio qualifies to be taxed as a regulated investment company.
Investors should consult their own tax counsel with respect to the
specific tax consequences of their being shareholders of the
58
Portfolio, including the effect and applicability of federal,
state and local tax laws to their own particular situation and the
possible effects of changes therein.
DIVIDENDS AND DISTRIBUTIONS. The Portfolio intends to
make timely distributions of the Portfolio's taxable income
(including any net capital gain) so that the Portfolio will not be
subject to federal income and excise taxes. Dividends of the
Portfolio's net ordinary income and distributions of any net
realized short-term capital gain are 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 Portfolio. Any dividend or distribution received by
a shareholder on shares of the Portfolio will have the effect of
reducing the net asset value of such shares by the amount of such
dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of such shares by a shareholder,
although in effect a return of capital to that particular
shareholder, would be taxable to him as described above.
Dividends are taxable in the manner discussed regardless of
whether they are paid to the shareholder in cash or are reinvested
in additional shares of the Portfolio.
Since the Portfolio expects to derive substantially all
of its gross income (exclusive of capital gains) from sources
other than dividends, it is expected that none of the Portfolio's
dividends or distributions will qualify for the dividends-received
deduction for corporations.
A dividend or capital gains distribution with respect to
shares of the Portfolio held by a tax-deferred or qualified
retirement plan, such as an IRA, 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.
After the end of the taxable year, the Portfolio will
notify shareholders of the federal income tax status of any
distributions made by the Portfolio to shareholders during such
year.
SALES AND REDEMPTIONS. Any gain or loss arising from a
sale or redemption of Portfolio shares generally will be capital
gain or loss except in the case of a dealer or a financial
institution, and will be long-term capital gain or loss if such
shareholder has held such shares for more than one year at the
time of the sale or redemption; otherwise it will be short-term
59
capital gain or loss. If a shareholder has held shares in the
Portfolio 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 Portfolio will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the shares are
sold or exchanged. For this purpose, acquisitions pursuant to the
Dividend Reinvestment Plan would constitute a replacement if made
within the period. If disallowed, the loss will be reflected in
an upward adjustment to the basis of the shares acquired.
BACKUP WITHHOLDING. The Portfolio may be required to
withhold United States federal income tax at the rate of 31% of
all taxable distributions payable to shareholders who fail to
provide the Portfolio with their correct taxpayer identification
numbers or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to
backup withholding. Corporate shareholders and certain other
types of 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
United States federal income tax liability or refunded.
ZERO COUPON TREASURY SECURITIES. Under current federal
tax law, the Portfolio will receive net investment income in the
form of interest by virtue of holding Treasury bills, notes and
bonds, and will recognize interest attributable to it under the
original issue discount rules of the Code from holding zero coupon
Treasury securities. Current federal tax law requires that a
holder (such as the Portfolio) of a zero coupon security accrue a
portion of the discount at which the security was purchased as
income each year even though the Portfolio receives no interest
payment in cash on the security during the year. Accordingly, the
Portfolio may be required to pay out as an income distribution
each year an amount which is greater than the total amount of cash
interest the Portfolio actually received. Such distributions will
be made from the cash assets of the Portfolio or by liquidation of
portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the
Investment Adviser will select which securities to sell. The
Portfolio may realize a gain or loss from such sales. In the
event the Portfolio realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain
60
distribution, if any, than they would have in the absence of such
transactions.
STRIPPED MORTGAGE-RELATED SECURITIES. Certain classes of
SMRS which are issued at a discount, the payments of which are
subject to acceleration by reason of prepayments of the underlying
Mortgage Assets securing such classes, are subject to special
rules for determining the portion of the discount at which the
class was issued which must be accrued as income each year. Under
Code section 1272(a)(6), a principal-only class or a class which
receives a portion of the interest and a portion of the principal
from the underlying Mortgage Assets is subject to rules which
require accrual of interest to be calculated and included in the
income of a holder (such as the Portfolio) based on the increase
in the present value of the payments remaining on the class,
taking into account payments includable in the class' stated
redemption price at maturity which are received during the accrual
period. For this purpose, the present value calculation is made at
the beginning of each accrual period (i) using the yield to
maturity determined for the class at the time of its issuance
(determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual
period), calculated on the assumption that certain prepayments
will occur, and (ii) taking into account any prepayments that have
occurred before the close of the accrual period. Since interest
included in the Portfolio's income as a result of these rules will
have been accrued and not actually paid, the Portfolio may be
required to pay out as an income distribution each year an amount
which is greater than the total amount of cash interest the
Portfolio actually received, with possible results as described
above.
TAXATION OF FOREIGN STOCKHOLDERS. The foregoing
discussion relates only to U.S. Federal income tax law as it
affects shareholders who are U.S. residents or U.S. corporations.
The effects of Federal income tax law on shareholders who are non-
resident aliens or foreign corporations may be substantially
different. Foreign investors should consult their counsel for
further information as to the U.S. tax consequences of receipt of
income from the Fund.
_______________________________________________________________
GENERAL INFORMATION
_______________________________________________________________
CAPITALIZATION
The Fund is a Maryland Corporation organized in 1973.
