<PAGE>
As filed with the Securities and Exchange
Commission on October 6, 2000
File Nos. 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. 74
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 52
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 LLP
One Battery Park Plaza
New York, New York 10004
It is proposed that this filing will become effective (check
appropriate box)
x immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
<PAGE>
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
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.
The purpose of this Post-Effective Amendment No. 74 is to
register Advisor Class shares of the Quality Bond Portfolio of
the Registrant and to update and simplify the prospectus
disclosure relating to the Advisor Class shares of the U.S.
Government Portfolio and the Corporate Bond Portfolio of the
Registrant. No information contained in the Registrant's
Registration Statement relating to the Corporate Bond Portfolio
or the U.S. Government Portfolio of the Registrant, insofar as it
relates to Class A shares, Class B shares or Class C shares, is
amended or superseded hereby.
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Alliance Bond Fund
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.
Prospectus and Application
October 6, 2000
Advisor Class
> Alliance U.S. Government Portfolio
> Alliance Quality Bond Portfolio
> Alliance Corporate Bond Portfolio
AllianceCapital [LOGO](R)
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Investment Products Offered
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> Are Not FDIC Insured
> May Lose Value
> Are Not Bank Guaranteed
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TABLE OF CONTENTS
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Page
RISK/RETURN SUMMARY ....................................................... 3
Alliance U.S. Government Portfolio ........................................ 4
Alliance Quality Bond Portfolio ........................................... 5
Alliance Corporate Bond Portfolio ......................................... 6
Summary of Principal Risks ................................................ 7
FEES AND EXPENSES OF THE FUNDS ............................................ 9
GLOSSARY .................................................................. 10
DESCRIPTION OF THE FUNDS .................................................. 11
Investment Objectives and Principal Policies .............................. 11
Description of Investment Practices........................................ 13
Additional Risk Considerations ............................................ 21
MANAGEMENT OF THE FUNDS ................................................... 23
PURCHASE AND SALE OF SHARES ............................................... 24
How The Funds Value Their Shares .......................................... 24
How To Buy Shares ......................................................... 24
How To Exchange Shares .................................................... 25
How To Sell Shares ........................................................ 25
DIVIDENDS, DISTRIBUTIONS AND TAXES......................................... 25
CONVERSION FEATURE ........................................................ 26
GENERAL INFORMATION........................................................ 26
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.
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Alliance Bond
Fund, Inc. You will find additional information about each Portfolio (a "Fund"),
including a detailed description of the risks of an investment in the Funds,
after this Summary.
The Risk/Return Summary describes the Funds' objectives, principal investment
strategies, principal risks and fees. Each Fund's Summary page includes a short
discussion of some of the principal risks of investing in that Fund. A further
discussion of these and other risks is on page 7.
More detailed descriptions of the Funds, including the risks associated with
investing in the Funds, can be found further back in this Prospectus. Please be
sure to read this additional information BEFORE you invest. The Funds may at
times use certain types of investment derivatives such as options, futures,
forwards and swaps. The use of these techniques includes 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 bar
chart provide an indication of the historical risk of an investment in each Fund
by showing:
o how the Fund's average annual returns for one, five, and 10 years (or over
the life of the Fund if the Fund is less than 10 years old) compare to
those of a broad based securities market index; and
o changes in the Fund's performance from year to year over 10 years (or over
the life of the Fund if the Fund is less than 10 years old).
A Fund's past performance, of course, does not necessarily indicate how it will
perform in the future. As with all investments, you may lose money by investing
in the Funds.
3
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Alliance U.S. Government Portfolio
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OBJECTIVE:
The Fund's investment objective is a high level of current income that is
consistent with Alliance's determination of prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund invests primarily in U.S. Government securities, including
mortgage-related securities, 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 and in high grade debt
securities secured by mortgages on commercial real estate or residential rental
properties. The average weighted maturity of the Fund's investments varies
between one year or less and 30 years.
PRINCIPAL RISKS:
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund invests in mortgage-related and
asset-backed securities, it is subject to the risk that mortgage loans or other
obligations will be prepaid when interest rates decline, forcing the Fund to
reinvest in securities with lower interest rates. For this and other reasons,
mortgage-related and asset-backed securities may have significantly greater
price and yield volatility than traditional debt securities.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund. This information is for the Fund's Class A shares,
which, although not offered in this Prospectus, have returns that are
substantially similar to the Fund's Advisor Class shares because the classes
invest in the same portfolio of securities. The returns of the classes differ
only to the extent that the classes do not have the same expenses. Adviser Class
expenses are lower than Class A expenses.
PERFORMANCE TABLE AND BAR CHART INFORMATION
PERFORMANCE TABLE
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1 Year 5 Years 10 Years
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Class A -7.32% 5.03% 5.91%
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Lehman Brothers
Government
Bond Index -2.23% 7.44% 7.48%
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The average annual total returns in the performance table are for the periods
ended December 31, 1999 and reflect imposition of the maximum front-end sales
charge.
BAR CHART
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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.
[The following table was represented as a bar chart in the printed material.]
Calendar Year End
90 7.86
91 15.74
92 6.03
93 9.72
94 -4.38
95 16.58
96 0.34
97 8.55
98 8.60
99 -3.21
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 6.12%, 3rd quarter, 1991; and Worst quarter was down -3.41%,
1st quarter, 1994.
4
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Alliance Quality Bond Portfolio
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OBJECTIVE:
The Fund's investment objective is a high level of current income consistent
with preservation of capital by investing in investment grade fixed-income
securities.
PRINCIPAL INVESTMENT STRATEGIES:
The Fund invests in readily marketable securities that do not involve undue risk
of capital. The Fund normally invests all of its assets in securities that are
rated at least BBB- by S&P or, if unrated, are of comparable quality. The Fund
has the flexibility to invest in long- and short-term fixed income securities
depending on Alliance's assessment of prospective cyclical interest rate
changes.
The Fund also may:
o use derivatives strategies;
o invest in convertible debt securities, preferred stock and dividend-paying
stocks;
o invest in U.S. Government obligations, and
o invest in foreign fixed-income securities.
PRINCIPAL RISKS:
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, derivatives risk and market risk. To the extent the Fund invests in
foreign securities, it has foreign risk and currency risk.
PERFORMANCE TABLE AND BAR CHART INFORMATION
There is no bar chart or performance table for the Fund because it has not
completed a full calendar year of operations.
5
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Alliance Corporate Bond Portfolio
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OBJECTIVE:
The Fund's investment objective is primarily to maximize income over the long
term to the extent 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 invests primarily in corporate bonds. The Fund may invest up to 50% of
its total assets in foreign debt securities primarily corporate debt securities
and sovereign debt obligations. All of the Fund's investments, whether foreign
or domestic, will be U.S. Dollar denominated. The Fund also may invest in
income-producing equity securities. While the Fund invests primarily (currently
65%) in investment grade debt securities, it also may invest a significant
amount of its total assets in lower-rated debt 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.
PRINCIPAL RISKS:
Among the principal risks of investing in the Fund are interest rate risk,
credit risk, and market risk. Because the Fund emphasizes investments with a
relatively long average maturity and duration, its returns may be more volatile
than other corporate bond funds. To the extent the Fund invests in lower-rated
securities, your investment is subject to more credit risk than an investment in
a fund that invests solely in higher-rated securities. The Fund's investments in
foreign debt obligations have foreign risk.
The table and bar chart provide an indication of the historical risk of an
investment in the Fund. This information is for the Fund's Class A shares,
which, although not offered in this Prospectus, have returns that are
substantially similar to the Fund's Advisor Class shares because the classes
invest in the same portfolio of securities. The returns of the classes differ
only to the extent that the classes do not have the same expenses. Advisor
Class expenses are lower than Class A expenses.
PERFORMANCE TABLE AND BAR CHART INFORMATION
PERFORMANCE TABLE
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1 Year 5 Years 10 Years
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Class A -2.43% 8.96% 9.51%
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Lehman Brothers
Aggregate Bond
Index -0.82% 7.73% 7.70%
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The average annual total returns in the performance table are for the periods
ended December 31, 1999 and reflect imposition of the maximum front-end sales
charge.
BAR CHART
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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.
[The following table was represented as a bar chart in the printed material.]
Calendar Year End
90 5.54
91 18.05
92 13.07
93 31.09
94 -12.75
95 27.98
96 10.02
97 11.81
98 -0.03
99 1.94
You should consider an investment in the Fund as a long-term investment. The
Fund's returns will fluctuate over long and short periods. For example, during
the period shown in the bar chart, the Fund's:
Best quarter was up 15.61%, 2nd quarter, 1995; and Worst quarter was down
-8.43%, 1st quarter, 1994.
6
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SUMMARY OF PRINCIPAL RISKS
The value of your investment in the Funds will change with changes in the values
of the Funds' investments. Many factors can affect those values. In this
discussion, we describe the principal risks that may affect the Funds as a
whole. The Funds could be subject to additional principal risks because the
types of investments made by the Funds can change over time. This Prospectus has
additional descriptions of the types of investments that appear in bold type in
the discussions under "Descriptions of Investment Practices" and "Additional
Risk Considerations." These 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. Increases in
interest rates may cause the value of a Fund's investments to decline.
Even Funds such as the Alliance U.S. Government and Alliance Quality Bond 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 is generally greater for Funds that invest in debt securities
with longer maturities, such as Alliance 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 Alliance U.S.
Government and Alliance Quality Bond. The value of these securities is affected
more by changes in interest rates because when interest rates rise, the
maturities of these types 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 Funds must reinvest their assets in debt securities
with lower interest rates. Increased interest rate risk also is likely for
Alliance Quality Bond and Alliance 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 Alliance Corporate Bond, which invests 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.
Alliance Corporate Bond, which invests in foreign debt securities, is subject to
increased credit risk because of the difficulties of requiring foreign entities
to honor their contractual commitments.
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.
Alliance Quality Bond and Alliance Corporate Bond are subject to this risk. A
Fund's investments in foreign securities may experience more rapid and extreme
changes in value than if it invested isolely 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.
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.
Alliance Quality Bond and Alliance Corporate Bond, which invests in securities
denominated in, and receiving revenues in, foreign currencies, are subject to
currency risk.
DERIVATIVES RISK
The 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
7
<PAGE>
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 underlying assets, rates, or indices. Alliance
Corporate Bond could have increased derivatives risk because of its investments
in structured securities.
LEVERAGING RISK
When a Fund borrows money or otherwise leverages its portfolio, 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.
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
The Funds are subject to management risk because they are actively managed
investment funds. Alliance will apply its investment techniques and risk
analyses in making investment decisions for the Funds, but there can be no
guarantee that these decisions 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 the Funds.
8
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FEES AND EXPENSES OF THE FUNDS
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Front-end or Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is lower) None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) and
EXAMPLES
The Examples are to help you compare the cost of investing in a Fund with the
cost of investing in other funds. They assume that you invest $10,000 in a Fund
for the time periods indicated and then redeem all your shares at the end of
those periods. They also assume that your investment has a 5% return each year,
that a Fund's operating expenses stay the same and that all dividends and
distributions are reinvested. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
Operating Expenses Examples
------------------------------------------------ -------------------------------
<S> <C> <C>
Alliance U.S. Government Portfolio
Management Fees .55% After 1 year 187
12b-1 Fees none After 3 years 579
Interest Expense 1.02% After 5 years 995
Other Expenses .27% After 10 years 2,159
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Total Fund Operating Expenses 1.84%
=====
Alliance Quality Bond Portfolio
Management Fees .55% After 1 year 69
12b-1 Fees none After 3 years (b) 2,536
Other Expenses 12.25%
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Total Fund Operating Expenses 12.80%
=====
Waiver and/or Expense Reimbursement (a) (12.12)%
Net Expenses .68%
=====
Alliance Corporate Bond Portfolio
Management Fees .55% After 1 year 84
12b-1 Fees none After 3 years 262
Interest Expense .01% After 5 years 455
Other Expenses .26% After 10 years 1,014
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Total Fund Operating Expenses .82%
=====
</TABLE>
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(a) Reflects Alliance's contractual waiver of a portion of its advisory fee
and/or reimbursement of a portion of the Fund's operating expenses. This
waiver extends through the end of the Fund's current fiscal year and may
be extended by Alliance for additional one year terms.
(b) Examples assume that Alliance's agreement to waive management fees and/or
bear Fund expenses is not extended beyond its initial term.
9
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GLOSSARY
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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.
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.
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:
o ARMS, which are adjustable-rate mortgage securities;
o SMRS, which are stripped mortgage-related securities;
o CMOs, which are collateralized mortgage obligations;
o GNMA certificates, which are securities issued by the Government
National Mortgage Association or GNMA;
o FNMA certificates, which are securities issued by the Federal
National Mortgage Association or FNMA; and o 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.
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 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 securities not backed by
the full faith and credit of the United States include certificates issued by
FNMA and FHLMC.
RATING AGENCIES AND RATED SECURITIES
Duff & Phelps is Duff & Phelps Credit Rating Company.
Fitch is Fitch IBCA, Inc.
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."
Moody's is Moody's Investors Service, Inc.
NRSRO is a nationally recognized statistical rating organization.
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.
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.
10
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Exchange is the New York Stock Exchange.
Securities Act is the Securities Act of 1933, as amended.
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DESCRIPTION OF THE FUNDS
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This section of the Prospectus provides a more complete description of each
Fund's investment objective and principal strategies and risks. Of course, there
can be no assurance that any Fund will achieve its investment objective.
Please note that:
o Additional discussions of the Funds' investments, including the risks of
the investments, can be found in the discussion under Description of
Investment Practices following this section.
o The description of the principal risks for a Fund may include risks
described in the Summary of Principal Risks above. Additional information
about the risks of investing in a Fund can be found in the discussion
under Additional Risk Considerations following this section.
o Additional descriptions of each Fund's strategies, investments, and risks,
can be found in a Fund's Statement of Additional Information or SAI.
o Except as noted, (i) the Funds' investment objectives are "fundamental"
and cannot be changed without a shareholder vote, and (ii) the Funds'
investment policies are not fundamental and thus can be changed without a
shareholder vote. Where an investment policy or restriction has a
percentage limitation, such limitation is applied at the time of
investment. Changes in the market value of securities in the Fund's
portfolio after they are purchased by the Fund will not cause the Fund to
be in violation of such limitation.
INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES
Alliance U.S. Government Portfolio
Alliance U.S. Government Portfolio seeks a high level of current income that is
consistent with Alliance's determination of prudent investment risk. As a matter
of fundamental policy, the Fund pursues its objective by investing at least 65%
of its total assets in U.S. Government securities, 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, including high-grade debt securities secured by
mortgages on commercial real estate or residential rental properties.
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, that are determined by Alliance to have undergone similar credit
quality deterioration.
The Fund also may:
o enter into reverse repurchase agreements and dollar rolls;
o enter into various hedging transactions, such as interest rate swaps,
caps, and floors;
o enter into forward contracts;
o purchase and sell futures contracts for hedging purposes;
o purchase call and put options on futures contracts or securities for
hedging purposes; and
o enter into repurchase agreements.
Alliance Quality Bond Portfolio
Alliance Quality Bond Portfolio seeks high current income consistent with
preservation of capital by investing in investment grade fixed-income
securities. In seeking to achieve its investment objective, the Fund invests in
readily marketable securities with relatively attractive yields that do not
involve undue risk of loss of capital. The Fund normally invests all of its
assets in securities that are rated at least BBB- by S&P or Baa3 by Moody's or
that are of comparable quality. The Fund normally maintains an average aggregate
quality rating of its portfolio securities of at least A (S&P and Moody's). The
Fund has the flexibility to invest in long- and short-term fixed-income
securities (including debt securities, convertible debt securities and U.S.
Government obligations) and preferred stocks based on Alliance's assessment of
prospective cyclical interest rate changes.
In the event that the credit rating of a security held by the Fund falls below
investment grade (or, if in the case of unrated securities, Alliance determines
that the quality of a security has deteriorated below investment grade), the
Fund will not be obligated to dispose of that security and may continue to hold
the security if, in the opinion of Alliance, such investment is appropriate in
the circumstances.
The Fund also may:
o purchase and sell interest rate futures contracts and options;
o enter into interest rate swaps, caps and floors for hedging purposes;
o purchase put and call options and write covered put and call options on
securities it may purchase;
o write covered call options for cross-hedging purposes;
o invest in foreign fixed-income securities, but only up to 20% of its total
assets;
o enter into foreign currency futures contracts and related options;
11
<PAGE>
o enter into forward foreign currency exchange contracts and options on
foreign currencies for hedging purposes;
o invest in CMO's;
o invest in zero coupon securities and "pay-in-kind" debentures; and
o make secured loans of portfolio securities of up to 50% of its total
assets.
Alliance Corporate Bond Portfolio
Alliance Corporate Bond Portfolio seeks primarily to maximize income over the
long term to the extent 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
Fund expects that the average weighted maturity of its portfolio of fixed-income
securities will 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 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 had greater net asset value volatility
than most other corporate bond funds. Prospective investors in the Fund should
therefore be prepared to accept the degrees 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 June 30, 2000, the Fund's investments were rated (or
equivalent quality);
o A or above 21.59%
o Baa or BBB 48.09%
o Ba or BB 19.52%
o B 10.68%
o C .32%
The Fund may invest up to 50% 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 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 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:
o invest in structured securities;
o 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;
o for hedging purposes, purchase put and call options written by others and
write covered put and call options;
o for hedging purposes, enter into various hedging transactions, such as
interest rate swaps, caps, and floors;
o invest in variable, floating, and inverse floating rate instruments;
o invest in zero coupon and pay-in-kind securities; and
o invest in CMOs and multi-class pass-through mortgage-related securities.
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DESCRIPTION OF INVESTMENT PRACTICES
This section describes certain investment practices and associated risks that
may be used by the Funds. There can be no assurance that at any given time a
Fund will engage in any of these derivative or other practices.
Derivatives. The Funds may use derivatives to achieve their investment
objective. 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 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 a Fund's
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.
Alliance's use of derivatives is subject to continuous risk assessment and
control from the standpoint of the 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.
There are four principal types of derivative instruments -- options, futures,
forwards, and swaps -- from which virtually any type of derivative transaction
can be created.
o 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).
o 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.
o 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.
o Swaps -- A swap is a customized, privately negotiated agreement that
obligates two parties to exchange a series of cash flows at specified
intervals (payment dates) based upon or calculated by reference to changes
in specified prices or rates (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
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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.
o 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.
o Management Risk -- Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use
and complexity of derivatives require the maintenance of adequate controls
to monitor the transactions entered into, the ability to assess the risk
that a derivative adds to the Fund's portfolio, and the ability to
forecast price, interest rate, or currency exchange rate movements
correctly.
o Credit Risk -- This is the risk that a loss may be sustained by the 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 Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative
in evaluating potential credit risk.
o Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
o Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is
related to a notional principal amount, even if the parties have not made
any initial investment. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment.
o 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 the Fund. Derivatives do not always perfectly or even highly
correlate or track the value of the assets, rates or indices they are
designed to closely track. Consequently, the 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. In
addition, there is no guarantee that a specific derivative will be
available for a fund to utilize at any given time.
Derivatives Used by the Funds. The following describes specific derivatives that
the Funds may use.
Forward Foreign Currency Exchange Contracts. Alliance Quality Bond purchases or
sells forward foreign currency exchange contract ("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 or 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. Alliance U.S. Government and
Alliance Quality Bond may buy and sell futures contracts on fixed-income or
other
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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.
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 will be used for income or
hedging purposes.
Alliance U.S. Government 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. The Fund also will not 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 total assets of
the Fund.
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 swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments) computed based on a contractually-based
principal (or "notional") amount. Interest rate swaps are entered into on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments).
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.
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.
Alliance U.S. Government, Alliance Quality Bond and Alliance Corporate Bond will
not enter into an interest rate swap, cap, or floor transaction unless the
unsecured senior long- or short-term debt or the claims-paying ability of the
other party is then rated in the highest rating category of at least one NRSRO.
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 may invest 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 the 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, the 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,
the Fund would realize a loss if the price of the underlying security declined
or remained the same (in the case of 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 the 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, a Fund will not 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.
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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.
The Funds generally purchase or write privately negotiated options on
securities. A Fund effects 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. Alliance U.S.
Government and Alliance Corporate Bond will not purchase an option on a security
if, immediately thereafter, the aggregate cost of all outstanding options
purchased by the Fund would exceed 2% of the Fund's total assets. Nor will these
Funds 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.
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, the Fund might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, the 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.
A Fund's right to receive or deliver a security under a forward commitment may
be sold prior to the settlement date. The Fund enters 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. As a matter of fundamental policy,
Alliance Corporate Bond may not 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-
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counter options and assets used to cover over-the-counter options, and (iii)
repurchase agreements not terminable within seven days.
A Fund may not be able to sell its illiquid 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.
Loans of Portfolio Securities. The Funds 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 a 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 a Fund any income earned from the
securities. A 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 total assets for Alliance Quality Bond.
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 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 foreign government securities is, with respect to
Alliance Corporate Bond, restricted by the governing documentation as to the
nature of the assignee such that the only way in which a 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 a Fund to
assign a value to these investments for purposes of valuing a Fund's portfolio
and calculating its net asset value.
Alliance Corporate Bond may invest up to 15% of its total assets in loan
participations and assignments.
Mortgage-Related Securities. A Fund's 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 the 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 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. The 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
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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 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
mortgage-backed bonds or pass-through securities, with each class receiving
different proportions of the principal and interest payments from the underlying
assets. A common type of SMRS has one class of interest-only securities 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 reason, the Fund does not rely 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. These prepayments generally occur during
periods of falling mortgage interest rates. If property owners make unscheduled
prepayments of their mortgage loans, these prepayments will result in the early
payment of the applicable mortgage-related securities. In that event, the 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, the 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
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<PAGE>
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 the 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 also can 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 the Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as 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-term nature. The 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, the 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,
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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. Under normal circumstances, Alliance
U.S. Government does not expect to engage in reverse repurchase agreements and
dollar rolls with respect to greater than 50% of its total assets.
Structured Securities. Structured securities in which Alliance Corporate Bond
may invest represent interests in entities organized and operated solely for the
purpose of restructuring the investment characteristics of foreign government
securities. 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. Alliance
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 rate 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 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 fluctuation 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).
Alliance Quality Bond and Alliance 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.
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
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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 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 a 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 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. A Fund's investments
in foreign countries may include short-term, foreign-currency denominated
securities of the type mentioned above issued by foreign governmental entities,
companies and supranational organizations. While a Fund is investing for
temporary defensive purposes, they may not meet its investment objective.
ADDITIONAL RISK CONSIDERATIONS
Investment in a Fund involves the special risk considerations described below.
Certain of these risks may be heightened when investing in emerging markets.
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 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 relate to the foreign
currency-denominated obligations of a Fund's investments. 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 Alliance Quality Bond
could adversely affect the Fund's shareholders, as noted above, or in
anticipation of such changes, the Fund may increase the percentage of its
investment portfolio invested in U.S. Government securities, which would tend to
offset the negative impact of leverage on Fund shareholders. The 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
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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 assets 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 deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances.
A Fund also could 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 the 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 the 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.
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 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
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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 a 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
Alliance Quality Bond and Alliance Corporate Bond 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.
--------------------------------------------------------------------------------
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 adviser managing client accounts with assets as of June 30, 2000,
totaling more than $388 billion (of which approximately $185 billion represented
assets of investment companies). As of June 30, 2000, Alliance managed
retirement assets for many of the largest public and private employee benefit
plans (including 29 of the FORTUNE 100 companies), for public employee
retirement funds in 33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52 registered
investment companies, managed by Alliance, comprising 122 separate investment
portfolios currently have more than over 6.1 million shareholder accounts.
Alliance provides investment advisory services and order placement facilities
for the Fund. For these advisory services, during their fiscal years ended June
30, 1999, the Funds paid Alliance as a percentage of net assets:
Fee as a
percentage of
Fund net assets*
---- ------------
Alliance U.S. Government .56
Alliance Quality Bond .55*
Alliance Corporate Bond .55
--------------------------------------------------------------------------------
* 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.
PORTFOLIO MANAGERS
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 for the Fund's portfolio, and each
person's principal occupation during the past five years.
Principal occupation
Employee; time period; during the past
Fund title with ACMC five years
--------------------------------------------------------------------------------
Alliance Wayne D. Lyski; *
U.S. Government since 1983;
Executive Vice President
Jeffrey S. Phelgar; *
since 1997;
Senior Vice President
Alliance Matthew Bloom; *
Quality Bond since inception;
Alliance Wayne D. Lyski; since *
Corporate Bond 1987; (see above)
Paul J. DeNoon; *
since January 1992;
Senior Vice President
--------------------------------------------------------------------------------
* Persons associated with Alliance have been employed in a substantially
similar capacity to their current position.
PERFORMANCE OF A SIMILARLY MANAGED PORTFOLIO
Alliance is the investment adviser of a portfolio (the "Historical Fund") 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 substantially the same investment strategies and techniques as those of
Alliance Quality Bond. Alliance has served as investment adviser to the
Historical Fund since its inception in 1993. Matthew Bloom, who is primarily
responsible for the day-to-day management of Alliance Quality Bond, has been the
person principally responsible for the day-to-day management of the Historical
fund since 1995.
The following tables set forth performance results for the Historical Fund since
its inception on October 1, 1993, together with those of the Lipper Corporate
Debt Funds BBB Rated Average and the Lehman Aggregate Bond index as comparative
benchmarks. As of March 31, 1999, the assets in the Historical Fund totaled
approximately $333 million.
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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 Fund. In addition, the performance
data do not reflect Alliance Quality Bond's higher expenses, which, if
reflected, would lower the performance of the Historical Fund. The performance
data have not been adjusted for corporate or individual taxes, if any, payable
with respect to the Historical Fund. The rates of return shown for the
Historical fund are not an estimate or guarantee of future investment
performance of Alliance Quality Bond.
The Lipper Corporate Debt Funds BBB Rated 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 Alliance Quality Bond. Nonetheless, the investment policies
pursued by the Funds in the survey may differ from those of Alliance Quality
Bond and the Historical Fund. This survey is published by Lipper, Inc., a firm
recognized for its reporting of performance of actively managed funds. According
to Lipper, Inc., performance data are presented net of investment management
fees, operating expenses and, for funds with Rule 12b-1 plans, asset-based sales
charges. The Lehman Aggregate Bond Index is an Index comprised of investment
grade fixed-income securities, including U.S. Treasury, mortgage-backed,
corporate and "Yankee bonds" (U.S. dollar-denominated bonds issued outside the
United States).
The performance results presented below are based on percent changes in net
asset values of the Historical Fund 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. The inception date for the Historical Fund, the Lipper data and
the Lehman Index date is October 1, 1993.
Annualized Rates of Return
Periods Ended December 31, 1999
--------------------------------------------------------------------------------
Portfolio/Benchmark 1 Year 3 Years 5 Years Inception
--------------------------------------------------------------------------------
Historical Fund -2.00% 5.15% 7.47% 4.96%
Lehman Aggregate
Bond Index -0.82% 5.73% 7.73% 5.65%
Lipper Corporate Debt
Funds BBB Rated
Average -1.73% 4.69% 7.65% 5.39%
Cumulative Rates of Return
Periods Ended December 31, 1999
--------------------------------------------------------------------------------
Portfolio/Benchmark 1 Year 3 Years 5 Years Inception
--------------------------------------------------------------------------------
Historical Fund -2.00% 16.25% 43.34% 35.34%
Lehman Aggregate
Bond Index -0.82% 18.20% 45.12% 40.97%
Lipper Corporate Debt
Funds BBB Rated
Average -1.73% 14.80% 44.85% 39.12%
--------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
--------------------------------------------------------------------------------
HOW THE FUNDS VALUE THEIR SHARES
The Funds' share price is based on net asset value or NAV, which is calculated
at 4:00 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 Funds' directors 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 a Fund.