The authorized capital stock of the Fund consists of 1,800,000,000
shares of Common Stock having a par value of $.001 per share. All
61
shares of each Portfolio participate equally in dividends and
distributions from that Portfolio, including any distributions in
the event of a liquidation and upon redeeming shares, will receive
the then current net asset value of the Portfolio represented by
the redeemed shares less any applicable CDSC. Each share of the
Portfolio is entitled to one vote for all purposes. Shares of
both Portfolios vote for the election of Directors and on any
other matter that affects both Portfolios in substantially the
same manner as a single class, except as otherwise required by
law. 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 class. There are no conversion or preemptive rights in
connection with any shares of the Portfolio. All shares of the
Portfolio when duly issued will be fully paid and
non-assessable.
The authorized capital stock of the Portfolio currently
consists of 200,000,000 shares of Class A Common Stock,
200,000,000 shares of Class B Common Stock, and 200,000,000 shares
of Class C Common Stock, and 200,000,000 shares of Advisor Class
Common Stock, each having a par value of $.001 per share.
Class A, Class B and Class C shares each represent interests in
the assets of the Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions,
except that expenses related to the distribution of each class and
transfer agency expenses of each class are borne solely by each
class and each class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan
which pertain to a particular class and other matters for which
separate class voting is appropriate under applicable law,
provided that, if the Fund submits to a vote of both the Class A
shareholders and the Class B shareholders an amendment to the Rule
12b-1 distribution plan that would materially increase the amount
to be paid thereunder with respect to the Class A shares, the
Class A shareholders and the Class B shareholders will vote
separately by class.
The Fund's Board of Directors may, without shareholder
approval, increase or decrease the number of authorized but
unissued shares of the Portfolio's Class A, Class B, Class C and
Advisor Class Common Stock.
The Board of Directors is authorized to reclassify and
issue any unissued shares to any number of additional series and
classes without shareholder approval. Accordingly, the Directors
in the future, for reasons such as the desire to establish one or
more additional portfolios with different investment objectives,
policies or restrictions, may create additional series of shares.
Any issuance of shares of another series would be governed by the
1940 Act and the laws of the State of Maryland. If shares of
62
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 for the election of
Directors and on any other matter 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 separate 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.
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, are available to shareholders of
the Fund. Meetings of shareholders may be called by 10% of the
Fund's outstanding shareholders. 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.
As of the close of business on __________, l999, there
were ____________ shares of common stock of the Portfolio
outstanding. Of this amount, __________ shares were Class A
shares, __________ shares were Class B shares and __________
shares were Class C shares. To the knowledge of the Portfolio,
the following persons owned of record, or beneficially, 5% or more
of the outstanding shares of the Portfolio as of __________, 1999:
No of % of % of % of
Name and Address Shares Class A Class B Class C
CUSTODIAN
State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, acts as the
Fund's Custodian for the assets of the Fund but plays no part in
deciding on the purchase or sale of portfolio securities. Subject
to the supervision of the Fund's Directors, State Street may enter
into subcustodial agreements for the holding of the Fund's foreign
securities.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., an indirect wholly-
owned subsidiary of the Investment Adviser, located at 1345 Avenue
of the Americas, New York, New York 10105, is the principal
underwriter of shares of the Portfolio, and as such may solicit
63
orders from the public to purchase shares of the Portfolio. Under
the Distribution Services 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
shares of the Portfolio offered hereby are passed upon by Seward &
Kissel, New York, New York. Seward & Kissel has relied upon the
opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland,
for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
PERFORMANCE INFORMATION
From time to time, the Portfolio advertises its
"yield" and "total return," which are computed separately for
Class A, Class B and Class C shares. The Portfolio's yield for
any 30-day (or one-month) period is computed by dividing the net
investment income per share earned during such period by the
maximum public offering price per share on the last day of the
period, and then annualizing such 30-day (or one-month) yield in
accordance with a formula prescribed by the Commission which
provides for compounding on a semi-annual basis. The Portfolio
may also state in sales literature an "actual distribution rate"
for each class which is computed in the same manner as yield
except that actual income dividends declared per share during the
period in question are substituted for net investment income per
share. The actual distribution rate is computed separately for
Class A, Class B and Class C shares. Advertisements of the
Portfolio's total return disclose its average annual compounded
total return for the periods prescribed by the Commission. The
Portfolio'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 purpose of
computing total return, income dividends and capital gains
distributions paid on shares of the Portfolio are assumed to have
been reinvested when paid and the maximum sales charges applicable
to purchases and redemptions of the Portfolio's shares are assumed
to have been paid. The Portfolio's advertisements may quote
performance rankings or ratings of the Portfolio by financial
publications or independent organizations such as Lipper
64
Analytical Services, Inc. and Morningstar, Inc. or compare the
Portfolio's performance to various indices.
The yield for the month ended December 31, 1998 for the
Class A shares of the Portfolio was 6.09%, for Class B shares was
5.66% and for Class C shares was 5.66%. The actual distribution
rate for such period for the Portfolio for Class A shares was
6.86%, for Class B shares was 6.42% and for Class C shares was
6.42%.