HOW TO BUY SHARES
You may purchase Advisor Class shares at NAV through your financial
representative. Advisor Class shares are not subject to any initial or
contingent sales charges or distribution expenses. You may purchase and hold
shares solely:
o through accounts established under a fee-based program, sponsored and
maintained by a registered broker-dealer or other financial intermediary
and approved by the Fund's principal underwriter, Alliance Fund
Distributors, Inc. or AFD;
o through a self-directed defined contribution employee benefit plan (e.g.,
a 401(k) plan) that has at least 1,000 participants or $25 million in
assets;
o as an interest in a "qualified State tuition program" (within the meaning
of section 529 of the Code) approved by AFD;
o by investment advisory clients of, and certain other persons associated
with, Alliance and its affiliates or the Fund; and
o through registered investment advisers or other financial intermediaries
who charge a management, consulting or other fee for their services and
who purchase shares through a broker or agent approved by AFD 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.
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 to be approved by AFD
for investment in Advisor Class shares. A Fund's Statement of Additional
Information has more detailed information about who may purchase and hold
Advisor Class shares.
24
<PAGE>
The Funds may refuse any order to purchase Advisor Class shares. In this regard,
the Funds reserve the right to restrict purchases of Advisor Class shares
(including through exchanges) when there appears to be evidence a pattern of
frequent purchases and sales made in response to short-term considerations.
HOW TO EXCHANGE SHARES
You may exchange your Advisor Class shares for Advisor Class shares of other
Alliance Mutual Funds. Exchanges of Advisor Class shares are made at the
next-determined NAV without any sales or service charge. 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 Fund 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 a Fund) on any day the
Exchange is open, either directly or through your financial intermediary. Your
sales price will be the next-determined NAV after a Fund receives your sales
request in proper form. Normally, proceeds will be sent to you within 7 days. If
you recently purchased your shares by check or electronic funds transfer, you
cannot redeem 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). If you are in doubt about what procedures or documents are required by
your fee-based program or employee benefit plan to sell your shares, you should
contact your financial representative.
o Selling Shares Through Your Financial Representative
Your financial representative must receive your sales 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. Your financial representative is responsible for
submitting all necessary documentation to a Fund and may charge you for this
service.
o Selling Shares Directly to a Fund
By Mail
-- Send a signed letter of instruction or stock power, along with
certificates, to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, N.J. 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. If you have any questions about these procedures, contact AFS.
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 received by 4:00 p.m. Eastern time
for you to receive that day's NAV.
-- If you have selected electronic funds transfer in your Shareholder
Application, the redemption proceeds may be 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, retirement plan accounts, or shares held by a
shareholder who has changed his or her address of record within the
previous 30 calendar days.
Other
If you are a Fund shareholder through an account established under a fee-based
program, your fee-based program may impose requirements with respect to the
purchase, sale, or exchange of Advisor Class shares of the Fund that are
different from those described in this Prospectus. A transaction, service,
administrative or other similar fee may be charged by your broker-dealer, agent,
financial intermediary or other financial representative with respect to the
purchase, sale or exchange of Advisor Class shares made through such financial
representative. Such financial intermediaries may also impose requirements with
respect to the purchase, sale or exchange of shares that are different from, or
in addition to, those imposed by the Fund, including requirements as to the
minimum initial and subsequent investment amounts.
--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
--------------------------------------------------------------------------------
AND TAXES
--------------------------------------------------------------------------------
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 net asset value
as of the close of business
25
<PAGE>
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.
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 the 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.
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, a Fund will send you tax information
stating the amount and type of all its distributions for the year. Consult your
tax adviser about the federal, state, and local tax consequences in your
particular circumstances.
--------------------------------------------------------------------------------
CONVERSION FEATURE
--------------------------------------------------------------------------------
Conversion
As described above, Advisor Class shares may be held solely through certain
fee-based program accounts, employee benefit plans, state tuition programs and
registered investment advisory or other financial intermediary relationships,
and by investment advisory clients of, and certain persons associated with,
Alliance and its affiliates or the Fund. If a holder of Advisor Class shares (i)
ceases to participate in the fee-based program or plan, or to be associated with
an eligible investment advisor or financial intermediary or (ii) is otherwise no
longer eligible to purchase Advisor Class shares (each a "Conversion Event"),
then all Advisor Class shares held by the shareholder will convert automatically
and without notice, to Class A shares of the same 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 NAV of the two classes and without the imposition of any sales load,
fee or other charge.
Description of Class A Shares
The Class A shares of a Fund have a distribution fee of .30% under the Fund's
Rule 12b-1 plan that allows the Fund to pay distribution and service fees for
the distribution and sale of its shares. Because this fee is paid out of the
Fund's assets, Class A shares have a higher expense ratio and may pay lower
dividends and may have a lower NAV than Advisor Class shares.
--------------------------------------------------------------------------------
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
26
<PAGE>
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
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.
27
<PAGE>
--------------------------------------------------------------------------------
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.
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 -- 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
28
<PAGE>
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.
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 fluctutate 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 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.
29
<PAGE>
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 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.
30
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(This page left intentionally blank.)
<PAGE>
For more information about the Funds, the following documents are available upon
request:
Annual/Semi-Annual Reports to Shareholders
The Funds' 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, N.J. 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:
o Call the Commision at 1-202-942-8090 for more information on the operation
of the Public Reference Room.
o Reports and other information about the Funds are available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov
o Copies of the information may be obtained, after paying a duplicating fee,
by electronic request at [email protected], or by writing the
Commission's Public Reference Section, Wash. DC 20549-0102
You also may find more information about Alliance and the Funds on the Internet
at: www.Alliancecapital.com.
Fund SEC File No.
Alliance U.S. Government 811-02383
Alliance Quality Bond 811-02383
Alliance Corporate Bond 811-02383
32
<PAGE>
(LOGO) ALLIANCE BOND FUND, INC. -
U.S. GOVERNMENT PORTFOLIO
QUALITY BOND PORTFOLIO
CORPORATE BOND PORTFOLIOn
_______________________________________________________________
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
October 6, 2000
_______________________________________________________________
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the
Prospectus, dated October 6, 2000, for the U.S. Government
Portfolio, Quality Bond Portfolio and Corporate Bond Portfolio(
each a "Portfolio") of Alliance Bond Fund, Inc. (the "Fund") that
offers the Advisor Class shares of the Portfolios (the "Advisor
Class Prospectus"). Copies of the Advisor Class Prospectus may
be obtained by contacting Alliance Fund Services, Inc., at the
address or the "For Literature" telephone number shown above.
TABLE OF CONTENTS
Page
Description of the Portfolios.........................
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...................................
Appendix A: Futures Contracts and Options on
Futures Contracts and Foreign Currencies............ A-1
________________________________
(R) This is a registered service mark used under license from the
owner, Alliance Capital Management L.P.
<PAGE>
_______________________________________________________________
DESCRIPTION OF THE PORTFOLIO
_______________________________________________________________
INTRODUCTION TO THE FUND
Alliance Bond Fund, Inc. (the "Fund") is an 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 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 and
Sale 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 three portfolios: U.S. Government
Portfolio, Quality Bond Portfolio and Corporate Bond Portfolio.
Each Portfolio offers Class A, Class B, Class C (each a "Retail
Class") and Advisor Class shares. This Statement of Additional
Information describes the Portfolios' Advisor Class shares.
Copies of the Portfolios' Retail Class Prospectus and Statements
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.
Except as otherwise indicated, the Portfolios'
investment policies are not designated "fundamental policies"
and, therefore, may be changed by the Board of Directors without
a shareholder vote. However, a Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. A 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.
U.S. GOVERNMENT PORTFOLIO
Investment Objective
The investment objective of the Portfolio is to seek a
high level of current income that is consistent with prudent
investment risk.
2
<PAGE>
How The Portfolio Pursues Its Objective
As a matter of fundamental policy the Portfolio pursues
its objective by investing at least 65% of the value of its total
assets in U.S. Government securities, repurchase agreements and
forward contracts relating to U.S. Government securities. The
Portfolio may invest the remaining 35% of the value of its total
assets in non-U.S. Government mortgage-related and asset-backed
securities. The Portfolio will not invest in any security rated
below BBB or Baa by a nationally recognized statistical rating
organization. The Portfolio may invest in unrated securities of
equivalent quality to the rated securities in which it may
invest, as determined by Alliance Capital Management L.P. (the
"Investment Adviser" or "Adviser"). The Portfolio expects, but
is not required, to dispose of securities that are downgraded
below BBB and Baa or, if unrated, are determined by the Adviser
to have undergone similar credit quality deterioration subsequent
to their purchase.
The Portfolio may also (i) enter into repurchase
agreements and reverse repurchase agreements, forward contracts,
and dollar rolls, (ii) enter into various hedging transactions,
such as interest rate swaps, caps and floors, (iii) purchase and
sell futures contracts for hedging purposes, and (iv) purchase
call and put options on futures contracts or on securities for
hedging purposes.
QUALITY BOND PORTFOLIO
Investment Objective
The investment objective of the Portfolio is high
current income consistent with preservation of capital by
investing in investment grade fixed-income securities.
How The Portfolio Pursues Its Objective
The Portfolio invests in readily marketable securities
with relatively attractive yields that do not involve undue risk
of loss of capital. The Portfolio normally invests all of its
assets in securities that are rated at least BBB by S&P or Baa by
Moody's or, if unrated, are of comparable quality. The Portfolio
normally maintains an average aggregate quality rating of its
portfolio securities of at least A (S&P and Moody's). The
Portfolio has the flexibility to invest in long- and short-term
fixed-income securities (including debt securities, convertible
debt securities and U.S. Government obligations) and preferred
stocks based on the assessment of the Investment Adviser of
prospective cyclical, interest rate changes.
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In the event that the credit rating of a security held
by the Portfolio falls below investment grade (or, if in the case
of unrated securities, the Investment Adviser determines that the
quality of a security has deteriorated below investment grade),
the Portfolio will not be obligated to dispose of that security
and may continue to hold the security if, in the opinion of the
Investment Adviser, such investment is appropriate in the
circumstances.
CORPORATE BOND PORTFOLIO
Investment Objective
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 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, 1999, the
Portfolio did not invest in securities rated below B by Moody's,
or if unrated by Moody's, considered by 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
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as junk bonds. 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 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
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should be aware that there are risks associated with investment
by the Portfolio in foreign securities.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The following additional investment policies supplement
those set forth in the Prospectus. The following information
provides a description of the types of securities in which the
Portfolios would be able to invest and the various investment
techniques that the Portfolios would be able to use in pursuit of
their investment objectives.
BRADY BONDS. The Corporate Bond 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
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)
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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.
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.
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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 ("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 Portfolio that holds the securities.
U.S. Government securities are considered among the
safest of fixed-income investments. As a result, however, their
yields are generally lower than the yields available from other
fixed-income securities.
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.
In addition to GNMA Certificates, the Portfolios may
invest in mortgage-backed securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA, a federally chartered
and privately-owned corporation, issues mortgage-backed
pass-through securities which are guaranteed as to timely payment
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of principal and interest by FNMA. FHLMC, a corporate
instrumentality of the United States whose stock is owned by the
Federal Home Loan Banks, issues participation certificates which
represent an interest in mortgages from FHLMC's portfolio. FHLMC
guarantees the timely payment of interest and the ultimate
collection of principal. Securities guaranteed by FNMA and FHLMC
are not backed by the full faith and credit of the United States.
If other fixed or variable rate pass-through mortgage-backed
securities issued by the U.S. Government or its agencies or
instrumentalities are developed in the future, the Portfolio
reserves the right to invest in them.
The Investment Adviser will, consistent with a
Portfolio's investment objectives, policies, and quality
standards, consider making investments in new types of mortgage-
related securities as such securities are developed and offered
to investors.
ZERO COUPON SECURITIES
The Portfolios may invest in zero coupon Treasury
securities, which consist of Treasury bills or the principal
components of U.S. Treasury bonds or notes. Certain of the
Portfolios 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 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
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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
a Portfolio) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year
even though the holder receives no interest payment in cash on
the security during the year. As a result, in order to make the
distributions necessary for a 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
Portfolio has actually received as interest during the year. The
Portfolios believe, however, that it is highly unlikely that it
would be necessary to liquidate portfolio securities or borrow
money in order to make such required distributions or to meet
their investment objective.
The Portfolio may invest in SMRS which are derivative
multi-class mortgage-related securities. The Portfolios 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 a 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
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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, a 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS
PASS-THROUGH SECURITIES. Mortgage-related securities in which
the Portfolios 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
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
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allocated among the several classes of a series of a CMO in many
ways.
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 Portfolios' 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 a Portfolio selects
CMOs that do not meet the above requirements, the 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.
In addition, certain of the Portfolios may invest in
mortgage-backed bonds. Mortgage-backed bonds are general
obligations of the issuer fully collateralized directly or
indirectly by a pool of mortgages. These mortgages serve as
collateral for the issuer's payment obligations on the
mortgage-backed bonds but interest and principal payments on the
mortgages are not passed through directly (as with GNMA, FNMA and
FHLMC pass-through securities) or on a modified basis (as with
CMOs). Accordingly, a change in the rate of prepayments on the
pool of mortgages could change the effective maturity of a CMO
but not the effective maturity of a mortgage-backed bond
(although, like many bonds, mortgage-backed bonds may be callable
by the issuer prior to maturity).
It is expected that governmental, government-related, or
private entities may create mortgage loan pools and other
mortgage-backed securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those
described above.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of
conventional residential mortgage loans. In addition, such
issuers may be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-backed
securities. Pools created by nongovernmental issuers generally
offer a higher rate of interest than government and
government-related pools because of the absence of direct or
indirect government or agency guarantors. Timely payment of
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interest and principal with respect to these pools may be
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of
credit. The insurance, guarantees, and creditworthiness of the
issuers thereof will be considered in determining whether a
mortgage-backed security meets the Portfolios' investment quality
standards. There is no assurance that the private insurers or
guarantors can meet their obligations under the insurance
policies or guarantee arrangements.
OTHER ASSET-BACKED SECURITIES. In general, the
collateral supporting asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience
unexpected levels of prepayments. As with mortgage-related
securities, asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different
parties and use similar credit enhancement techniques. The
Portfolio may purchase asset-backed securities that represent
fractional interests in pools of retail installment loans, both
secured (such as Certificates for Automobile Receivables) and
unsecured, leases or revolving credit receivables, both secured
and unsecured (such as Credit Card Receivable Securities).
Underlying retail installment loans, leases or revolving
credit receivables are subject to prepayment, which may reduce
the overall return to certificate holders. Certificate holders
may also experience delay in payment on the certificates if the
full amounts due on underlying retail installment loans, leases
or revolving credit receivables are not realized by the Portfolio
because of unanticipated legal or administrative costs of
enforcing the contracts, retail installment loans, leases or
revolving credit receivables, or because of depreciation or
damage to the collateral (usually automobiles) securing certain
contracts, retail installment loans, leases or revolving credit
receivables, or other factors. If consistent with its investment
objective and policies, the Portfolios may invest in other
asset-backed securities that may be developed in the future.
OPTIONS. The Portfolios may purchase put and call
options written by others and write covered put and call options
overlying the types of securities in which the Portfolios 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.
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The Portfolios 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 Portfolios might purchase a call option. In
purchasing a call option, a Portfolio would be in a position to
realize a gain if, during the option period, the price of the
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, a
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 a Portfolio were
permitted to expire without being sold or exercised, its premium
would represent a loss to the Portfolio.
When a 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 a 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 a Portfolio were
exercised the Portfolio would be obligated to purchase the
underlying security at the exercise price. If a call option
written by a Portfolio were exercised the Portfolio would be
obligated to sell the underlying security at the exercise price.
The Portfolios may write put options either to earn
additional income in the form of option premiums (anticipating
that the price of the underlying security will remain stable or
rise during the option period and the option will therefore not
be exercised) or to acquire the underlying security at a net cost
below the current value (e.g., the option is exercised because of
a decline in the price of the underlying security, but the amount
paid by a Portfolio, offset by the option premium, is less than
the current price).
Certain of the Portfolios will write covered call
options both to reduce the risks associated with certain of its
investments and to increase total investment return through the
receipt of premiums. In return for the premium income, a
Portfolio will, give up the opportunity to profit from an
increase in the market price of the underlying security above the
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exercise price so long as its obligations under the contract
continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, a Portfolio will retain the
risk of loss should the price of the security decline. The
premium is intended to offset that loss in whole or in part.
Unlike the situation in which the Portfolio owns securities not
subject to a call option, the Portfolio, in writing call options,
must assume that the call may be exercised at any time prior to
the expiration of its obligation as a writer, and that in such
circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially
below the prevailing market 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 Portfolios may also write covered 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 Portfolios 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.
A Portfolio may terminate its obligation to the holder
of an option written by the Portfolio through a "closing purchase
transaction." The Portfolios 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. A Portfolio
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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. A closing
purchase transaction for exchange-traded options may be made only
on a national securities exchange. There is no assurance that a
liquid secondary market on a national securities exchange will
exist for any particular option, or at any particular time, and
for some options, such as over-the-counter options, no secondary
market on a national securities exchange may exist. If the
Portfolio is unable to effect a closing purchase transaction, the
Portfolio will not sell the underlying security until the option
expires or the Portfolio delivers the underlying security upon
exercise.
The Portfolios may purchase or write options in
negotiated transactions. The Portfolios effect 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
Adviser has also adopted procedures for monitoring the
creditworthiness of such entities. Options traded in the over-
the-counter market may not be as actively traded as those traded
on an exchange. Accordingly, it may be more difficult to value
such options. Options purchased or written by the Portfolio in
negotiated transactions may be considered 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.
The Portfolios may enter into contracts (or amend
existing contracts) with primary dealer(s) with whom it writes
over-the-counter options. The contracts will provide that the
Portfolio has the absolute right to repurchase an option it
writes at any time at a repurchase price which represents the
fair market value, as determined in good faith through
negotiation between the parties, but which in no event will
exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary
between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by
the Portfolio for writing the option, plus the amount, if any, of
the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to
account for the difference between the price of the security and
the strike price of the option if the option is written
"out-of-the-money." Although the Portfolios have established
standards of creditworthiness for these primary dealers, the
Portfolios may still be subject to the risk that firms
participating in such transactions will fail to meet their
obligations. With respect to agreements concerning the
over-the-counter options a Portfolio has written, the Portfolio
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will treat as illiquid only securities equal in amount to the
formula price described above less the amount by which the option
is "in-the-money," i.e., the amount by which the price of the
option exceeds the exercise price.
OPTIONS ON SECURITIES INDICES. A Portfolio may purchase
put and call options and write covered put and call options on
securities indexes for the purpose of hedging against the risk of
unfavorable price movements adversely affecting the value of the
Portfolio's securities or securities it intends to purchase. An
option on a securities index is similar to an option on a
security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option. A
call option on a securities index is considered covered, for
example, if, so long as a Portfolio is obligated as the writer of
the call, it holds securities the price changes of which are, in
the opinion of the Investment Adviser, expected to replicate
substantially the movement of the index or indexes upon which the
options written by the Portfolio are based. A put on a securities
index written by a Portfolio will be considered covered if, so
long as it is obligated as the writer of the put, the Portfolio
segregates with its custodian liquid assets having a value equal
to or greater than the exercise price of the option.
Through the purchase of listed index options, a
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in a
Portfolio's securities probably will not correlate perfectly with
movements in the level of the index and, therefore, the Portfolio
would bear a risk of loss on index options purchased by it if
favorable price movements of the hedged portfolio securities do
not equal or exceed losses on the options or if adverse price
movements of the hedged portfolio securities are greater than
gains realized from the options.
FUTURES CONTRACTS AND OPTIONS THEREON. The Portfolios
may purchase and sell futures contracts and related options on
debt securities and on indexes of debt securities to hedge
against anticipated changes in interest rates that might
otherwise have an adverse effect on the value of its assets or
assets it intends to acquire. The Portfolios may also enter into
futures contracts and related options on foreign currencies in
order to limit its exchange rate risk. A "sale" of a futures
contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract
means the incurring of a contractual obligation to acquire the
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securities called for by the contract at a specified price on a
specified date. The purchaser of a futures contract on an index
agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of
the index on the expiration date of the contract and the price at
which the contract was originally struck. All futures contracts
and related options will be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission (the
"CFTC"). The Portfolios will only write options on futures
contracts which are "covered." These investment techniques will
be used only to hedge against anticipated future changes in
interest or exchange rates which otherwise might either adversely
affect the value of the Portfolios' securities or adversely
affect the prices of securities which the Portfolios intend to
purchase at a later date. These investment techniques will not
be used for speculation.
In general, the Portfolios will limit their use of
futures contracts and options on futures contracts so that either
(i) the contracts or options thereon are for "bona fide hedging"
purposes as defined under regulations of the CTFC or (2) if for
other purposes, no more than 5% of the liquidation value of the
Portfolio's total assets will be used for initial margin of
option premiums required to establish non-hedging positions.
These instruments will be used for hedging purposes and not for
speculation or to leverage a Portfolio.
In instances involving the purchase of futures contracts
or the writing of put options thereon by a Portfolio, an amount
of liquid assets equal to the cost of such futures contracts or
options written (less any related margin deposits) will be
deposited in a segregated account with its custodian, thereby
insuring that the use of such futures contracts and options is
unleveraged. In instances involving the sale of futures
contracts or the writing of call options thereon by a Portfolio,
the securities underlying such futures contracts or options will
at all times be maintained by the Portfolio or, in the case of
index futures and related options, the Portfolio will own
securities the price changes of which are, in the opinion of the
Investment Adviser, expected to replicate substantially the
movement of the index upon which the futures contract or option
is based.
Positions taken in the futures markets are not normally
held until delivery or cash settlement is required, but are
instead liquidated through offsetting transactions which may
result in a gain or a loss. While futures positions taken by a
Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying
securities whenever it appears economically advantageous to the
Portfolio to do so.
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Positions in futures contracts may be closed out only on
an exchange or a board of trade which provides the market for
such futures. Although the Portfolios intend to purchase or sell
futures only on exchanges or boards of trade where there appears
to be an active market, there is no guarantee that such will
exist for any particular contract or at any particular time. If
there is not a liquid market at a particular time, it may not be
possible to close a futures position at such time, and, in the
event of adverse price movements, the Portfolio would continue to
be required to make daily cash payments of maintenance margin.
However, in the event futures positions are used to hedge
portfolio securities, the securities will not be sold until the
futures positions can be liquidated. In such circumstances, an
increase in the price of securities, if any, may partially or
completely offset losses on the futures contracts.
See Appendix A for further discussion of the use, risks
and costs of futures contracts and options on futures contracts.
FORWARD COMMITMENTS. Certain of the Portfolios may
enter into forward commitments for the purchase or sale of
securities. Such transactions may include purchases on a "when-
issued" basis or purchases or sales on a "delayed delivery"
basis.
When forward commitment transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the
securities take place at a later date, normally within four
months after the transaction, although delayed settlements beyond
four months may be negotiated. Securities purchased or sold
under a forward commitment are subject to market fluctuation, and
no interest accrues to the purchaser prior to the settlement
date. At the time a Portfolio enters into a forward commitment,
it will record the transaction and thereafter reflect the value
of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value.
The use of forward commitments enables a Portfolio to
protect against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling
bond prices, a Portfolio might sell securities in its portfolio
on a forward commitment basis to limit its exposure to falling
bond prices. In periods of falling interest rates and rising
bond prices, a Portfolio might sell a 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. However, if the Investment Adviser
were to forecast incorrectly the direction of interest rate
movements, the Portfolio might be required to complete such when-
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issued or forward transactions at prices less favorable than
current market values.
A Portfolio's right to receive or deliver a security
under a forward commitment may be sold prior to the settlement
date, but the Portfolio will enter into forward commitments only
with the intention of actually receiving or delivering the
securities, as the case may be. To facilitate such transactions,
a Portfolio's custodian will maintain, in the separate account of
the Portfolio, liquid assets having value equal to, or greater
than, any commitments to purchase securities on a forward
commitment basis. If the Portfolio, however, chooses to dispose
of the right to receive or deliver a security subject to a
forward commitment prior to the settlement date of the
transaction, it can incur a gain or loss. In the event the other
party to a forward commitment transaction were to default, the
Portfolio might lose the opportunity to invest money at favorable
rates or to dispose of securities at favorable prices.
Although the Portfolios intend to make such purchases
for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases. For
example, by committing to purchase securities in the future, a
Portfolio subjects itself to a risk of loss on such commitments
as well as on its portfolio securities. Also, a Portfolio may
have to sell assets that have been set aside in order to meet
redemptions. In addition, if a Portfolio determines it is
advisable as a matter of investment strategy to sell the forward
commitment or when-issued or delayed delivery securities before
delivery, the Portfolio may incur a gain or loss because of
market fluctuations since the time the commitment to purchase
such securities was made. Any such gain or loss would be treated
as a capital gain or loss and would be treated for tax purposes
as such. When the time comes to pay for the securities to be
purchased under a forward commitment or on a when-issued or
delayed delivery basis, the Portfolio will meet its obligations
from the then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of
the forward commitment or when-issued or delayed delivery
securities themselves (which may have a value greater or less
than the Portfolio's payment obligation).
FORWARD CONTRACTS. 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.
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OPTIONS ON FOREIGN CURRENCIES. The Portfolios may
purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. Dollar
value of foreign currency-denominated portfolio securities and
against increases in the U.S. Dollar cost of such securities to
be acquired. As in the case of other kinds of options, however,
the writing of an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the
Portfolio could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the
Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Portfolio are
exchange-traded or traded over-the-counter. The Portfolio will
write options on foreign currencies only if they are "covered."
The Portfolios will not speculate in foreign currency
options. Accordingly, the Portfolios will not hedge a currency
substantially in excess of the market value of the securities
denominated in that currency which it owns or the expected
acquisition price of securities which it anticipates purchasing.
See Appendix A for further discussion of the use, risks
and costs of options on foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The
Portfolios may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk
to the Portfolios of adverse changes in the relationship between
the U.S. Dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A
Portfolio 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 ("transaction hedge").
Additionally, for example, when a Portfolio 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 Portfolio's securities denominated in such foreign
currency, or when the Portfolio 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 ("position hedge"). In this
situation a Portfolio may, in the alternative, enter into a
forward contract to sell a different foreign currency for a fixed
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U.S. Dollar amount where the Portfolio 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
Portfolio are denominated ("cross-hedge"). To the extent required
by applicable law, a Portfolio's Custodian will place liquid
assets in a separate account of the Portfolio having a value
equal to the aggregate amount of the Portfolio's commitments
under forward contracts entered into with respect to position
hedges and cross-hedges. If the value of the assets placed in a
separate account declines, additional liquid assets will be
placed in the account on a daily basis so that the value of the
account will equal the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all
or part of the separate account, a Portfolio may purchase a call
option permitting the Portfolio to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no
higher than the forward contract price or the Portfolio may
purchase a put option permitting the Portfolio to sell the amount
of foreign currency subject to a forward purchase contract at a
price as high or higher than the forward contract price. In
addition, a Portfolio may use such other methods of "cover" as
are permitted by applicable law. Unanticipated changes in
currency prices may result in poorer overall performance for the
Portfolio than if it had not entered into such contracts.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate forward contracts. In
such event the Portfolios' ability to utilize forward contracts
in the manner set forth in the Prospectus may be restricted. The
use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. Dollar equivalent value of
the prices of or rates of return on a Portfolio's foreign
currency-denominated portfolio securities and the use of such
techniques will subject the Portfolio to certain risks. The
Portfolios will not speculate in forward currency contracts. The
Portfolios will only enter forward foreign currency exchange
contracts with counterparties that, in the option of the
Investment Adviser, do not present undue credit risk. Generally,
such forward contracts will be for a period of less than three
months.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign currency-denominated asset that is the subject of the
hedge generally will not be precise. In addition, a Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge
its assets. Also, with regard to a Portfolio's use of cross-
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hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to
the U.S. Dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of
the foreign currencies underlying a Portfolio's cross-hedges and
the movements in the exchange rates of the foreign currencies in
which the Portfolio's assets that are the subject of such cross-
hedges are denominated.