The average annual total return based on net asset value
for each class of shares for the one-, five- and ten-year periods
ended December 31, 1998 (or since inception through that date, as
noted) was as follows:
12 Months
Ended 5 Years Ended 10 Years Ended
12/31/98 12/31/98 12/31/98
_________ _____________ ______________
Class A ______% ______% ______%
Class B ______% ______% ______%*
Class C ______% ______% ______%*
*Inception Dates: Class B - September 30, 1991
Class C - May 3, 1993
Yield and total return are computed separately for the
Portfolio's Class A, Class B, Class C and Advisor Class shares.
The Portfolio's yield and total return are not fixed and will
fluctuate in response to prevailing market conditions or as a
function of the type and quality of the securities held by the
Portfolio, its average portfolio maturity and its expenses. Yield
and total return information is useful in reviewing the
Portfolio's performance and such information may provide a basis
for comparison with other investments. Such other investments may
include certificates of deposit, money market funds and corporate
debt securities. However, an investor should know that investment
return and principal value of an investment in the Portfolio will
fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. In addition, the
Portfolio's shares are not insured or guaranteed by the U.S.
Government. In comparison, certificates of deposit are guaranteed
and pay a fixed rate of return; money market funds seek a stable
net asset value; and corporate debt securities may provide a
higher yield than those available from the Portfolio.
Advertisements quoting performance rankings or ratings of
the Fund's Portfolio as measured by financial publications or by
65
independent organizations such as Lipper Analytical Services, Inc.
("Lipper") and Morningstar, Inc. and advertisements presenting the
historical record payments of income dividends by the Portfolio
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. The Portfolio has been ranked by Lipper in the category
known as "U.S. Government bond funds".
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the
shareholder's broker or other financial adviser 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.
66
____________________________________________________________
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT AUDITORS
____________________________________________________________
67
____________________________________________________________
APPENDIX A:
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
A-1
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."
A-2
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
(a) (1) Articles of Incorporation of the Registrant -
Incorporated by reference to Exhibit 1(a) to Post-
Effective Amendment No. 65 of the Registrant's
Registration Statement on Form N-1A (File
Nos. 2-48227 and 811-2383) filed with the
Securities and Exchange Commission on October 31,
1997.
(2) Articles of Amendment of the Articles of
Incorporation of the Registrant dated December 15,
1989 and filed December 19, 1989 - Incorporated by
reference to Exhibit 1(b) to Post-Effective
Amendment No. 66 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
(3) Articles Supplementary to the Articles of
Incorporation of the Registrant dated and filed
August 28, 1991 - Incorporated by reference to
Exhibit 1(b) to Post-Effective Amendment No. 65 of
the Registrant's Registration Statement on Form
N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on
October 31, 1997.
(4) Articles Supplementary to the Articles of
Incorporation of the Registrant dated March 25,
1992 and filed March 26, 1992 - Incorporated by
reference to Exhibit 1(d) to Post-Effective
Amendment No. 65 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 31, 1997.
(5) Articles of Amendment to the Articles of
Incorporation of the Registrant dated October 27,
1992 and filed November 2, 1992 - Incorporated by
reference to Exhibit 1(e) to Post-Effective
Amendment No. 66 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
C-1
(6) Articles Supplementary to the Articles of
Incorporation of the Registrant dated December 30,
1992 and filed December 31, 1992 - Incorporated by
reference to Exhibit 1(f) to Post-Effective
Amendment No. 66 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
(7) Articles of Amendment to the Articles of
Incorporation of the Registrant dated January 7,
1993 and filed January 8, 1993 - Incorporated by
reference to Exhibit 1(e) to Post-Effective
Amendment No. 65 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 31, 1997.
(8) Articles Supplementary to the Articles of
Incorporation of the Registrant dated April 29,
1993 and filed April 30, 1993 - Incorporated by
reference to Exhibit 1(h) to Post-Effective
Amendment No. 66 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
(9) Articles Supplementary to the Articles of
Incorporation of the Registrant dated
September 30, 1996 and filed October 2, 1996
-Incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 64 of the
Registrant's Registration Statement on Form N-1A
(File Nos. 2-48227 and 811-2383) filed with the
Securities and Exchange Commission on October 31,
1996.
(10) Articles Supplementary to the Articles of
Incorporation of the Registrant dated March 31,
1998 and filed April 6, 1998 - Incorporated by
reference to Exhibit 1(j) to Post-Effective
Amendment No. 66 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
(b) By-Laws of the Registrant - Incorporated by reference
to Exhibit 2 to Post-Effective Amendment No. 65 of the
Registrant's Registration Statement on Form N-1A (File
Nos. 2-48227 and 811-2383) filed with the Securities
and Exchange Commission on October 31, 1997.
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(c) Not applicable.
(d) Investment Advisory Contract between the Registrant and
Alliance Capital Management L.P. - Incorporated by
reference to Exhibit 5 to Post-Effective Amendment
No. 65 of the Registrant's Registration Statement on
Form N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on October 31,
1997.
(e) (1) Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. -
Incorporated by reference as Exhibit 6(a) to Post-
Effective Amendment No. 65 of the Registrant's
Registration Statement on Form N-1A (File
Nos. 2-48227 and 811-2383) filed with the
Securities and Exchange Commission on October 31,
1997.