INTEREST RATE TRANSACTIONS. In order to attempt to
protect the value of the Portfolios' investments from interest
rate fluctuations, a Portfolio may enter into various hedging
transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Portfolios expect to
enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio.
The Portfolios may also enter into these transactions to protect
against any increase in the price of securities the Portfolios
anticipate purchasing at a later date. The Portfolios intend 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 Portfolios 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 a 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 Portfolios 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 a 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
Portfolios will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-
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paying ability of the other party thereto is then rated in the
highest rating category of at least one nationally recognized
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.
GENERAL. The successful use of the foregoing investment
practices draws upon the Investment Adviser's special skills and
experience with respect to such instruments and usually depends
on the Investment Adviser's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or
exchange rates move in an unexpected manner, the Portfolios may
not achieve the anticipated benefits of futures contracts or
options on futures contracts, options, forward currency
contracts, interest rate transactions or forward commitment
contracts or may realize losses and thus be in a worse position
than if such strategies had not been used. Further, unlike many
exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with
respect to options on currencies, and adverse market movements
could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the
prices of such instruments and movements in the values of the
securities and currencies hedged will not be perfect and could
produce unanticipated losses.
The Portfolios' ability to dispose of its position in
futures contracts, options, interest rate transaction and forward
commitment contracts will depend on the availability of liquid
markets in such instruments. Markets for these vehicles with
respect to a number of fixed-income securities and currencies are
relatively new and still developing. If, for example, a
secondary market did not exist with respect to an option
purchased or written by a Portfolio over-the-counter, it might
not be possible to effect a closing transaction in the option
(i.e., dispose of the option) with the result that (i) an option
purchased by the Portfolio would have to be exercised in order
for the Portfolio to realize any profit and (ii) the Portfolio
may not be able to sell portfolio securities covering an option
written by the Portfolio until the option expired or it delivered
the underlying currency or futures contract upon exercise.
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If in the event of an adverse movement a Portfolio could
not close a futures position, it would be required to continue to
make daily cash payments of variation margin. If a Portfolio
could not close an option position, an option holder would be
able to realize profits or limit losses only by exercising the
option, and an option writer would remain obligated until
exercise or expiration. Finally, if a broker or clearing member
of an options or futures clearing corporation were to become
insolvent, a Portfolio could experience delays and might not be
able to trade or exercise options or futures purchased through
that broker. In addition, a Portfolio could have some or all of
their positions closed out without their consent. If substantial
and widespread, these insolvencies could ultimately impair the
ability of the clearing corporations themselves.
No assurance can be given that a Portfolio will be able
to utilize these instruments effectively for the purposes set
forth above.
LENDING OF PORTFOLIO SECURITIES. Consistent with
applicable regulatory requirements, certain of the Portfolios may
loan their portfolio securities where such loans are continuously
secured by cash, marketable securities issued or guaranteed by
the U.S. Government or its agencies, or a standby letter of
credit issued by qualified banks equal to no less than the market
value, determined daily, of the securities loaned. In loaning
its portfolio securities, a 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. Loans
will only be made to firms deemed by the Investment Adviser to be
of good standing and will not be made unless, in the judgment of
the Investment Adviser, the consideration to be earned from such
loans would justify the risk.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Corporate
Bond 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
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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 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
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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.
SECURITIES RATINGS. 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 issuer's
capacity to pay interest and repay principal than in the case of
higher-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 a 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. In
considering investments for the Portfolio, the Investment Adviser
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. 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 a 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.
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STRUCTURED SECURITIES. Corporate Bond 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
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.
ILLIQUID SECURITIES. U. S. Government Portfolio and
Quality Bond Portfolio will not invest more than 15% of their net
assets in illiquid securities. Corporate Bond Portfolio will not
invest in illiquid securities. For this purpose, illiquid
securities are securities restricted as to disposition under
Federal securities laws and 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 a Portfolio over-the-counter and the cover for
options written by the Portfolio over-the-counter, and
(c) repurchase agreements not terminable within seven days.
Securities that have legal or contractual restrictions on resale
but have a readily available market are not deemed illiquid for
purposes of this limitation.
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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
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 a Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. 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
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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 Portfolios 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 Portfolios 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). Under a repurchase agreement, underlying debt
instruments are acquired for a relatively short period (usually
not more than one week and never more than a year) subject to an
obligation of the seller to repurchase and the Portfolio to
resell the debt instruments at a fixed price and time, thereby
determining the yield during the Portfolio's holding period. The
Portfolios enter into repurchase agreements with respect to U.S.
Government obligations, certificates of deposit, or banker's
acceptances with registered broker-dealers, U.S. Government
securities dealers or domestic banks whose creditworthiness is
determined to be satisfactory by the Investment Adviser pursuant
to guidelines adopted by the Board of Directors. Generally, the
Portfolio does not invest in repurchase agreements maturing in
more than seven days.
Repurchase agreements may exhibit the characteristics of
loans by a Portfolio. During the term of the repurchase
agreement, a Portfolio retains the security subject to the
repurchase agreement as collateral securing the seller's
repurchase obligation, continually monitors on a daily basis the
market value of the security subject to the agreement and
requires the seller to deposit with the Portfolio collateral
equal to any amount by which the market value of the security
subject to the repurchase agreement falls below the resale amount
provided under the repurchase agreement.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Reverse
repurchase agreements involve sales by a Portfolio of portfolio
assets concurrently with an agreement by the Portfolio to
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repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio
continues to receive principal and interest payments on these
securities. Generally, the effect of such a transaction is that
the Portfolio 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 the
Portfolio of the reverse repurchase transaction is less than the
cost of otherwise obtaining the cash.
Dollar rolls involve sales by a Portfolio of securities
for delivery in the current month and the Portfolio's
simultaneously contracting to repurchase substantially similar
(same type and coupon) securities on a specified future date.
During the roll period, the Portfolio forgoes principal and
interest paid on the securities. The Portfolio 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 the Portfolio 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 Portfolio'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
Portfolio's obligation to repurchase the securities. Under
normal circumstances, the Adviser does not expect to engage in
reverse repurchase agreements and dollar rolls with respect to
greater than 50% of the Portfolio's total assets.
INVESTMENT IN OTHER INVESTMENT COMPANIES. Certain of
the Portfolios may invest in other investment companies whose
investment objectives and policies are consistent with those of
the Portfolio. If a Portfolio acquires shares in investment
companies, shareholders would bear both their proportionate share
of expenses in the Portfolio (including management and advisory
fees) and, indirectly, the expenses of such investment companies
(including management and advisory fees).
PORTFOLIO TURNOVER. Because the Portfolios will
actively use trading to achieve their investment objectives and
policies, the Portfolios 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
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funds on a long-term basis, and correspondingly larger mark-up
charges can be expected to be borne by a Portfolio. Management
anticipates that the annual turnover in the Portfolios may be in
excess of 250% in future years (but is not expected to exceed
500%). An annual turnover rate of 250% occurs, for example, when
all of the securities in the Portfolio are replaced two and one-
half times in a period of one year.
The value of the Portfolios' 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 Portfolios' investment
objectives will be achieved.
CERTAIN RISK CONSIDERATIONS
EXTENT OF TRADING. No established secondary markets may
exist for many of the Sovereign Debt Obligations in which
Corporate Bond 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, Corporate Bond 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.
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.
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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
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.
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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
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. Corporate Bond 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
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Portfolio to adopt special procedures, seek local government
approvals or take other actions, each of which may involve
additional costs to the Portfolio.
RISKS OF INVESTMENTS IN FOREIGN SECURITIES. Foreign
issuers are subject to accounting 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 statement
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 Portfolios will 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. 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.
Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar
developments, such as military coups, have occurred in the past
in countries in which the Portfolio will invest and could
adversely affect the Portfolios' assets should these conditions
or events recur.
Foreign investment in certain foreign securities is
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain foreign securities and increase the costs and expenses of
the Portfolios. Certain countries in which the Portfolios will
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 other than those on which a Portfolio
will focus it investments may require governmental approval for
the repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors. In addition, if a
deterioration occurs in a country's balance of payments, the
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country could impose temporary restrictions on foreign capital
remittances.
Income from certain investments held by the Portfolios
could be reduced by foreign income taxes, including withholding
taxes. It is impossible to determine the effective rate of
foreign tax in advance. The Portfolios' net asset value may also
be affected by changes in the rates or methods of taxation
applicable to the Portfolios or to entities in which the
Portfolios have invested. The Investment Adviser generally will
consider the cost of any taxes in determining whether to acquire
any particular investments, but can provide no assurance that the
tax treatment of investments held by the Portfolios will not be
subject to change.
For many foreign securities, there are U.S. dollar-
denominated American Depository Receipts (ADRs) which are traded
in the United States on exchanges or over-the-counter, are issued
by domestic banks or trust companies and which market quotations
are readily available. ADRs do not lessen the foreign exchange
risk inherent in investing in the securities of foreign issuers.
However, by investing in ADRS rather than directly in stock of
foreign issuers, the Portfolio can avoid currency risks which
might occur during the settlement period for either purchases or
sales. The Portfolio may purchase foreign securities directly,
as well as through ADRs.
1940 ACT RESTRICTIONS
Under the 1940 Act, a Portfolio may invest not more than
10% of its total assets in securities of other investment
companies. In addition, under the 1940 Act a 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 a
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 Advisor Class Prospectus for the Portfolios. 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.
U.S. Government Portfolio:
The following restrictions provide that, except with
respect to investments in repurchase agreements, reverse
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repurchase agreements, forward contracts and dollar rolls
involving the types of securities in which the Portfolio may
invest, and the employment, for hedging purposes, of futures,
options, options on futures, and interest rate swaps, caps and
floors, 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;
7. Write, purchase or sell puts, calls or
combinations thereof
8. 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;
9. Make loans to other persons;
10. Effect a short sale of any security;
11. Purchase securities on margin, but it may
obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities; or
12. 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
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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.
Quality Bond Portfolio:
The following restrictions provide that the Portfolio
may not:
1. Issue any senior securities as defined in the
1940 Act (except to the extent that when-issued
securities transactions, forward commitments or stand-by
commitments may be considered senior securities);
2. Effect a short sale of any security except
when it has, by reason of ownership of other securities,
the right to obtain securities of equivalent kind and
amount that will be held so long as it is in a short
position;
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3. Underwrite securities issued by other persons
except to the extent that, in connection with the
disposition of its portfolio investments, it may be
deemed to be an underwriter under certain Federal
securities laws;
4. Purchase real estate or mortgages; however,
the Portfolio may, as appropriate and consistent with
its investment policies and other investment
restrictions, buy securities of issuers which engage in
real estate operations and securities which are secured
by interests in real estate (including partnership
interests and shares of real estate investment trusts),
and may hold and sell real estate acquired as a result
of ownership of such securities;
5. Purchase or sell commodities or commodity
contracts, except that the Portfolio may purchase and
sell futures contracts and options on futures contracts
(including foreign currency futures contracts and
options thereon, forward foreign currency exchange
contracts and interest rate futures contracts and
options), forward commitments and similar contracts;
6. Purchase any security on margin or borrow
money, except that this restriction shall not apply to
borrowing from banks for temporary purposes, to the
pledging of assets to banks in order to transfer funds
for various purposes as required without interfering
with the orderly liquidation of securities in the
Portfolio (but not for leveraging purposes), to margin
payments or pledges in connection with options, futures
contracts, options on futures contracts, forward
contracts or options on foreign currencies, or,
transactions in interest rate swaps, caps and floors; or
7. Make loans (including lending cash or
securities), except that the Portfolio may make loans of
portfolio securities not exceeding 50% of the value of
the Portfolio's total assets. This restriction does not
prevent the Portfolio from purchasing debt obligations
in which the Portfolio may invest consistent with its
investment policies, or from buying government
obligations, short-term commercial paper, or publicly-
traded debt, including bonds, notes, debentures,
certificates of deposit, and equipment trust
certificates, nor does this restriction apply to loans
made under insurance policies or through entry into
repurchase agreements to the extent they may be viewed
as loans.
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The Portfolio elects not to "concentrate" investments in
an industry, as that concept is defined under applicable Federal
securities laws. This means that the Portfolio will not make an
investment in an industry if that investment would make the
Portfolio's holdings in that industry exceed 25% of the
Portfolio's assets. The U.S. Government, its agencies and
instrumentalities are not considered members of any industry.
The Portfolio intends to be "diversified," as that term is
defined under the Investment Company Act. In general, this means
that the Portfolio will not make an investment unless, when
considering all its other investments, 75% of the value of the
Portfolio's assets would consist of cash, cash items, U.S.
Government securities, securities of other investment companies
and other securities. For the purposes of this restriction,
"other securities" are limited for any one issuer to not more
than 5% of the value of the Portfolio's total assets and to not
more than 10% of the issuer's outstanding voting securities. As
a matter of operating policy, the Portfolio will not consider
repurchase agreements to be subject to the above-stated 5%
limitation if the collateral underlying the repurchase agreements
consists exclusively of U.S. Government securities and such
repurchase agreements are fully collateralized.
Non-Fundamental Restrictions:
The following investment restrictions apply to the
Portfolio, but are not fundamental. They may be changed for the
Portfolio without a vote of the Portfolio's shareholders.
The Portfolio will not:
1. Invest more than 15% of its net assets in
securities restricted as to disposition under Federal
securities laws, or securities otherwise considered
illiquid or not readily marketable, including repurchase
agreements not terminable within seven days; however,
this restriction will not apply to securities sold
pursuant to Rule 144A under the Securities Act of 1933,
so long as such securities meet liquidity guidelines
established from time to time by the Board of Directors;
2. Trade in foreign exchange (except transactions
incidental to the settlement of purchases or sales of
securities for the Portfolio); however, the Portfolio
may trade in foreign exchange in connection with its
foreign currency hedging strategies, provided the amount
of foreign exchange underlying the Portfolio's currency
hedging transactions does not exceed 10% of the
Portfolio's assets;
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3. Acquire securities of any company that is a
securities broker or dealer, a securities underwriter,
an investment adviser of an investment company, or an
investment adviser registered under the Investment
Advisers Act of 1940 (other than any such company that
derives no more than 15% of its gross revenues from
securities related activities), except that the
Portfolio may purchase bank, trust company, and bank
holding company stock, and except that the Portfolio may
invest, in accordance with Rule 12d3-1 under the
Investment Company Act, up to 5% of its total assets in
any such company provided that it owns no more than 5%
of the outstanding equity securities of any class plus
10% of the outstanding debt securities of such company;
or
4. Make an investment in order to exercise
control or management over a company.
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.
Corporate Bond Portfolio:
The following restrictions provide that, except with
respect to investments in repurchase agreements, reverse
repurchase agreements, forward contracts and dollar rolls
involving the types of securities in which the Portfolio may
invest, and the employment, for hedging purposes, of futures,
options, options on futures, and interest rate swaps, caps and
floors, 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;
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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;
7. Write, purchase or sell puts, calls or
combinations thereof
8. 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;
9. Make loans to other persons;
10. Effect a short sale of any security;
11. Purchase securities on margin, but it may
obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities; or
12. 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;
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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 business and affairs of the Fund are managed under
the direction of the Board of Directors. 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, 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,* 55, Chairman of the Board, is the
President, Chief Operating Officer and a Director of Alliance
Capital Management Corporation ("ACMC"), with which he has been
associated since prior to 1995.
RUTH BLOCK, 69, was formerly an Executive Vice President
and the Chief Insurance Officer of 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, 71, 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.
____________________
* An "interested person" of the Fund as defined in the 1940
Act.
43
<PAGE>
JOHN H. DOBKIN, 58, 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., 68, is an Investment Adviser and
an independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1993. His address is
Room 100, 2 Greenwich Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 76, has been 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, 61, 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, 66, 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, 59, is an
Executive Vice President of ACMC, with which he has been
associated since prior to 1995.
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT, 40, is an
Executive Vice President of ACMC, with which she has been
associated since prior to 1995.
MATTHEW BLOOM, SENIOR VICE PRESIDENT, 44, is a Senior
Vice President of Alliance, with which he has been associated
since prior to 1995.
EDMUND P. BERGAN, JR., SECRETARY, 50, is a Senior Vice
President and the General Counsel of Alliance Fund Distributors,
44
<PAGE>
Inc. ("AFD") and Alliance Fund Services, Inc. ("AFS") with which
he has been associated since prior to 1995.
DOMENICK PUGLIESE, ASSISTANT SECRETARY, 39, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since May 1995. Previously,, 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 1995.
ANDREW L. GANGOLF, ASSISTANT SECRETARY, 45, is a Senior
Vice President and Assistant General Counsel of AFD, with which
he has been associated since prior to 1995.
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER,
50, is a Senior Vice President of AFS and a Vice President of
AFD, with which he has been associated since prior to 1995.
JUAN RODRIGUEZ, CONTROLLER, 43, is an Assistant Vice
President of AFS, with which he has been associated since prior
to 1995.
VINCENT S. NOTO, CONTROLLER, 35, is a Vice President
of AFS, with which he has been associated since prior to 1995.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended June 30, 1999, the
aggregate compensation paid to each of the Directors during
calendar year 1999 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.
45
<PAGE>
Total Number
of Investment
Total Number Funds
of Funds in Within the
Total the Alliance Alliance Fund
Compensation Fund Complex, Complex,
From the Including the Including
Alliance Fund, as to the Fund, as
Fund which the to 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- 50 116
Ruth Block $2,159 $180,763 37 79
David H. Dievler $2,220 $216,288 44 86
John H. Dobkin $2,201 $185,363 42 97
William H. Foulk, Jr. $2,219 $241,003 45 111
Dr. James M. Hester $2,220 $172,913 38 80
Clifford L. Michel $2,220 $187,763 39 96
Donald J. Robinson $1,656 $193,709 41 105
As of October 8, 1999, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the
Portfolio.
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 adviser managing client accounts with assets as of
June 30, 2000, totaling more than $388 billion (of which more
than $185 billion represented the assets of investment
companies). As of June 30, 2000, the Investment Adviser managed
retirement assets for many of the largest public and private
employee benefit plans (including 29 of the nation's FORTUNE 100
companies), for public employee retirement funds in 33 states,
for investment companies and for foundations, endowments, banks
and insurance companies worldwide. The 52 registered investment
companies, with 122 separate portfolios managed by the Investment
46
<PAGE>
Adviser, currently have approximately 6.1 million shareholder
accounts.
ACMC is the general partner of the Investment Adviser
and a wholly owned subsidiary of The Equitable Life Assurance
Society of the United States ("Equitable"). Equitable, one of
the largest life insurance companies in the United States, is the
beneficial owner of an approximately 55.4% partnership interest
in the Investment Adviser. Alliance Capital Management Holding
L.P. ("Alliance Holding") owns an approximately 41.9% partnership
interest in the Investment Adviser.** Equity interests in
Alliance Holding are traded on the New York Stock Exchange in the
form of units. Approximately 98% of such interests are owned by
the public and management or employees of the Investment Adviser
and approximately 2% are owned by Equitable. Equitable is a
wholly owned subsidiary of AXA Financial, Inc. ("AXA Financial"),
a Delaware corporation whose shares are traded on the New York
Stock Exchange. AXA Financial serves as the holding company for
the Investment Adviser, Equitable and Donaldson, Lufkin &
Jenrette, Inc., an integrated investment and merchant bank. As
of June 30, 1999, AXA, a French insurance holding company, owned
approximately 58.2% of the issued and outstanding shares of
common stock of AXA Financial.
Under the 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.
____________________
** Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Investment Adviser. Prior thereto, the Investment Adviser
had no material business operations. One result of the
organization was that the Advisory Agreement, then between
the Fund and Alliance Holding, was transferred to the
Investment Adviser by means of a technical assignment, and
ownership of Alliance Fund Distributors, Inc. and Alliance
Fund Services, Inc., the Fund's principal underwriter and
transfer agent, respectively, also was transferred to the
Investment Adviser.
47
<PAGE>
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.
Under the terms of the Investment Advisory Contract, the
U.S. Government Portfolio pays the Investment Adviser, a
quarterly fee on the first business day of January, April, July
and October equal to .15 of 1% (approximately .60 of 1% on an
annual basis) of the first $500 million and .125 of 1%
(approximately .50 of 1% on an annual basis) of the excess over
$500 million of the Portfolio's aggregate net assets valued on
the last business day of the previous quarter. The Quality Bond
Portfolio pays the Investment Adviser a monthly fee of 1/12 of
.55 of 1% of average daily net assets. The Corporate Bond
Portfolio pays the Investment Adviser a monthly fee of 1/12 of
.625 of 1% of the first $500 million of the Portfolio's average
net assets and 1/12 of .50 of 1% of the excess over $500 million
of such average net assets.
The Investment Advisory Contract became effective with
respect to the Portfolio on July 1, 1999 and shall remain in
effect until June 30, 2001. 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.
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
48
<PAGE>
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: AFD Exchange Reserves,
Alliance All-Asia Investment Fund, Inc., Alliance Balanced
Shares, Inc., Alliance Capital Reserves, Alliance Disciplined
Value Fund, Inc., Alliance Global Dollar Government Fund, Inc.,
Alliance Global Small Cap Fund, Inc., Alliance Global Strategic
Income Trust, Inc., Alliance Government Reserves, Alliance
Greater China '97 Fund, Inc., Alliance Growth and Income Fund,
Inc., Alliance Health Care Fund, Inc., Alliance High Yield Fund,
Inc., Alliance Institutional Funds, Inc., Alliance Institutional
Reserves, Inc., Alliance International Fund, Alliance
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., Alliance Municipal Income Fund II, Alliance Municipal
Trust, Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Real Estate Investment
Fund, Inc., Alliance Select Investor Series, Inc., Alliance
Technology Fund, Inc., Alliance Utility Income Fund, Inc.,
Alliance Variable Products Series Fund, Inc., Alliance Worldwide
Privatization Fund, Inc., The Alliance Fund, Inc., The Alliance
Portfolios and EQ Advisors Trust, all registered open-end
49
<PAGE>
investment companies; and to ACM Government Income Fund, Inc.,
ACM Government Securities Fund, Inc., ACM Government Spectrum
Fund, Inc., ACM Government Opportunity Fund, Inc., ACM Managed
Dollar Income Fund, Inc., ACM Managed Income Fund, Inc., ACM
Municipal Securities Income Fund, Inc., Alliance All-Market
Advantage Fund, Inc., Alliance World Dollar Government Fund,
Inc., Alliance World Dollar Government Fund II, Inc., The Austria
Fund, Inc., The Korean Investment Fund, Inc., The Southern Africa
Fund, Inc. and The Spain Fund, Inc., all registered closed-end
investment companies.
______________________________________________________________
EXPENSES OF THE FUND
______________________________________________________________
DISTRIBUTION SERVICES AGREEMENT
The Fund has entered into a Distribution Services
Agreement (the "Agreement") with Alliance Fund Distributors,
Inc., the Fund's principal underwriter (the "Principal
Underwriter"), to permit the Principal Underwriter to distribute
the Portfolios' shares and to permit the Fund to pay distribution
services fees to defray expenses associated with distribution of
its shares in accordance with a plan of distribution which is
included in the Agreement and which has been duly adopted and
approved in accordance with Rule 12b-1 adopted by the Commission
under the 1940 Act (the "Rule 12b-1 Plan").
Distribution services fees are accrued daily and paid
monthly and charged as expenses of the Portfolios as accrued.
The Rule 12b-1 Plan is in compliance with rules of the National
Association of Securities Dealers, Inc. which effectively limit
the annual asset-based sales charges and service fees that a
mutual fund may pay on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to
that class. The rules also limit the aggregate of all front-end,
deferred and asset-based sales charges imposed with respect to a
class of shares by a mutual fund that also charges a service fee
to 6.25% of cumulative gross sales of shares of that class, plus
interest at the prime rate plus 1% per annum.
In approving the Rule 12b-1 Plan, the Directors of the
Fund determined that there was a reasonable likelihood that the
Rule 12b-1 Plan would benefit the Fund and its shareholders. The
distribution services fee of a particular class will not be used
to subsidize the provision of distribution services with respect
to any other class.
The Adviser may from time to time and from its own funds
or such other resources as may be permitted by rules of the
50
<PAGE>
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 for an additional annual term at
their meeting held on April 25-27, 2000.
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 Advisor Class shares of the
Portfolios, plus reimbursement for out-of-pocket expenses.
CODE OF ETHICS
The Fund, the Investment Adviser and the Principal
Underwriter have each adopted codes of ethics pursuant to Rule
17j-1 of the 1940 Act. These codes of ethics permit personnel
subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
_______________________________________________________________
PURCHASE OF SHARES
_______________________________________________________________
The following information supplements that set forth in
the 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 to investors
51
<PAGE>
eligible to purchase Advisor Class shares, without any initial,
contingent deferred or asset-based sales charge.
Advisor Class shares of the Portfolios may be purchased
and held solely (i) through accounts established under fee-based
programs, sponsored and maintained by registered broker-dealers
or other financial intermediaries and approved by the Principal
Underwriter, (ii) through self-directed defined contribution
employee benefit plans (e.g., 401(k) plans) that have at least
1,000 participants or $25 million in assets, (iii) by "qualified
state tuition programs" (within the meaning of section 529 of the
Code) approved by AFD, (iv) 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 (v) 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 Portfolios through
their financial representatives. A transaction, service,
administrative or other similar 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. 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 Portfolios, including requirements as to the minimum
initial and subsequent investment amounts. Sales personnel of
selected dealers and agents distributing the Portfolio's shares
may receive differing compensation for selling Advisor Class
shares.
The Portfolios may refuse any order for the purchase of
shares. The Portfolio reserve the right to suspend the sale of
the Portfolios' 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. 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
52
<PAGE>
on the New York Stock Exchange (the "Exchange") (currently
4:00 p.m. Eastern time) by dividing the value of the Portfolio's
total assets, less its liabilities, by the total number of its
shares then outstanding. A Fund business day is any day on which
the Exchange is open for trading.
The Fund will accept unconditional orders for shares to
be executed at the public offering price equal to their net asset
value next determined, 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. In the case of orders for
purchase of shares placed through financial representatives, the
applicable public offering price will be the net asset value so
determined, but only if the 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 financial representative is responsible for
transmitting such orders by 5:00 p.m. Eastern time (certain
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 representative fails to do
so, the investor's right to that day's closing price must be
settled between the investor and the financial representative.
If the financial representative 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.
53
<PAGE>
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 the subscriber's financial representative.
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 Portfolios. Such
additional amounts may be utilized, in whole or in part, to
provide additional compensation to registered representatives who
sell shares of the Portfolios. On some occasions, such cash or
other incentives may take the form of payment for attendance at
seminars, meals, sporting events or theater performances, or
payment for travel, lodging and entertainment incurred in
connection with travel taken by persons associated with a dealer
or agent to locations within or outside the United States. Such
dealer or agent may elect to receive cash incentives of
equivalent amount in lieu of such payments.
Advisor Class shares represent an interest in the same
portfolio of investments of the Portfolios as other classes of
the Portfolios, have the same rights and are identical in all
respects, except that 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 Fund's
classes of 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.
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, qualified state
tuition programs 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
program or plan, or to be associated with the investment adviser
or financial intermediary, in each case, that satisfies the
54
<PAGE>
requirements to purchase shares set forth under "Purchase of
Shares--General" or (ii) the holder is otherwise no longer
eligible to purchase Advisor Class shares as described in the
Advisor Class Prospectus and this Statement of Additional
Information (each, a "Conversion Event"), then all Advisor Class
shares held by the shareholder will convert automatically to
Class A shares of the Fund during the calendar month following
the month in which the Fund is informed of the occurrence of the
Conversion Event. The Fund will provide the shareholder with at
least 30 days' notice of the conversion. The failure of a
shareholder or a fee-based program to satisfy the minimum
investment requirements to purchase Advisor Class shares will not
constitute a Conversion Event. The conversion would occur on
the basis of the relative net asset values of the two classes and
without the imposition of any sales load, fee or other charge.