(2) Amendment to the Distribution Services Agreement
between the Registrant and Alliance Fund
Distributors, Inc. - Incorporated by reference as
Exhibit 6(e) to Post-Effective Amendment No. 64 of
the Registrant's Registration Statement on Form
N-1A (File Nos. 2-48227 and 811-2383), filed with
the Securities and Exchange Commission on
October 31, 1996.
(3) Selected Dealer Agreement between Alliance Fund
Distributors, Inc. and selected dealers offering
shares of Registrant - Incorporated by reference
as Exhibit 6(c) to Post-Effective Amendment No. 65
of the Registrant's Registration Statement on Form
N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on
October 31, 1997.
(4) Selected Agent Agreement between Alliance Fund
Distributors, Inc. and selected agents making
available shares of Registrant - Incorporated by
reference as Exhibit 6(d) to Post-Effective
Amendment No. 65 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission on October 31, 1997.
(f) Not applicable.
(g) (1) Custodian Contract between the Registrant and
State Street Bank and Trust Company - Incorporated
C-3
by reference to Exhibit 8(a) to Post-Effective
Amendment No. 65 of the Registrant's Registration
Statement on Form N-1A (File Nos. 2-48227 and
811-2383) filed with the Securities and Exchange
Commission with the Securities and Exchange
Commission on October 31, 1997.
(2) Amendment to the Custodian Contract between the
Registrant and State Street Bank and Trust
Company - Incorporated by reference to
Exhibit 8(a) to Post-Effective Amendment No. 64 of
the Registrant's Registration Statement on Form
N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on
October 31, 1996.
(h) Transfer Agency Agreement between Registrant and
Alliance Fund Services, Inc. - Incorporated by
reference to Exhibit 9 to Post-Effective Amendment
No. 65 of the Registrant's Registration Statement on
Form N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on October 31,
1997.
(i) Opinion and Consent of Seward & Kissel - Incorporated
by reference to Exhibit 10 to Post-Effective Amendment
No. 63 of the Registrant's Registration Statement on
Form N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on September 5,
1996.
(j) Not applicable.
(k) Not applicable.
(l) Not applicable.
(m) (1) Rule 12b-1 Plan - See Exhibit (e)(1) above.
(2) Amended Rule 12b-1 Plan - See Exhibit (e)(2)
above.
(n) Not applicable.
(o) Amended and Restated Rule 18f-3 Plan - Incorporated by
reference to Exhibit 18(a) to Post-Effective Amendment
No. 64 of the Registrant's Registration Statement on
Form N-1A (File Nos. 2-48227 and 811-2383) filed with
the Securities and Exchange Commission on October 31,
1996.
C-4
Other Exhibits:
Powers of Attorney of Ruth S. Block, John D. Carifa,
David H. Dievler, John H. Dobkin, William H. Foulk,
Jr., James M. Hester, Clifford L. Michel and Donald J.
Robinson - Incorporated by reference to Other Exhibits
to Post-Effective Amendment No. 66 of the Registrant's
Registration Statement on Form N-1A (File Nos. 2-48227
and 811-2383) filed with the Securities and Exchange
Commission on October 30, 1998.
ITEM 24. Persons Controlled by or under Common Control with the
Fund.
None.
ITEM 25. Indemnification.
It is the Registrants policy to indemnify its directors
and officers, employees and other agents to the maximum
extent permitted by Section 2-418 of the General
Corporation Law of the State of Maryland and as set
forth in Article EIGHTH of Registrants Articles of
Incorporation as set forth below and Section 10(a) of
the Distribution Services Agreement filed as Exhibit
(e)(1) as set forth below.
The liability of the Registrants directors and officers
is dealt with in Article SEVENTH, Section (f) of
Registrants Articles of Incorporation, as set forth
below. The Investment Advisers liability for any loss
suffered by the Registrant or its shareholders is set
forth in Section 4 of the Investment Advisory Contract
filed as Exhibit (d) as set forth below.
SECTION 2-418 OF THE MARYLAND GENERAL CORPORATION LAW
READS AS FOLLOWS:
2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS.--(a) In this section the
following words have the meaning indicated.
(1) "Directors" means any person who is or
was a director of a corporation and any person
who, while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
C-5
(2) "Corporation" includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessors existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorneys fees.
(4) "Official capacity" means the following
(i) When used with respect to a
director, the office of director in the
corporation; and
(ii) When used with respect to a person
other than a director as contemplated in
subsection (j), the elective or appointive office
in the corporation held by the officer, or the
employment or agency relationship undertaken by
the employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not
include service for any other foreign or domestic
corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is,
or is threatened to be made a named defendant or
respondent in a proceeding.
(6) "Proceeding" means any threatened,
pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
established that:
(i) The act or omission of the director was
material to the cause of action adjudicated in the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate
dishonesty; or
C-6
(ii) The director actually received an
improper personal benefit in money, property, or
services; or
(iii) In the case of any criminal proceeding,
the director had reasonable cause to believe that
the act or omission was unlawful.
(2)(i) Indemnification may be against
judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one by
or in the right of the corporation,
indemnification may not be made in respect of any
proceeding in which the director shall have been
adjudged to be liable to the corporation.
(3)(i) The termination of any proceeding by
judgment, order or settlement does not create a
presumption that the director did not meet the
requisite standard of conduct set forth in this
subsection.
(ii) The termination of any proceeding
by conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable
presumption that the director did not meet that
standard of conduct.
(c) A director may not be indemnified under
subsection (b) of this section in respect of any
proceeding charging improper personal benefit to
the director, whether or not involving action in
the directors official capacity, in which the
director was adjudged to be liable on the basis
that personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on
the merits or otherwise, in the defense of any
proceeding referred to in subsection (b) of this
section shall be indemnified against reasonable
expenses incurred by the director in connection
with the proceeding.
(2) A court of appropriate jurisdiction upon
application of a director and such notice as the
C-7
court shall require, may order indemnification in
the following circumstances:
(i) If it determines a director is
entitled to reimbursement under paragraph (1) of
this subsection, the court shall order
indemnification, in which case the director shall
be entitled to recover the expenses of securing
such reimbursement; or
(ii) If it determines that the director
is fairly and reasonably entitled to
indemnification in view of all the relevant
circumstances, whether or not the director has met
the standards of conduct set forth in subsection
(b) of this section or has been adjudged liable
under the circumstances described in subsection
(c) of this section, the court may order such
indemnification as the court shall deem proper.
However, indemnification with respect to any
proceeding by or in the right of the corporation
or in which liability shall have been adjudged in
the circumstances described in subsection (c)
shall be limited to expenses.
(3) A court of appropriate jurisdiction may
be the same court in which the proceeding
involving the directors liability took place.
(e)(1) Indemnification under subsection (b)
of this section may not be made by the corporation
unless authorized for a specific proceeding after
a determination has been made that indemnification
of the director is permissible in the
circumstances because the director has met the
standard of conduct set forth in subsection (b) of
this section.
(2) Such determination shall be made:
(i) By the board of directors by a
majority vote of a quorum consisting of directors
not, at the time, parties to the proceeding, or,
if such a quorum cannot be obtained, then by a
majority vote of a committee of the board
consisting solely of two or more directors not, at
the time, parties to such proceeding and who were
duly designated to act in the matter by a majority
vote of the full board in which the designated
directors who are parties may participate;
C-8
(ii) By special legal counsel selected
by the board or a committee of the board by vote
as set forth in subparagraph (i) of this
paragraph, or, if the requisite quorum of the full
board cannot be obtained therefor and the
committee cannot be established, by a majority
vote of the full board in which directors who are
parties may participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses
shall be made in the same manner as the
determination that indemnification is permissible.
However, if the determination that indemnification
is permissible is made by special legal counsel,
authorization of indemnification and determination
as to reasonableness of expenses shall be made in
the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of
such counsel.
(4) Shares held by directors who are parties
to the proceeding may not be voted on the subject
matter under this subsection.
(f)(1) Reasonable expenses incurred by a
director who is a party to a proceeding may be
paid or reimbursed by the corporation in advance
of the final disposition of the proceeding, upon
receipt by the corporation of:
(i) A written affirmation by the
director of the directors good faith belief that
the standard of conduct necessary for
indemnification by the corporation as authorized
in this section has been met; and
(ii) A written undertaking by or on
behalf of the director to repay the amount if it
shall ultimately be determined that the standard
of conduct has not been met.
(2) The undertaking required by subparagraph
(ii) of paragraph (1) of this subsection shall be
an unlimited general obligation of the director
but need not be secured and may be accepted
without reference to financial ability to make the
repayment.
C-9
(3) Payments under this subsection shall be
made as provided by the charter, bylaws, or
contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of
expenses provided or authorized by this section
may not be deemed exclusive of any other rights,
by indemnification or otherwise, to which a
director may be entitled under the charter, the
bylaws, a resolution of stockholders or directors,
an agreement or otherwise, both as to action in an
official capacity and as to action in another
capacity while holding such office.
(h) This section does not limit the
corporations power to pay or reimburse expenses
incurred by a director in connection with an
appearance as a witness in a proceeding at a time
when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have
requested a director to serve an employee benefit
plan where the performance of the directors duties
to the corporation also imposes duties on, or
otherwise involves services by, the director to
the plan or participants or beneficiaries of the
plan:
(2) Excise taxes assessed on a director with
respect to an employee benefit plan pursuant to
applicable law shall be deemed fines; and
(3) Action taken or omitted by the director
with respect to an employee benefit plan in the
performance of the directors duties for a purpose
reasonably believed by the director to be in the
interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which
is not opposed to the best interests of the
corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be
indemnified as and to the extent provided in
subsection (d) of this section for a director and
shall be entitled, to the same extent as a
C-10
director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and advance
expenses to an officer, employee, or agent of the
corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may
indemnify and advance expenses to an officer,
employee, or agent who is not a director to such
further extent, consistent with law, as may be
provided by its charter, bylaws, general or
specific action of its board of directors or
contract.