Class A shares currently bear a .30% distribution services fee.
Advisor Class shares do not have any distribution services fee.
As a result, Class A shares have a higher expense ratio and may
pay correspondingly lower dividends and have a lower net asset
value than Advisor Class shares.
The conversion of Advisor Class shares to Class A shares
is subject to the continuing availability of an opinion of
counsel to the effect that the conversion of Advisor Class shares
to Class A shares does not constitute a taxable event under
federal income tax law. The conversion of Advisor Class shares
to Class A shares may be suspended if such an opinion is no
longer available at the time such conversion is to occur. In
that event, the Advisor Class shareholder would be required to
redeem 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 Advisor Class Prospectus 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 a 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.
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REDEMPTION
Subject only to the limitations described below, the
Fund's Articles of Incorporation require that the Fund redeem the
shares of a 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. There is no redemption charge. 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 a 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.
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.
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 Portfolios for which no share
certificates have been issued, the registered owner or owners
should forward a letter to the Fund containing a request for
redemption. The signature or signatures on the letter must be
guaranteed by an "eligible guarantor institution" as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended.
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 Fund with the request that the shares
represented thereby, or a specified portion thereof, be redeemed.
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The stock assignment form on the reverse side of each stock
certificate surrendered to the Fund for redemption must be signed
by the registered owner or owners exactly as the registered name
appears on the face of the certificate or, alternatively, a stock
power signed in the same manner may be attached to the stock
certificate or certificates or, where tender is made by mail,
separately mailed to the Fund. The signature or signatures on the
assignment form must be guaranteed in the manner described above.
TELEPHONE REDEMPTION BY ELECTRONIC FUNDS TRANSFER. Each
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.
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
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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 Fund may repurchase shares through the Principal
Underwriter or selected financial intermediaries.. The repurchase
price will be the net asset value next determined after the
Principal Underwriter receives the request, except that requests
placed through financial representatives 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 is responsible for transmitting the
request to the Principal Underwriter by 5:00 p.m. Eastern time
(certain 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 fails
to do so, the shareholder's right to receive that day's closing
price must be settled between the shareholder and the financial
representative. A shareholder may offer shares of a Portfolio to
the Principal Underwriter either directly or through a selected
dealer or agent. Neither the Fund nor the Principal Underwriter
charges a fee or commission in connection with the repurchase of
shares. Normally, if shares of a Portfolio are offered through a
financial intermediary, the repurchase is settled by the
shareholder as an ordinary transaction with or through the
financial representative who may charge the shareholder for this
service. The repurchase of shares of the Fund as described above
is a voluntary service of the Fund and the Fund may suspend or
terminate this practice at any time.
GENERAL
The Fund reserves the right to close out an account that
through redemption has remained below $200 for 90 days.
Shareholders will receive 60 days written notice to increase the
account value before the account is closed. In the case of a
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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 Advisor Class Prospectus under "Purchase and Sale of 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 a 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 Portfolios 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.
EXCHANGE PRIVILEGE
You may exchange your Advisor Class shares for Advisor
Class shares of other Alliance Mutual Funds (as defined below).
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.
Currently, the Alliance Mutual Funds include:
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AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
-Corporate Bond Portfolio
-Quality Bond Portfolio
-U.S. Government Portfolio
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance International 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, Inc.
-California Portfolio
-Insured California Portfolio
-Insured National Portfolio
-National Portfolio
-New York Portfolio
Alliance Municipal Income Fund II
-Arizona Portfolio
-Florida Portfolio
-Massachusetts Portfolio
-Michigan Portfolio
-Minnesota Portfolio
-New Jersey Portfolio
-Ohio Portfolio
-Pennsylvania Portfolio
-Virginia Portfolio
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
-Biotechnology Portfolio
-Premier Portfolio
-Technology Portfolio
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
The Alliance Fund, Inc.
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The Alliance Portfolios
- Alliance Growth Fund
- Alliance Conservative Investors Fund
- Alliance Growth Investors Fund
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. 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
financial representative 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 Advisor Class
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
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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. Financial representatives 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 Portfolios 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 Portfolios has available
forms of such plans pursuant to which investments can be made in
the Portfolios 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:
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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.
SIMPLIFIED EMPLOYEE PENSION PLAN ("SEP"). Sole
proprietors, partnerships and corporations may sponsor a SEP under
which they make annual tax-deductible contributions to an IRA
established by each eligible employee within prescribed limits
based on employee compensation.
403(B)(7) RETIREMENT PLAN. Certain tax-exempt
organizations and public educational institutions may sponsor
retirement plans under which an employee may agree that monies
deducted from his or her compensation, minimum $25 per pay period,
may be contributed by the employer to a custodial account
established for the employee under the plan.
The Alliance Plans Division of Frontier Trust Company, a
subsidiary of Equitable, which serves as custodian or trustee
under the retirement plan prototype forms available from the Fund,
charges certain nominal fees for establishing an account and for
annual maintenance. A portion of these fees is remitted to
Alliance Fund Services, Inc. as compensation for its services to
the retirement plan accounts maintained with the Portfolio.
Distributions from retirement plans are subject to
certain Code requirements in addition to normal redemption
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procedures. For additional information please contact Alliance
Fund Services, Inc.
STATEMENTS AND REPORTS
Each shareholder of a Portfolio receives semi-annual and
annual reports which include a portfolio of investments, financial
statements and, in the case of the annual report, the report of
the Fund's independent auditors, Ernst & Young LLP, as well as a
monthly cumulative dividend statement and a confirmation of each
purchase and redemption. By contacting his or her broker or
Alliance Fund Services, Inc., a shareholder can arrange for copies
of his or her account statements to be sent to another person.
_______________________________________________________________
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
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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 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
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(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.
Mortgage-backed and asset-backed securities may be valued at
prices obtained from a bond pricing service or at a price obtained
from one or more of the major broker/dealers in such securities.
In cases where broker/dealer quotes are obtained, the Adviser may
establish procedures whereby changes in market yields or spreads
are used to adjust, on a daily basis, a recently obtained quoted
bid price on a security.
All other assets of the Fund are valued in good faith at
fair value by, or in accordance with procedures established by,
the Board of 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.
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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 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 Portfolios. The Portfolios'
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 Portfolios, and brokerage commissions are
payable with respect to transactions in exchange- traded interest
rate futures contracts.
The Investment Adviser makes the decisions for the
Portfolios and determines the broker or dealer to be used in each
specific transaction. Most transactions for the Portfolios,
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 Portfolios will be
principal transactions at net prices and the Portfolios will incur
little or no brokerage costs. Where possible, securities will be
purchased directly from the issuer or from an underwriter or
market maker for the securities unless the Investment Adviser
believes a better price and execution is available elsewhere.
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Purchases from underwriters of newly-issued securities for
inclusion in the Portfolios 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 Portfolios may consider sales of its
shares as a factor in the selection of dealers to enter into
portfolio transactions with a Portfolio. The Portfolios have 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 Portfolios. 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.
______________________________________________________________
TAXES
______________________________________________________________
GENERAL. Each Portfolio intends for each taxable year to
qualify to be taxed as a "regulated investment company" under the
Code. To so qualify, a 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
issuer, to an amount not greater than 5% of the Portfolio's total
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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 a 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.
Each 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 a
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 a 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 Portfolios and
of sales or redemptions of Portfolio shares, and assumes that the
Portfolios qualify to be taxed as a regulated investment company.
Investors should consult their own tax counsel with respect to the
specific tax consequences of their being shareholders of a
Portfolio, including the effect and applicability of federal,
state and local tax laws to their own particular situation and the
possible effects of changes therein.
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio intends to
make timely distributions of the Portfolio's taxable income
(including any net capital gain) so that the Portfolio will not be
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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 a 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 a Portfolio.
Since each 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 Portfolios'
dividends or distributions will qualify for the dividends-received
deduction for corporations.
A dividend or capital gains distribution with respect to
shares of a 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.
The Fund will advise the Portfolios' shareholders
annually as to the Federal income tax status of dividends and
distributions made to a Portfolio's shareholders during each
calendar 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 the
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 a
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
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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 a 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. Each Portfolio may be required to
withhold United States federal income tax at the rate of 31% of
all distributions payable to shareholders who fail to provide the
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, a 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 a Portfolio) of a zero coupon security accrue a
portion of the discount at which the security was purchased as
income each year even though the Portfolio receives no interest
payment in cash on the security during the year. Accordingly, a
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 a 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. A
Portfolio may realize a gain or loss from such sales. In the
event a Portfolio realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain
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
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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 a 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 a 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.
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a 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 foreign
currencies, from the disposition of debt securities denominated in
a foreign currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the date
of acquisition of the asset and the date of disposition also are
treated as ordinary income or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of a Portfolio's investment
company taxable income available to be distributed to its
shareholders as ordinary income, rather than increasing or
decreasing the amount of a Portfolio's net capital gain. Because
section 988 losses reduce the amount of ordinary dividends the
Portfolio will be allowed to distribute for a taxable year, such
section 988 losses may result in all or a portion of prior
dividend distributions for such year being recharacterized as a
non-taxable return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his
Portfolio shares. To the extent that such distributions exceed
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such shareholder's basis, each will be treated as a gain from the
sale of shares.
"SECTION 1256 CONTRACTS". Certain listed options,
regulated futures contracts and forward foreign currency contracts
are considered "section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by a Portfolio at the end
of each taxable year will be "marked to market" and treated for
federal income tax purposes as though sold for fair market value
on the last business day of such taxable year. Gain or loss
realized by a Portfolio on section 1256 contracts other than
forward foreign currency contracts generally will be considered
60% long-term and 40% short-term capital gain or loss. Gain or
loss realized by a Portfolio on forward foreign currency contracts
generally will be treated as section 988 gain or loss and will
therefore be characterized as ordinary income or loss and will
increase or decrease the amount of the Portfolio's net investment
income available to be distributed to holders as ordinary income,
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 2,800,000,000
shares of Common Stock having a par value of $.001 per share. 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 the
Portfolios vote for the election of Directors and on any other
matter that affects the 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.
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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.
U.S. Government Portfolio, Quality Bond Portfolio and
Corporate Bond Portfolio currently have authorized capital stock
consisting of 200,000,000, 250,000,000 and 250,000,000 shares of
Advisor Class Common stock, respectively, each having a par value
of $.001 per share. Advisor Class shares represent interests in
the assets of each Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions as
other classes of the Portfolios, 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.
The Fund's Board of Directors may, without shareholder
approval, increase or decrease the number of authorized but
unissued shares of the Portfolios' 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
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
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shares of a series may not be modified except by the vote of a
majority of the outstanding shares of such series.
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 Portfolios, and as such may solicit
orders from the public to purchase shares of the Portfolios.
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 Portfolios offered hereby are passed upon by Seward
& Kissel LLP, New York, New York. Seward & Kissel LLP has relied
upon the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland, for matters relating to Maryland law.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, has been appointed
as independent auditors for the Fund.
PERFORMANCE INFORMATION
From time to time, the Portfolios advertise their "yield"
and "total return." The Portfolios' 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. Advertisements of a
Portfolio's total return disclose its average annual compounded
total return for the periods prescribed by the Commission. A
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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 a 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. A Portfolio's advertisements may quote
performance rankings or ratings of the Portfolio by financial
publications or independent organizations such as Lipper, Inc. and
Morningstar, Inc. or compare the Portfolio's performance to
various indices.
A Portfolio's yield and total return are not fixed and will
fluctuate in response to prevailing market conditions or as a
function of the type and quality of the securities held by the
Portfolio, its average portfolio maturity and its expenses.
Yield and total return information is useful in reviewing a
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 a
Portfolio will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. In
addition, a 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 a Portfolio.
Advertisements quoting performance rankings or
ratings of the Fund's Portfolios as measured by financial
publications or by independent organizations such as Lipper, Inc.
and Morningstar, Inc. and advertisements presenting the
historical record payments of income dividends by the Portfolios
may also from time to time be sent to investors or placed in
newspapers, magazines, such as Barrons, Business Week, Changing
Times, Forbes, Investor's Daily, Money Magazine, The New York
Times and The Wall Street Journal or other media on behalf of the
Fund.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the
shareholder's broker or 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
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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.
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____________________________________________________________
APPENDIX A
FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS AND FOREIGN CURRENCIES
____________________________________________________________
FUTURES CONTRACTS
A Portfolio may enter into contracts for the
purchase or sale for future delivery of debt securities or
foreign currencies, or contracts based on financial indices.
U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC"), and must be executed through a
futures commission merchant, or brokerage firm, which is a member
of the relevant contract market. Futures contracts trade on a
number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased
or sold, a Portfolio must allocate cash or securities as a
deposit payment ("initial deposit"). It is expected that the
initial deposit would be approximately 1 1/2%-5% of a contract's
face value. Daily thereafter, the futures contract is valued and
the payment of "variation margin" may be required, since each day
the Portfolio would provide or receive cash that reflects any
decline or increase in the contract's value.
At the time of delivery of securities pursuant
to such a contract, adjustments are made to recognize differences
in value arising from the delivery of securities with a different
interest rate from that specified in the contract. In some (but
not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call
for the actual delivery or acquisition of securities, in most
cases the contractual obligation is fulfilled before the date of
the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
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contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
The purpose of the acquisition or sale of a
futures contract, in the case of a Portfolio which holds or
intends to acquire fixed-income securities, is to attempt to
protect a Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income
securities or foreign currency. For example, if interest rates
were expected to increase, a Portfolio might enter into futures
contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the
debt securities owned by a Portfolio. If interest rates did
increase, the value of the debt securities in the portfolio would
decline, but the value of the futures contracts to a Portfolio
would increase at approximately the same rate, thereby keeping
the net asset value of the Portfolio from declining as much as it
otherwise would have. A Portfolio could accomplish similar
results by selling debt securities and investing in bonds with
short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique
allows a Portfolio to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest
rates may decline, futures contracts may be purchased to attempt
to hedge against anticipated purchases of debt securities at
higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a
Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the
market had stabilized. At that time, the futures contracts could
be liquidated and a Portfolio could then buy debt securities on
the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash
equivalents or high quality liquid debt securities from its
portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the
aggregate value of the initial and variation margin payments made
by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash
and futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
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relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Investment
Adviser may still not result in a successful transaction.