(k)(1) A corporation may purchase and
maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of
the corporation, or who, while a director,
officer, employee, or agent of the corporation, is
or was serving at the request, of the corporation
as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust,
other enterprise, or employee benefit plan against
any liability asserted against and incurred by
such person in any such capacity or arising out of
such persons position, whether or not the
corporation would have the power to indemnify
against liability under the provisions of this
section.
(2) A corporation may provide similar
protection, including a trust fund, letter of
credit, or surety bond, not inconsistent with this
section.
(3) The insurance or similar protection
may be provided by a subsidiary or an affiliate of
the corporation.
(l) Any indemnification of, or advance of
expenses to, a director in accordance with this
section, if arising out of a proceeding by or in
the right of the corporation, shall be reported in
writing to the stockholders with the notice of the
next stockholders meeting or prior to the meeting.
ARTICLE EIGHTH OF THE REGISTRANTS ARTICLES OF INCORPORATION READS
AS FOLLOWS:
C-11
EIGHTH: To the maximum extent permitted by the General
Corporation Law of the State of Maryland as from time
to time amended, the Corporation shall indemnify its
currently acting and its former directors and officers
and those persons who, at the request of the
Corporation, serve or have served another corporation,
partnership, joint venture, trust or other enterprise
in one or more of such capacities.
Section 10(a) of the Distribution Services Agreement reads as
follows:
Section 10. Indemnification.
(a) The Fund agrees to indemnify, defend and hold
the Underwriter, and any person who controls the
Underwriter within the meaning of Section 15 of the
Securities Act, free and harmless form and against any
and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees
incurred in connection therewith) which the Underwriter
or any such controlling person may incur, under the
Securities Act, or under common law or otherwise,
arising out of or based upon any alleged untrue
statements of a material fact contained in the Fund's
Registration Statement or Prospectus or Statement of
Additional Information in effect form time to time
under the Securities Act or arising out of or based
upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to
make the statements in either thereof not misleading;
provided, however, that in no event shall anything
therein contained by so construed as to protect the
Underwriter against any liability to the Fund or its
security holders to which the Underwriter would
otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its
duties, or by reason of the Underwriter's reckless
disregard of its obligations and duties under this
agreement. The Fund's agreement to indemnify the
Underwriter or any such controlling person, such
notification to be given by letter or by telegram
addressed to the Fund at its principal office in New
York, New York, and sent to the Fund by the person
against whom such action is brought within ten days
after the summons or other first legal process shall
have been served. The failure so to notify the Fund of
the commencement of any such action shall not relieve
the Fund from any liability which it may have to the
person against whom such action is brought by reason of
C-12
any such alleged untrue statement or omission otherwise
than on account of the indemnity agreement contained in
this Section 10. The Fund will be entitled to assume
the defense of any such suit brought to enforce any
such claim, and to retain counsel of good standing
chosen by the Fund and approved by the Underwriter. In
the event the Fund does elect to assume the defense of
any such suit and retain counsel of good standing
approved by the Underwriter, the defendant or
defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of
them; but in case the Fund does not elect to assume the
defense of any such suit, or in case the Underwriter
does not approve of counsel chosen by the Fund, the
Fund will reimburse the Underwriter or the controlling
person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel
retained by the Underwriter or such persons. The
indemnification agreement contained in this Section 10
shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of
the Underwriter or any controlling person and shall
survive the sale of any of the Fund's shares made
pursuant to subscriptions obtained by the Underwriter.
This agreement of indemnity will inure exclusively to
the benefit of the Underwriter, to the benefit of its
successors and assigns, and to the benefit of any
controlling persons and their successors and assigns.
The Fund agrees promptly to notify the Underwriter of
the commencement of any litigation or proceeding
against the Fund in connection with the issue and sale
of any of its shares.
Article SEVENTH, Section (f) of the Registrant's Articles of
Incorporation reads as follows:
(f) Specifically and without limitation of
subsection (e) of this Article Seventh but subject to
the exception therein prescribed, the Corporation may
enter into management or advisory, underwriting,
distribution and administration contracts, and may
otherwise do business, with Alliance Capital Management
Corporation, and any parent, subsidiary or affiliate of
such firm or any affiliate of any such affiliate, or
the stockholders, directors, officers and employees
thereof, and may deal freely with one another
notwithstanding that the Board of Directors of the
Corporation may be composed in part of directors,
officers or employees of such firm and/or its parents,
subsidiaries or affiliates shall be invalidated or in
any way affected thereby, nor shall any director or
C-13
officer of the Corporation be liable to the Corporation
or to any stockholder or creditor thereof or to any
person for any loss incurred by it or him under or by
reason of such contract or transaction; provided that
nothing herein shall protect any director or officer of
the Corporation against any liability to the
Corporation or to its security holders to which he
would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office; and provided always that such contract or
transaction shall have been on terms that were not
unfair to the Corporation at the time at which it was
entered into.
Section 4 of the Investment Advisory Contract reads as follows:
4. We shall expect of you, and you will give us
the benefit of, your best judgment and efforts in
rendering these services to us, and we agree as an
inducement to your undertaking these services that you
shall not be liable hereunder for any mistake of
judgment or in any event whatsoever, except for lack of
good faith, provided that nothing herein shall be
deemed to protect, or purport to protect, you against
any liability to us or to our security holders to which
you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of
your reckless disregard of your obligations and duties
hereunder.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Securities Act")
may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection
with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of
C-14
whether such indemnification by it is against public
policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
In accordance with Release No. IC-11330
(September 2, 1980), the Registrant will indemnify its
directors, officers, investment manager and principal
underwriters only if (1) a final decision on the merits
was issued by the court or other body before whom the
proceeding was brought that the person to be
indemnified (the "indemnitee") was not liable by reason
or willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the
conduct of his office ("disabling conduct") or (2) a
reasonable determination is made, based upon a review
of the facts, that the indemnitee was not liable by
reason of disabling conduct, by (a) the vote of a
majority of a quorum of the directors who are neither
"interested persons" of the Registrant as defined in
section 2(a)(19) of the Investment Company Act of 1940
nor parties to the proceeding ("disinterested, non-
party directors"), or (b) an independent legal counsel
in a written opinion. The Registrant will advance
attorneys fees or other expenses incurred by its
directors, officers, investment adviser or principal
underwriters in defending a proceeding, upon the
undertaking by or on behalf of the indemnitee to repay
the advance unless it is ultimately determined that he
is entitled to indemnification and, as a condition to
the advance, (1) the indemnitee shall provide a
security for his undertaking, (2) the Registrant shall
be insured against losses arising by reason of any
lawful advances, or (3) a majority of a quorum of
disinterested, non-party directors of the Registrant,
or an independent legal counsel in a written opinion,
shall determine, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
The Registrant participates in a joint directors
and officers liability insurance policy issued by the
ICI Mutual Insurance Company. Coverage under this
policy has been extended to directors, trustees and
officers of the investment companies managed by
Alliance Capital Management L.P. Under this policy,
outside trustees and directors would be covered up to
the limits specified for any claim against them for
acts committed in their capacities as trustee or
director. A pro rata share of the premium for this
C-15
coverage is charged to each investment company and to
the Investment Adviser.
ITEM 26. Business and Other Connections of Investment Adviser.
The descriptions of Alliance Capital Management L.P.
under the captions "Management of the Fund" in the
Prospectuses and in the Statements of Additional
Information constituting Parts A and B, respectively,
of this Registration Statement are incorporated by
reference herein.
The information as to the directors and executive
officers of Alliance Capital Management Corporation,
the general partner of Alliance Capital Management
L.P., set forth in Alliance Capital Management L.P.'s
Form ADV filed with the Securities and Exchange
Commission on April 21, 1988 (File No. 801-32361) and
amended through the date hereof, is incorporated by
reference.
ITEM 27. Principal Underwriters.
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale of
shares of the Registrant. Alliance Fund Distributors,
Inc. also acts as Principal Underwriter or Distributor
for the following investment companies:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Global Dollar Government Fund, Inc.
Alliance Global Environment Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China 97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
C-16
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
(b) The following are the Directors and Officers of
Alliance Fund Distributors, Inc., the principal place
of business of which is 1345 Avenue of the Americas,
New York, New York, 10105.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Michael J. Laughlin Director and Chairman
John D. Carifa Director
Robert L. Errico Director and President
Geoffrey L. Hyde Director and Senior
Vice President
Dave H. Williams Director
David Conine Executive Vice President
Richard K. Saccullo Executive Vice President
Edmund P. Bergan, Jr. Senior Vice President, Secretary
General Counsel and
Secretary
Richard A. Davies Senior Vice President
and Managing Director
Robert H. Joseph, Jr. Senior Vice President
and Chief Financial Officer
C-17
Anne S. Drennan Senior Vice President
and Treasurer
Karen J. Bullot Senior Vice President
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Bradley F. Hanson Senior Vice President
Richard E. Khaleel Senior Vice President
Stephen R. Laut Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Kevin A. Rowell Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Joseph F. Sumanski Senior Vice President
Peter J. Szabo Senior Vice President
William C. White Senior Vice President
Nicholas K. Willett Senior Vice President
Richard A. Winge Senior Vice President
Gerard J. Friscia Vice President and
Controller
Ricardo Arreola Vice President
C-18
Jamie A. Atkinson Vice President
Benji A. Baer Vice President
Kenneth F. Barkoff Vice President