By establishing an appropriate "short" position
in index futures, a Portfolio may seek to protect the value of
its portfolio against an overall decline in the market for such
securities. Alternatively, in anticipation of a generally rising
market, a Portfolio can seek to avoid losing the benefit of
apparently low current prices by establishing a "long" position
in securities index futures and later liquidating that position
as particular securities, are acquired. To the extent that these
hedging strategies are successful, a Portfolio will be affected
to a lesser degree by adverse overall market price movements than
would otherwise be the case.
In addition, futures contracts entail risks.
Although a Portfolio believes that use of such contracts will
benefit the Portfolio, if the Investment Adviser's investment
judgment about the general direction of interest rates is
incorrect, the Portfolio's overall performance would be poorer
than if it had not entered into any such contract. For example,
if a Portfolio has hedged against the possibility of an increase
in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of
the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions.
In addition, in such situations, if a Portfolio has insufficient
cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS
The Portfolios intend to purchase and write
options on futures contracts for hedging purposes. The purchase
of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual
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security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based
or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures
contracts, when a Portfolio is not fully invested it may purchase
a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures
contract constitutes a partial hedge against declining prices of
the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio
will retain the full amount of the option premium which provides
a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures
contract constitutes a partial hedge against increasing prices of
the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of
securities which the Portfolio intends to purchase. If a put or
call option a Portfolio has written is exercised, the Portfolio
will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and
changes in the value of its futures positions, a Portfolio's
losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio
securities. A Portfolio will write only options on futures
contracts which are "covered."
The purchase of a put option on a futures
contract is similar in some respects to the purchase of
protective put options on portfolio securities. For example, a
Portfolio may purchase a put option on a futures contract to
hedge the Portfolio against the risk of rising interest rates.
Upon the exercise of a call, the writer of the
option is obligated to sell the futures contract (to deliver a
"long" position to the option holder) at the option exercise
price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a
put, the writer of the option is obligated to purchase the
futures contract (deliver a "short" position to the option
holder) at the option exercise price which will presumably be
higher than the current market price of the contract in the
futures market. When the holder of an option exercises it and
assumes a long futures position, in the case of call, or a short
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futures position in the case of a put, its gain will be credited
to its futures margin account, while the loss suffered by the
writer of the option will be debited to its futures margin
account and must be immediately paid by the writer. However, as
with the trading of futures, most participants in the options
markets do not seek to realize their gains or losses by exercise
of their option rights. Instead, the holder of an option will
usually realize a gain or loss by buying or selling an offsetting
option at a market price that will reflect an increase or a
decrease from the premium originally paid.
Options on futures contracts can be used by a
Portfolio to hedge substantially the same risks as might be
addressed by the direct purchase or sale of the underlying
futures contracts. If a Portfolio purchases an option on a
futures contract, it may obtain benefits similar to those that
would result if it held the futures position itself. Purchases
of options on futures contracts may present less risk in hedging
than the purchase and sale of the underlying futures contracts
since the potential loss is limited to the amount of the premium
plus related transaction costs.
If a Portfolio writes options on futures
contracts, the Portfolio will receive a premium but will assume a
risk of adverse movement in the price of the underlying futures
contract comparable to that involved in holding a futures
position. If the option is not exercised, a Portfolio will
realize a gain in the amount of the premium, which may partially
offset unfavorable changes in the value of securities held in or
to be acquired for a Portfolio. If the option is exercised, the
Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but
which will offset any favorable changes in the value of its
portfolio securities or, in the case of a put, lower prices of
securities it intends to acquire.
While the holder or writer of an option on a
futures contract may normally terminate its position by selling
or purchasing an offsetting option of the same series, the
Portfolio's ability to establish and close out options positions
at fairly established prices will be subject to the existence of
a liquid market. A Portfolio will not purchase or write options
on futures contracts unless, in the Investment Adviser's opinion,
the market for such options has sufficient liquidity that the
risks associated with such options transactions are not at
unacceptable levels.
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OPTIONS ON FOREIGN CURRENCIES
A Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities,
even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of
portfolio securities, a Portfolio may purchase put options on the
foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole or in part,
the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of
a currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, a
Portfolio may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to a Portfolio deriving
from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, a Portfolio could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
A Portfolio may write options on foreign
currencies for the same types of hedging purposes. For example,
where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a
put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option
to hedge against an anticipated increase in the dollar cost of
securities to be acquired, a Portfolio could write a put option
on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up
to the amount of the premium, and only if rates move in the
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expected direction. If this does not occur, the option may be
exercised and a Portfolio would be required to purchase or sell
the underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign
currencies, a Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
A Portfolio will write options on foreign
currencies only if they are covered. A put option on a foreign
currency written by a Portfolio will be considered "covered" if,
so long as the Portfolio is obligated as the writer of the put,
it segregates with the Portfolio's custodian liquid assets equal
at all times to the aggregate exercise price of the put. A call
option on a foreign currency written by a Portfolio will be
considered "covered" only if the Portfolio owns short term debt
securities with a value equal to the face amount of the option
contract and denominated in the currency upon which the call is
written.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS,
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio
in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options)
by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the purchase
of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts
could lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements
associated with such positions.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
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a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation ("OCC"), thereby reducing the risk
of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at
a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions, on exercise.
In addition, futures contracts, options on
futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges. Such transactions
are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value
of such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in the Portfolio's ability to act
upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of
different requirements than in the United States, and (v) lesser
trading volume.
<PAGE>
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.
(6) Articles Supplementary to the Articles of
Incorporation of the Registrant dated December 30,
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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 (a) to Post-Effective
Amendment No. 69 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 April 9, 1999.
(11) Articles Supplementary to the Articles of
Incorporation of the Registrant dated June 29,
1999 and filed July 1, 1999 - Incorporated by
reference to Exhibit (a)(11) to Post-Effective
Amendment No. 72 (erroneously numbered 69) of the
Registrant's Registration Statement on Form N-1A
(File Nos. 2-48227 and 811-2383) filed with the
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Securities and Exchange Commission on October 29,
1999.
(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.
(c) Not applicable.
(d) (1) 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.
(2) Amendment to the Investment Advisory Contract
between the Registrant and Alliance Capital
Management L.P. - Incorporated by reference to
Exhibit (d)(2) to Post-Effective Amendment No. 72
(erroneously numbered 69) 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 29, 1999.
(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
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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
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 LLP -
Incorporated by reference to Exhibit (i) to Post-
Effective Amendment No. 72 (erroneously numbered 69) 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 29, 1999.
(j) Not applicable.
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(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) 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.
(o) Reserved.
(p) (1) Code of Ethics relating to Alliance Bond Fund,
Inc. - Filed herewith.
(2) Code of Ethics relating to Alliance Capital
Management L.P. - Filed herewith.
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. 72 (erroneously
numbered 69) 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
29, 1999.
ITEM 24. Persons Controlled by or under Common Control with the
Fund.
None.
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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.
(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
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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
(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
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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
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
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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;
(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
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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.
(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.
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(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
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.
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(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:
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:
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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
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
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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
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
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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
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
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<PAGE>
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
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.
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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. 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 Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance 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.
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.
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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 Chairman and
President
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
Anne S. Drennan Senior Vice President
and Treasurer
Benji A. Baer Senior Vice President
Karen J. Bullot Senior Vice President
John R. Carl Senior Vice President
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
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Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Andrew L. Gangolf Senior Vice President and Assistant
Assistant General Counsel Secretary
Bradley F. Hanson Senior Vice President
George H. Keith 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
Domenick Pugliese Senior Vice President and Assistant
Assistant General Counsel Secretary
Kevin A. Rowell Senior Vice President
John P. Schmidt Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Scott C. Sipple 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
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Emily D. Wrapp Senior Vice President and
Assistant General Counsel
Gerard J. Friscia Vice President and
Controller
Ricardo Arreola Vice President
Kenneth F. Barkoff Vice President
Charles M. Barrett Vice President
Gregory P. Best Vice President
Casimir F. Bolanowski Vice President
Dale E. Boyd Vice President
Robert F. Brendli Vice President
Christopher L. Butts Vice President
Thomas C. Callahan Vice President
Kevin T. Cannon Vice President
Doris T. Ciliberti Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Russell R. Corby Vice President
John W. Cronin Vice President
William J. Crouch Vice President
Robert J. Cruz Vice President
Richard W. Dabney Vice President
Richard P. Dyson Vice President
John C. Endahl Vice President
John E. English Vice President
Sohaila S. Farsheed Vice President
Daniel J. Frank Vice President
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<PAGE>
Shawn C. Gage Vice President
Joseph C. Gallagher Vice President
Michael J. Germain Vice President
Mark D. Gersten Vice President Treasurer and
Chief
Financial
Officer
Hyman Glasman Vice President
John Grambone Vice President
Charles M. Greenberg Vice President
Alan Halfenger Vice President
William B. Hanigan Vice President
Michael S. Hart Vice President
Scott F. Heyer Vice President
Timothy A. Hill Vice President
Brian R. Hoegee Vice President
George R. Hrabovsky Vice President
Michael J. Hutten Vice President
Scott Hutton Vice President
Oscar J. Isoba Vice President
Richard D. Keppler Vice President
Richard D. Kozlowski Vice President
Daniel W. Krause Vice President
Donna M. Lamback Vice President
P. Dean Lampe Vice President
Henry Michael Lesmeister Vice President
Eric L. Levinson Vice President
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<PAGE>
James M. Liptrot Vice President
James P. Luisi Vice President
Michael F. Mahoney Vice President
Kathryn Austin Masters Vice President
Shawn P. McClain Vice President
David L. McGuire Vice President
Jeffrey P. Mellas Vice President
Michael V. Miller Vice President
Thomas F. Monnerat Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Michael F. Nash, Jr. Vice President
Timothy H. Nasworthy Vice President
Nicole Nolan-Koester Vice President
Daniel A. Noto Vice President
Peter J. O'Brien Vice President
John C. O'Connell Vice President
John J. O'Connor Vice President
Christopher W. Olson Vice President
Daniel P. O'Donnell Vice President
Richard J. Olszewski Vice President
Catherine N. Peterson Vice President
Jeffrey R. Peterson Vice President
Joanne M. Philpott Vice President
James J. Posch Vice President
Bruce W. Reitz Vice President
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<PAGE>
Jeffrey B. Rood Vice President
Karen C. Satterberg Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Clara Sierra Vice President
Teris A. Sinclair Vice President
Jeffrey C. Smith Vice President
David A. Solon Vice President
John M. Sorrell Vice President
Martine H. Stansbery, Jr. Vice President
Eileen Stauber Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Benjamin H. Travers Vice President
David R. Turnbough Vice President
Andrew B. Vaughey Vice President
Wayne W. Wagner Vice President
Patrick E. Walsh Vice President
Mark E. Westmoreland Vice President
Paul C. Wharf Vice President
Stephen P. Wood Vice President
Michael W. Alexander Assistant Vice
President
Richard J. Appaluccio Assistant Vice
President
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<PAGE>
Paul G. Bishop Assistant Vice
President
Mark S. Burns Assistant Vice
President
John M. Capeci Assistant Vice
President
Maria L. Carreras Assistant Vice
President
John P. Chase Assistant Vice
President
Judith A. Chin Assistant Vice
President
Jorge Ciprian Assistant Vice
President
William P. Condon Assistant Vice
President
Jean A. Coomber Assistant Vice
President
Terri J. Daly Assistant Vice
President
Ralph A. DiMeglio Assistant Vice
President
Faith C. Deutsch Assistant Vice
President
Timothy J. Donegan Assistant Vice
President
Adam E. Engelhardt Assistant Vice
President
Michele Grossman Assistant Vice
President
Arthur F. Hoyt, Jr. Assistant Vice
President
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<PAGE>
David A. Hunt Assistant Vice
President
Theresa Iosca Assistant Vice
President
Erik A. Jorgensen Assistant Vice
President
Eric G. Kalender Assistant Vice
President
Elizabeth E. Keefe Assistant Vice
President
Edward W. Kelly Assistant Vice
President
Victor Kopelakis Assistant Vice
President
Alexandra C. Landau Assistant Vice
President
Laurel E. Lindner Assistant Vice
President
Evamarie C. Lombardo Assistant Vice
President
Richard F. Meier Assistant Vice
President
Charles B. Narrick Assistant Vice
President
Alex E. Pady Assistant Vice
President
Raymond E. Parker Assistant Vice
President
Wandra M. Perry Hartsfield Assistant Vice
President
Rizwan A. Raja Assistant Vice
President
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<PAGE>
Carol H. Rappa Assistant Vice
President
Brendan J. Reynolds Assistant Vice
President
James A. Rie Assistant Vice
President
Lauryn A. Rivello Assistant Vice
President
Nancy D. Testa Assistant Vice
President
Margaret M. Tompkins Assistant Vice
President
Marie R. Vogel Assistant Vice
President
Nina C. Wilkinson Assistant Vice
President
Wesley S. Williams Assistant Vice
President
Matthew Witschel 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.
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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.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant certifies that it meets all of the requirements
for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(a) under the Securities Act of 1933 and 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 6th day of
October, 2000.
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 October 6, 2000
John D. Carifa
2) Principal Financial
and Accounting Officer
/s/ Mark D. Gersten Treasurer and
__________________________ Chief Financial
Mark D. Gersten Officer October 6, 2000
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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. October 6, 2000
_________________________
Edmund P. Bergan, Jr.
(Attorney-in-fact)
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INDEX TO EXHIBITS
(p)(1) Code of Ethics relating to Alliance Bond Fund, Inc.
(p)(2) Code of Ethics relating to Alliance Capital
Management L.P.
00250123.AX8
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