Casimir F. Bolanowski Vice President
Michael E. Brannan Vice President
Timothy W. Call Vice President
Kevin T. Cannon Vice President
John R. Carl Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
John W. Cronin Vice President
Richard W. Dabney Vice President
Stephen J. Demetrovits Vice President
John F. Dolan Vice President
John C. Endahl Vice President
Sohaila S. Farsheed Vice President
Shawn C. Gage Vice President
Joseph C. Gallagher Vice President
Andrew L. Gangolf Vice President and Assistant
Assistant General Secretary
Counsel
Alex G. Garcia Vice President
Mark D. Gersten Vice President Treasurer and
Chief
Financial
Officer
John Grambone Vice President
Charles M. Greenberg Vice President
C-19
Alan Halfenger Vice President
William B. Hanigan Vice President
Michael S. Hart Vice President
Scott F. Heyer Vice President
Timothy A. Hill Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Michael J. Hutten Vice President
Scott Hutton Vice President
Richard D. Keppler Vice President
Donna M. Lamback Vice President
P. Dean Lampe Vice President
Henry Michael Lesmeister Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Jerry W. Lynn Vice President
Christopher J. MacDonald Vice President
Michael F. Mahoney Vice President
Shawn P. McClain Vice President
Jeffrey P. Mellas Vice President
Thomas F. Monnerat Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Nicole Nolan-Koester Vice President
John C. O'Connell Vice President
John J. O'Connor Vice President
C-20
James J. Posch Vice President
Domenick Pugliese Vice President and Assistant
Assistant General Secretary
Counsel
Bruce W. Reitz Vice President
Karen C. Satterberg Vice President
John P. Schmidt Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Clara Sierra Vice President
Teris A. Sinclair Vice President
Scott C. Sipple Vice President
Martine H. Stansbery, Jr. Vice President
Andrew D. Strauss Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
David R. Turnbough Vice President
Martha D. Volcker Vice President
Patrick E. Walsh Vice President
Mark E. Westmoreland Vice President
David E. Willis Vice President
Emilie D. Wrapp Vice President and Assistant
Assistant General Secretary
Counsel
Patrick Look Assistant Vice
President and
Assistant Treasurer
C-21
Michael W. Alexander Assistant Vice
President
Richard J. Appaluccio Assistant Vice
President
Charles M. Barrett Assistant Vice
President
Robert F. Brendli Assistant Vice
President
John M. Capeci Assistant Vice
President
Maria L. Carreras Assistant Vice
President
John P. Chase Assistant Vice
President
Jean A. Coomber Assistant Vice
President
Russell R. Corby Assistant Vice
President
Terri J. Daly Assistant Vice
President
Ralph A. DiMeglio Assistant Vice
President
Faith C. Deutsch Assistant Vice
President
John E. English Assistant Vice
President
Duff C. Ferguson Assistant Vice
President
Theresa Iosca Assistant Vice
President
Erik A. Jorgensen Assistant Vice
President
C-22
Eric G. Kalender Assistant Vice
President
Edward W. Kelly Assistant Vice
President
Victor Kopelakis Assistant Vice
President
Michael Laino Assistant Vice
President
Nicholas J. Lapi Assistant Vice
President
Kristine J. Luisi Assistant Vice
President
Kathryn Austin Masters Assistant Vice
President
Richard F. Meier Assistant Vice
President
Richard J. Olszewski Assistant Vice
President
Catherine N. Peterson Assistant Vice
President
Rizwan A. Raja Assistant Vice
President
Carol H. Rappa Assistant Vice
President
Mark V. Spina Assistant Vice
President
Gayle S. Stamer Assistant Vice
President
Eileen Stauber Assistant Vice
President
Vincent T. Strangio Assistant Vice
President
C-23
Margaret M. Tompkins Assistant Vice
President
Marie R. Vogel Assistant Vice
President
Wesley S. Williams Assistant Vice
President
Matthew Witschel Assistant Vice
President
Christopher J. Zingaro Assistant Vice
President
Mark R. Manley Assistant Secretary
(c) Not applicable.
ITEM 28. Location of Accounts and Records.
The majority of the accounts, books and other documents
required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the Rules thereunder are maintained as
follows: journals, ledgers, securities records and other original
records are maintained principally at the offices of Alliance
Fund Services, Inc., 500 Plaza Drive, Secaucus, New Jersey 07094,
and at the offices of State Street Bank and Trust Company, the
Registrants Custodian, 225 Franklin Street, Boston, Massachusetts
02110. All other records so required to be maintained are
maintained at the offices of Alliance Capital Management L.P.,
1345 Avenue of the Americas, New York, New York 10105.
ITEM 29. Management Services.
Not applicable.
ITEM 30. Undertakings.
The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrants latest
report to shareholders, upon request and without charge.
The Registrant undertakes to provide assistance to
shareholders in communications concerning the removal of any
Director of the Fund in accordance with Section 16 of the
Investment Company Act of 1940.
C-24
SIGNATURE
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and State of
New York, on the 22nd day of December, 1998.
ALLIANCE BOND FUND, INC.
By /s/ John D. Carifa
___________________________
John D. Carifa
Chairman
Pursuant to the requirements of the Securities Act of
1933 this Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
1) Principal
Executive Officer
/s/ John D. Carifa Chairman and
________________________ President December 22, 1998
John D. Carifa
2) Principal Financial
and Accounting Officer
/s/ Mark D. Gersten Treasurer and
__________________________ Chief Financial
Mark D. Gersten Officer December 22, 1998
C-25
3) All of the Directors
Ruth Block
John D. Carifa
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
James M. Hester
Clifford L. Michel
Donald J. Robinson
By /s/ Edmund P. Bergan, Jr. December 22, 1998
_________________________
Edmund P. Bergan, Jr.
(Attorney-in-fact)
C-26
INDEX TO EXHIBITS
PAGE
None.
C-27
00250123.AS1
